NEW YORK (TheStreet) – Office Depot (ODP) - Get Report , the second-largest retailer of office products and services in the U.S., delivered a narrower-than-expected fourth-quarter loss Tuesday thanks to merger synergies from its 2013 acquisition of rival OfficeMax. But the company's revenue miss raises questions about Office Depot's long-term viability.
Consumers are moving their purchases online, favoring the model and convenience offered by e-commerce behemothAmazon (AMZN) - Get Report . And despite the long-term potential benefits that can be created with its $6.3 billion pending merger with larger rival Staples (SPLS) , it doesn't make Office Depot stock a compelling buy today.
While the earnings beat Tuesday is a good short-term sign about profitability, investors should realize that the company was already working with easier year-over-year comparisons. Once the value-creation from its OfficeMax acquisition is complete, Office Depot must show that it can grow earnings organically. Its revenue miss Tuesday doesn't support the notion that it can.
In that regard, the revenue miss also suggest that analysts expect too much from this company, especially after the stock has already gained 87% in just six months. Take a look at the chart.
Ahead of Tuesday's results, Office Depot shares were up more than 10% on the year, with 87% gains in just six months, compared with respective gains of 6.7% and 6.13% in the Dow Jones Industrial Average (DJI) and the S&P 500 (SPX) during that same span. Tuesday's revenue miss serves as a reminder for why investors should now take some profits.
For the quarter that ended in December, the Boca Raton, FL.-based company posted a net loss of $84 million, or 15 cents a share, narrowing from a loss of $144 million, or 34 cents a share in the year-ago quarter. On an adjusted basis, when excluding one-time gains and costs, the company earned 7 cents a share, beating analysts' estimates by 3 cents.
During the latest quarter, revenue arrived at $3.83 billion. While that was almost 10% higher year over year, it fell 2% short of estimates of $3.91 billion. As with its earnings beat, the 10% year-over-year jump in revenue was possible due to the acquisition of OfficeMax.
While the company reported 2% year-over-year decline in pro forma same-store sales, which included OfficeMax, investors shouldn't count on long-term sustainable results absent a credible online presence to better compete with Amazon.
Citing its pending merger with Staples, Office Depot opted to not issue its business outlook for full-year 2015. The company did say, however, it expects total revenue to be lower in 2015 and said merger synergy between the two companies would present benefits of $750 million per year.
The $750 million doesn't make Office Depot stock a compelling buy, especially with its full-year loss widening from 29 cents per share in 2013 to 66 cents a share in 2014.
Though operational improvement will likely continue, 87% stock gains in six months is too much to risk.
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.