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Office Depot Upgraded to Neutral

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On Aug 7, 2013, we upgraded leading office supplies company, Office Depot Inc. (ODP - Free Report) , to Neutral based on its improved prospects.

Why the Upgrade?

Office Depot came up with in line bottom-line results for the second quarter of 2013, marking an improvement from the prior-year quarter. The company is containing costs, closing underperforming stores, concentrating on its e-Commerce platforms, and focusing on providing innovative products and services, which should all contribute to margin improvement.

In a move to uplift itself, Office Depot decided to merge its business with OfficeMax Incorporated ,which would help the company capture incremental market share, streamline its cost structure and better compete with the industry bellwether, Staples Inc. and online rivals such as Inc. (AMZN - Free Report) .

The merger will result in annual savings of $400 million to $600 million by the third year of the deal. The transaction is expected to be concluded by the end of 2013. The company stated that it expects to generate $130–$200 million savings from purchasing efficiencies, while supply-chain initiatives are projected to result in $70–$100 million cost savings.  Selling, general and administrative efficiencies are expected to result in $130–$200 million in savings, while it expects to generate cost synergies of $70–$100 million from advertising and marketing efficiencies.

Amid these positives, the company continues to disappoint on the sales front. Sales decreased 4% during the recently concluded quarter on account of sluggish demand for big-ticket items. In the near future, we expect demand for office products to remain soft.

Currently, Office Depot holds a Zacks Rank #3 (Hold).

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