Has Office Depot Defied the Odds?

The office supply giant impressed the Street and management is making all the right moves. But can the company overcome a massive change in the industry's tides?

May 13, 2014 at 10:48AM

In what was perhaps the most surprising story of earnings season, big-box office supplier Office Depot (NASDAQ:ODP) wowed the Street with much better than expected earnings. Disrupted by the titan that is e-commerce and shifting retail trends, Office Depot's business model was held to the fire a few years back, and it's been on a treacherous slope until last week. Management is pulling all the levers and pushing all of the buttons to get this ship back on course, and it may just be working. With its recent acquisition of Office Max, its closure of poor performers, and its focus on merchandising, the company is doing everything that is typically suggested by turnaround-savvy activists. The question is: Will these efforts yield a long-term recovery, or is this the final burst of a dying star?

Smooth moves
If its essential business wasn't in such peril, Office Depot would be a no-brainer turnaround story, with a management team that will not sit still until things are back on track. For one thing, the company employed the strategy often espoused by businessman extraordinaire Richard Branson: When in doubt, grow. In November of last year, the company announced its purchase of Office Max for nearly $1 billion. Both companies were in trouble and served the same market; it was a natural marriage and allowed Office Depot to focus on operational issues rather than market share battles. Even better, the deal was done in an all-stock transaction -- a much more favorable tax scenario than a cash purchase.

Satisfying the optimists, management turned to placating the MBAs -- cutting costs anywhere and everywhere, including closing hundreds of U.S. stores that were underperforming and acting as a ball-and-chain on sales and cash flow. Those savings are expected to show up on the financial statements as early as the current quarter.

Office Depot is perhaps most compelling in its strategy with its ongoing operations. Bigger rival Staples is attempting to transition to its online business as quickly as possible (Stapes is the second-largest Internet retailer, behind Amazon), and is closing down hundreds of its brick-and-mortar stores in the process. Office Depot's management was wise not to try to follow suit. Staples already struggles to compete with the e-commerce giant, and Office Depot would almost certainly be in perpetual catch-up mode -- not a formula for long-term success.

Instead, the company is making use of its physical square footage. Management cited positive trends in the printing and copying business (partially a factor in the quick growth of small businesses), in addition to maintenance services. Office Depot can act as a custodian for small and medium-size companies that do not have their own back office to rely on.

The bottom line
Investors and analysts were impressed with the improved guidance and higher-than-expected cost savings from the Office Max acquisition. While those were nice perks to the recent earnings report, investors will want to keep an eye on the long-term trends in the business. Office Depot still has a tremendous hill to climb in order to secure a stable, long-term future. Keep a close eye on the development of its business services segment, as this is a defensible business compared to the retail segment.

This could be one of the more interesting turnaround stories, but it's way too early to tell.

Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers