NEW YORK (TheStreet) --Shares of the office supplies retailer Office Depot Inc. (ODP - Get Report) are gaining by 17.04% to $8.93 in pre-market trading on Tuesday, following a report from the Wall Street Journal suggesting the company and rival Staples Inc. (SPLS) are in advanced talks regarding a merger.

The price and structure of the possible deal could not be learned and there is no guarantee that a deal will be reached, sources told the Journal.

Starboard Value L.P had urged the two companies to combine in January. Starboard owns almost 6% of Staples and 10% of Office Depot.

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Were the two retailers to merge it would probably bring scrutiny from antitrust regulators who successfully sued to halt the same deal in 1997, the Journal added.

However, analysts point out the vast changes in the retail landscape since 1997, noting that consumers have more options and places like Office Depot and Staples are dealing with an increase in competition from businesses such as Target (TGT - Get Report) and Wal-Mart (WMT - Get Report) , who also sell office supplies.

Together, both Office Depot and Staples have about 4,000 stores and annual sales of over $35 billion, the Journal noted.

Separately, TheStreet Ratings team rates OFFICE DEPOT INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate OFFICE DEPOT INC (ODP) a HOLD. The primary factors that have impacted our rating are mixed some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • ODP's very impressive revenue growth greatly exceeded the industry average of 9.8%. Since the same quarter one year prior, revenues leaped by 55.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Compared to its closing price of one year ago, ODP's share price has jumped by 62.09%, exceeding the performance of the broader market during that same time frame. Although ODP had significant growth over the past year, our hold rating indicates that we do not recommend additional investment in this stock at the current time.
  • OFFICE DEPOT INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, OFFICE DEPOT INC continued to lose money by earning -$0.22 versus -$0.40 in the prior year. This year, the market expects an improvement in earnings ($0.18 versus -$0.22).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, OFFICE DEPOT INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Specialty Retail industry. The net income has significantly decreased by 81.3% when compared to the same quarter one year ago, falling from $160.90 million to $30.00 million.
  • You can view the full analysis from the report here: ODP Ratings Report

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