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Why Shares of Office Depot, Inc. Are Soaring 14% Despite Revenue Decline

By Daniel Miller – Nov 2, 2016 at 1:37PM

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Despite shares soaring on a better-than-expected third-quarter profit, Office Depot lacks a growth story for investors.

Image source: Getty Images.

What happened

Shares of Office Depot, Inc. (ODP -0.06%), a global provider of office products, services, and solutions, were soaring 15% as of 1:02 p.m. EDT after the company released its third-quarter results Wednesday morning that offered investors a bottom-line beat.

So what

Looking at the top line, things appeared pretty rough for the third quarter: Revenue fell 6.9% to $2.84 billion during the third quarter. That result was far below the consensus estimate of $3.49 billion. But the positive reaction from investors came from the company's bottom-line beat. Office Depot's profit jumped to $44 million, or $0.08 per share, thanks to cost cutting and a tax benefit. Adjusted earnings were $0.16 per share, ahead of analysts' estimates of $0.15 per share.

"We also realigned our organization to create a more efficient and effective operating structure that is focused on aggressively implementing a number of growth and profitability initiatives in our North American business," said Roland Smith, Office Depot chariman and chief executive officer, in a press release. "We are recovering quickly from the disruption caused by the protracted Staples acquisition attempt, and I'm very pleased with both our progress and financial results."

Now what

Despite the surprise third-quarter profit beat, this appears to still be a business in turmoil. Office Depot is selling its European business and plans to close roughly 300 stores over the next three years. It faces a brutal combo of less office supply demand from businesses at a time when more businesses can effectively order online or even use substitute "suppliers" such as Wal-Mart.

ODP Chart

ODP data by YCharts

The company is making moves to cut costs by shedding overhead and retail stores and selling off international business. And while management is quick to highlight that its customer commitments checked in at a two-year high during the third quarter, it's difficult to buy into a growth story here. Office Depot's best days are long behind it, and that 10-year graph above says a thousand words to that effect.

Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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