Office Depot Inc.ODP

Morningstar Rating

Stock Research and Analysis

by R. J. Hottovy, CFA

Like a number of retail categories, we believe a shakeout among office supply retailers is inevitable. Several firms, including Office Depot, have struggled to remain profitable amid intensifying competition and a harsh consumer environment. In our view, aggressive measures are needed for Office Depot to effectively compete over the long run. Read more

Bulls Say

Merchandise margins should improve with private-label merchandise. Management estimates private-label goods carry margin rates that are 5%-10% higher than the branded products they replace.

The new "M2" store format provides improved visibility and more effective product adjacencies, while also reducing operating costs. Remodeled stores have posted higher sales productivity than legacy stores.

A revamped customer-loyalty program provides a stronger value proposition for small business customers. This program also provides the firm with additional data to fine-tune marketing communications.

A reduction in store openings during 2009 should preserve capital for more efficient purposes.

Office Depot is considering alternative sources of funding, including sale-leaseback transactions and the sale of European accounts receivable. Read more

Bears Say

The company lacks the scale advantages and supply-chain efficiencies to compete with larger industry participants. Market-share gains will be difficult without low-cost advantages.

With more than 4,000 stores, we believe the North American office supply retail marketplace is nearing saturation. More than 80% of Office Depot's domestic stores are within five miles of a competing office supply superstore.

Roughly 26% of total revenue is derived from California and Florida, two states that have been disproportionately affected by the slumping domestic housing market. Certain international markets are also showing signs of a slowdown.

A history of restatements and one-time charges raises concerns over the effectiveness of the firm's internal reporting. Read more

Strategy

Office Depot is undergoing a multiyear turnaround plan to improve profitability. Key priorities include higher private-label penetration, store remodels, expanded service offerings, streamlined operations, and information technology upgrades. Read more

Management

Steve Odland became chairman and CEO of Office Depot in March 2005 after previous CEO Bruce Nelson resigned in 2004. We were encouraged that the board recently decided to separate the firm's CEO and chairman responsibilities (with the chairman role likely going to one of the board's independent directors), as it should provide more extensive corporate oversight. Read more

Profile

Office Depot is a worldwide provider of office supplies. The firm and its affiliates operate more than 1,600 stores in 48 countries, with 1,160 in North America and 444 overseas. Read more

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