Is Office Depot Back From the Dead?

After news broke that Barron's could see shares of Office Depot skyrocket, the company's stock rose 4%. This came in spite of its problems in recent years, and even at a time when rival Staples is struggling. Is Barron's right, or is Office Depot still heading under?

Jun 11, 2014 at 5:30PM

Images

Source: Wikimedia Commons. 

In an unlikely turn of events, shares of Office Depot (NASDAQ:ODP) jumped nearly 4% to close at $5.39 on June 9, after Barron's released a report saying the business's shares could rise as high as $8 as its turnaround by CEO Roland Smith picks up steam. If this comes to fruition, the company's investors could be handsomely rewarded, but is it logical to conclude that the home and office supplier is in the clear when even rival Staples (NASDAQ:SPLS) continues to struggle?

Office Depot's been in real trouble
The past few years have been somewhat of a mixed bag for Office Depot. Between 2009 and 2013, the retailer saw its revenue fall by 7% from $12.1 billion to $11.2 billion. According to the company's most recent annual report, this decline in sales was due, in part, to a 3% fall in store count (excluding the 823 it acquired through its merger with OfficeMax in 2013), but can also be chalked up to an aggregate comparable-store sales decline of 24% during the same timeframe.

ODP Revenue (Annual) Chart

ODP Revenue (Annual) data by YCharts.

Although its revenue has fallen, Office Depot has experienced one positive development. Over the past five years, the retailer saw its net loss of $596.5 million narrow to a loss of $20 million. Despite being hit by falling sales, management was able to significantly reduce costs, primarily in the company's selling, general and administrative expenses. Through cost-cutting initiatives and corporate restructuring, the company was able to reduce this metric from 29.9% of sales in 2009 to 22.8% by the end of 2013.

How does Office Depot stack up against Staples?
Over a similar timeframe, Staples has performed better in terms of revenue, but the comparison between it and Office Depot when it comes to profits isn't as clear. Between 2009 and 2013, Staples saw its revenue fall a slightly more modest 5%, from $24.3 billion to $23.1 billion as its 3% decline in store count was met with a more timid aggregate comparable-store sales falloff of 9%.

SPLS Revenue (Annual) Chart

SPLS Revenue (Annual) data by YCharts.

In terms of profits, however, Staples did both better and worse than Office Depot. During the most recent five-year period, the retailer saw its net income drop 16% from $738.7 million to $620.1 million. In addition to being negatively affected by falling revenue, the company's bottom line was impaired by its cost of goods sold, which rose from 73.3% of sales to 73.9%, and from its selling, general and administrative expenses, which rose from 20.2% of sales to 20.5%. Although turning a profit beats net losses, the fact that the business's bottom line contracted while Office Depot's improved is cause for concern.

Is there salvation for Office Depot, or is it game over?
According to the report by Barron's, Office Depot can be expected to improve moving forward because of restructuring. By 2016, the retailer expects to cut its store count by about 20% (400 stores). If management is correct about the end result, this move will reduce costs by around $675 million per year.

Picture

Source: Office Depot.

Another area the company expects to focus on is the expansion of its North American Business Solutions segment. Looking at Office Depot's most recent annual report, we can see that the segment accounted for just 32% of the company's revenue in 2013 but made up nearly 73% of its operating income. With high renewal rates and revenue that has risen by 10% over the past three years while the company's aggregate sales have fallen 2%, it's likely that any turnaround of the business can only be accomplished by leveraging this existing resource.

Foolish takeaway
It's not too hard to see that Office Depot isn't sitting all that pretty. In addition to seeing declining revenue, the company's nearly continuous net losses have to be discouraging to its shareholders. However, if the business can succeed in implementing its plan to improve operations, it's possible its prospects could improve. For this reason alone, the Foolish investor who thinks management has what it takes to achieve these goals might find value in the retailer, but for those looking for a less risky alternative, Staples might be a good opportunity to analyze in greater detail.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool owns shares of 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.

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