Summary
1.Despite the quick turnaround in announcing the less severe than expected financial impact that the vendor allocation timing issues have had over the past 4 quarters, uncertainty still abounds regarding the Leadership, business model and ultimate turnaround strategy for Office Depot. 2.Within the text of the 3rd quarter earnings announcement are statements which are "eerily" similar to those announced at the beginning of FY 2006 at OfficeMax such as lowering payroll and advertising costs with a significant curtailment in new store growth. 3.Given the fact that the US economy continues to operate in an extremely soft office products environment with strong indicators that Europe and particularly the UK are also showing slowdown signs, ODP will continue to struggle when overhead expenses created by last years B to B acquisitions and related investments in integration and salaries are additionally factored into a highly leveraged company.
Analysis
Facing the daunting task with the macro domestic and international economic issues coupled with a highly leveraged expense overhead line created by last years acquisitions of contract business in South Korea, the US, Europe and China, CEO Steve Odland will be extremely challenged with getting the topline business back on track while simultaneously working with less Advertising/Marketing dollars, retail store payroll and slower store growth and existing store remodels. At the same time, market share, customer loyalty/ service satisfaction, brand recognition and earnings must be maintained at minimum, improved optimally---no small feat for any Fortune 500 CEO! With the Q3 2007 earnings announcement on 11/20, Office Depot has now strung together three consecutive disappointing Earnings releases(5 if the 7% spike of the vendor allocation dollars are removed from the last 2 quarters of 2006) and the bleeding in comps in both retail and Contract is worsening with little hope that Q4 of TY will produce any relief as the economy continues to spiral downward. On 11/21, analysts have moved to a Neutral view on shares at ODP and a price that was at $18.48 as recently as 11/9 closed at $17.49 on 11/20, reflecting continued uncertainty on the business model and potential turnaround. Sanford Bernstein analyst Colin McGranahan stated on 11/20 that "the significant lowered store count, commentary about company specific missteps, and the announcement that ODP has engaged Peter J. Solomon Co. to advise it.....are acknowledgements that Office Depot is considering a change in tact....up to and including sale of the company."
The sale of course, would be a possible merge with Staples as part of a consolidation within the sector hinted at last year to be OfficeMax with either SPLS or ODP. However, in its highly leveraged position TY, ODP would not be the buyer. In any event, merge or no merge and obviously subject to enormous scrutiny by the FTC, ODP has its work cut out over the next year not only in "Taking Care of Business" for its diminished customer base, but additionally in taking care of its 3/4 FY 2007 earnings wounds.
