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Analyst Blog

Office Depot, Inc. (ODP - Free Report) has undertaken a strategic review of its business operating model, growth prospects and cost structure to bring itself back on growth trajectory, after an attempt to merge with Staples, Inc. (SPLS - Free Report) fell through.

The company is 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 recent decision to sell its European operation gives a clear indication that the company wants to focus on its core North American market.

With respect to the cost containment effort, Office Depot is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs and 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.

As part of its U.S. retail store optimization program launched in 2014, the company had shuttered 400 stores in the first phase, and plans to close 300 more stores over the next three year time frame in the second phase. The company is also focusing on smaller format stores of 15,000 square feet to better serve customers.

However, persistent weakness in the office products sector, technological advancements and stiff competition from online retailers such as Amazon.com, Inc. (AMZN - Free Report) are weighing upon the company’s performance. As per recent media report, Costco Wholesale Corporation (COST - Free Report) and Wal-Mart Stores Inc. (WMT - Free Report) are also striving to enter the office supply delivery services which will further intensify the competition.

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