Please ensure Javascript is enabled for purposes of website accessibility

Why Office Depot Stock Has Plunged 44% in 2016

By Adam Levine-Weinberg – Jun 28, 2016 at 1:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The failure of Office Depot's attempt to merge with Staples sent the stock plummeting.

What: So far, 2016 has not been a good year for office supply retailer Office Depot (ODP 1.66%). It's not too hard to understand why: federal antitrust regulators succeeded in scuttling the company's planned merger with Staples (SPLS) last month.

Office Depot shares have lost 44% of their value since the beginning of the year, according to S&P Capital IQ data. Virtually all of the stock's decline came on the day after the Staples merger fell apart.

ODP Chart

Office Depot YTD Stock Performance, data by YCharts

So what: Staples had offered to buy Office Depot for a lofty $11 per share. Entering the year, Office Depot shares traded for roughly half that amount, reflecting investors' skepticism that the deal would go through.

In many ways, Office Depot is worse off than it was before the merger attempt. First, it still hasn't fully integrated OfficeMax into its operations following their 2013 merger. It postponed some necessary integration activities while the Staples merger was pending. This means it isn't receiving the full benefit of that earlier merger yet. Second, Office Depot lost some market share in its commercial business due to disruption related to the planned Staples merger.

Additionally, after the merger fell through, Staples announced plans to cut prices to gain share in the commercial business, with a particular emphasis on companies with 10-200 employees. Office Depot will probably be forced to cut its own prices to avoid losing customers.

Office Depot may face stepped-up competition from Staples. Image source: The Motley Fool.

On the plus side, Office Depot did get a $250 million breakup fee from Staples. It is using part of the proceeds to fund a $100 million share buyback. This will allow Office Depot to repurchase more than 5% of its outstanding shares. But that's a small consolation for investors.

Now what: Office Depot is barely profitable: analysts expect it to post an adjusted pre-tax margin of less than 3% this year. Furthermore, it is the No. 2 player in a declining industry. So while the stock is relatively cheap, it is also extremely risky.

The stock's performance in the coming years will depend on how Office Depot tries to position itself to remain relevant and how far it can reduce its cost structure. Until management provides more clarity on those issues, investors may want to keep their distance.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The ODP Corporation Stock Quote
The ODP Corporation
$35.51 (1.66%) $0.58
Staples, Inc. Stock Quote
Staples, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.