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Office Depot Down 29% in a Month: Is Only Top Line to Blame?

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A glimpse of Office Depot, Inc.’s (ODP - Free Report) share price movement reveals that it has plunged about 29.4% in a month compared with the industry’s decline of 6.6%. Additionally, a downtrend in the Zacks Consensus Estimate also echoes the same sentiment. So what is behind the debacle? We have tried to ascertain major reasons that can be held responsible for this Zacks Rank #4 (Sell) stock’s dismal show in the bourses.

Shares of Office Depot crashed on Aug 10 following the company’s disappointing performance in the second quarter of 2017. The stock plunged almost 26% on the respective day after it succumbed to a negative earnings surprise of 33.3% in the quarter, with top line continuing to struggle. As a result, analysts polled by Zacks tweaked their estimates.

We note that the Zacks Consensus Estimate of 52 cents and 55 cents for 2017 and 2018 has declined by 2 cents and 4 cents, respectively, in the past 30 days. Moreover, the same has dropped by a penny to 17 cents for the third quarter.

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 7% decline 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.

General Industry Weakness

There has been persistent weakness in the office products sector. 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. Further, stiff competition from online retailers such as Amazon.com, Inc. (AMZN - Free Report) has been playing spoilsport.

Done with ODP? Find Solace in These 2 Safe Bets

Better-ranked stocks in the space are The Children's Place, Inc. (PLCE - Free Report) and Five Below, Inc. (FIVE - Free Report) both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters and has a long-term earnings growth rate of 9%.

Five Below delivered an average positive earnings surprise of 6.3% in the trailing four quarters and has a long-term earnings growth rate of 28.5%.

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