Can Office Depot Really Benefit From the Merger?

Office Depot (NYSE: ODP  ) scored a win in its merger with fellow big-box supply store retailer Office Max (NYSE: OMX  ) , but is the company out of the proverbial weeds? The Depot saw its shares decline more than 6% Wednesday due to an earnings report that came in under estimates and altogether left investors and analysts unimpressed. No one has any delusions as to the intense technology-fueled disruption facing Office Depot and its recently acquired competitor, but there are levers the company can pull to remain relevant in the future.

Tough earnings recap
Despite the news that the two big "Office" stores are joining forces to fight back against Amazon.com  (NASDAQ: AMZN  ) , the market had a hard time being enthused about Office Depot's $0.02-per-share earnings in the just-ended quarter -- a drop off of two-thirds since the year-ago quarter. Wall Street was expecting earnings to drop as well, but only by one penny.

Revenue wasn't as bad of a story -- down just 3% to $2.62 billion and slightly above analyst expectations. Management has been working to reel in costs in the face of falling sales, but the latter proved too substantial in the three-month period.

In North America, same-store sales dropped 2% while revenue dropped roughly 4%. Order values, transaction count, and traffic all trended down year over year. Both the company's Business Solutions and International divisions saw low-single-digit drops in sales figures as well.

Good news was tough to find, and the saving grace seems to be just the merger. But even as a mammoth office supplier, can the enlarged Office Depot compete?

Monolith
The new Office Depot will have around $17 billion in sales this year, 66,000 worldwide employees, and more than 2,000 locations. For comparison, the traditional industry leader, Staples (NASDAQ: SPLS  ) , did $24.38 billion in sales last year with roughly 50,000 employees and a similar number of stores.

Staples is able to do more with less because of its online business as it's the second largest Internet retailer in the world, right behind Amazon. Besides the interesting fact that Staples managed to develop such a tremendous presence in the e-commerce world, this spells bad news for Office Depot, regardless of the merger.

Office Depot is set to save around $600 million in costs by the third year of the merger, which is fantastic. The company will eliminate duplicate systems, stores, employees, and the whole like, as it moves to compete with Staples and Amazon. The thing is, Staples and Amazon control the office supply e-commerce space. Office Depot will have to reduce its margins to nearly nothing to be able to price competitively, not to mention Amazon's advantages in the shipping arena.

In the short term, this merger may help the company and investors juice some cash flow -- a story that is nothing to scoff at. But in the long term, it is hard to identify Office Depot's competitive advantages and what will keep the company afloat, let alone growing. For an attractively priced office supply pick, Staples is a much more compelling choice. For an expensive yet promising growth option, Amazon is the pick.

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