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What is Troubling Office Depot? Are the Remedies Sufficient?
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The office products sector has been grappling with multiple headwinds, and Office Depot, Inc. (ODP - Free Report) is not fully immune to these. Analysts pointed out that demand for office products (paper-based) has been decreasing due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Stiff competition from online retailers such as Amazon.com, Inc. (AMZN - Free Report) has been playing spoilsport. Moreover, analysts believe that with Costco Wholesale Corporation (COST - Free Report) and Wal-Mart Stores, Inc. (WMT - Free Report) gradually entering in the office supplies market competition is likely to intensify further.
What’s Giving Office Depot a Tough Time?
Dismal Top-Line Performance
Office Depot continues to battle a dismal top-line that missed the Zacks Consensus Estimate for the 12th straight quarter, when it reported second-quarter 2017 results. The company’s total sales of $2,363 million lagged the Zacks Consensus Estimate of $2,460 million and fell 9% year over year, following a decline of 7% in the preceding quarter.
Management expects total sales to be lower in 2017 in comparison with 2016, due to store closures, tough market conditions and losses of contract customers in the previous year. However, management anticipates the rate of decline to decelerate throughout 2017 taking into consideration higher customer retention and strategic endeavors, along with the implementation of new customer wins.
Declining Comps
Stiff competition from online retailers, loss of customers in Business Solutions Division and lower traffic count in retail stores are making things tough for Office Depot. We note that the company has been witnessing dismal comparable-store sales run for quite some time now. A look at the company’s performance in fiscal 2016 unveils that comps have declined 1%, 1%, 2% and 4% in the first, second, third and fourth quarters, respectively. In the first and second quarters of 2017, the same has tumbled 5% and 6%, respectively.
Are the Remedies Sufficient?
Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure to bring itself back on the growth trajectory. The company now intends to focus on core North American market. The company is also closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, concentrating on e-commerce platforms as well as focusing on providing innovative products and services. The company by increasing its penetration into adjacent categories and enhancing share of wallet with existing customers intends to boost sales in the contract channel.
With respect to the cost containment effort, Office Depot is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs as well as general and administrative expenditures, and also gaining from its U.S. retail store optimization plan. Management expects these endeavors to result in annual benefits of over $250 million by the end of 2018.
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What is Troubling Office Depot? Are the Remedies Sufficient?
The office products sector has been grappling with multiple headwinds, and Office Depot, Inc. (ODP - Free Report) is not fully immune to these. Analysts pointed out that demand for office products (paper-based) has been decreasing due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Stiff competition from online retailers such as Amazon.com, Inc. (AMZN - Free Report) has been playing spoilsport. Moreover, analysts believe that with Costco Wholesale Corporation (COST - Free Report) and Wal-Mart Stores, Inc. (WMT - Free Report) gradually entering in the office supplies market competition is likely to intensify further.
What’s Giving Office Depot a Tough Time?
Dismal Top-Line Performance
Office Depot continues to battle a dismal top-line that missed the Zacks Consensus Estimate for the 12th straight quarter, when it reported second-quarter 2017 results. The company’s total sales of $2,363 million lagged the Zacks Consensus Estimate of $2,460 million and fell 9% year over year, following a decline of 7% in the preceding quarter.
Management expects total sales to be lower in 2017 in comparison with 2016, due to store closures, tough market conditions and losses of contract customers in the previous year. However, management anticipates the rate of decline to decelerate throughout 2017 taking into consideration higher customer retention and strategic endeavors, along with the implementation of new customer wins.
Declining Comps
Stiff competition from online retailers, loss of customers in Business Solutions Division and lower traffic count in retail stores are making things tough for Office Depot. We note that the company has been witnessing dismal comparable-store sales run for quite some time now. A look at the company’s performance in fiscal 2016 unveils that comps have declined 1%, 1%, 2% and 4% in the first, second, third and fourth quarters, respectively. In the first and second quarters of 2017, the same has tumbled 5% and 6%, respectively.
Are the Remedies Sufficient?
Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure to bring itself back on the growth trajectory. The company now intends to focus on core North American market. The company is also closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, concentrating on e-commerce platforms as well as focusing on providing innovative products and services. The company by increasing its penetration into adjacent categories and enhancing share of wallet with existing customers intends to boost sales in the contract channel.
With respect to the cost containment effort, Office Depot is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs as well as general and administrative expenditures, and also gaining from its U.S. retail store optimization plan. Management expects these endeavors to result in annual benefits of over $250 million by the end of 2018.
Will You Make a Fortune on the Shift to Electric Cars?
Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.
With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.
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