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Will Office Depot's (ODP) Efforts Prop Up the Stock in 2018?
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A glimpse of Office Depot, Inc.’s (ODP - Free Report) share price movement reveals that it has plunged roughly 19.7% in a year as against the industry’s decline of 5.2%. Nevertheless, management is not sitting idle, and instead trying all means to bring the stock back on growth trajectory. But before jumping on initiatives undertaken, let’s analyze all that is going on in the industry and how the same has impacted the company.
A Brief Introspection
The office products sector has been grappling with multiple headwinds. 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 (AMZN - Free Report) has also been playing spoilsport. Analysts believe that with Costco (COST - Free Report) and Walmart (WMT - Free Report) gradually entering in the office supplies market, competition is likely to intensify further.
Office Depot is not fully immune to these. Persistent weakness in the sector, loss of customers in Business Solutions Division and lower traffic count in retail stores are making things tough for the company.
The company has been grappling with dwindling top-line performance. We noted total sales had declined 7%, 9% and 8% in the first, second and third quarters of 2017. Management expects total sales to be lower in 2017 in comparison with 2016, due to the store closures, tough market conditions, hurricane impacts and losses of contract customers in the previous year. Comparable-store sales have tumbled 5%, 6% and 5% in the respective quarters.
Strategic Endeavors
Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure to bring itself back on 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 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.
To widen domain of offerings, Office Depot acquired CompuCom Systems that will help it acclimatize to the fast changing retail landscape along with providing enterprise-level tech services and products to customers. The acquisition is likely to add approximately $1.1 billion in revenues and help realize cost savings of more than $40 million within a period of two years. The company also launched a new subscription-based business services platform, BizBox, to assist start-ups and small businesses on host of things such as website designing, financing and accounting service, HR/payroll support and others.
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
Will Office Depot's (ODP) Efforts Prop Up the Stock in 2018?
A glimpse of Office Depot, Inc.’s (ODP - Free Report) share price movement reveals that it has plunged roughly 19.7% in a year as against the industry’s decline of 5.2%. Nevertheless, management is not sitting idle, and instead trying all means to bring the stock back on growth trajectory. But before jumping on initiatives undertaken, let’s analyze all that is going on in the industry and how the same has impacted the company.
A Brief Introspection
The office products sector has been grappling with multiple headwinds. 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 (AMZN - Free Report) has also been playing spoilsport. Analysts believe that with Costco (COST - Free Report) and Walmart (WMT - Free Report) gradually entering in the office supplies market, competition is likely to intensify further.
Office Depot is not fully immune to these. Persistent weakness in the sector, loss of customers in Business Solutions Division and lower traffic count in retail stores are making things tough for the company.
The company has been grappling with dwindling top-line performance. We noted total sales had declined 7%, 9% and 8% in the first, second and third quarters of 2017. Management expects total sales to be lower in 2017 in comparison with 2016, due to the store closures, tough market conditions, hurricane impacts and losses of contract customers in the previous year. Comparable-store sales have tumbled 5%, 6% and 5% in the respective quarters.
Strategic Endeavors
Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure to bring itself back on 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 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.
To widen domain of offerings, Office Depot acquired CompuCom Systems that will help it acclimatize to the fast changing retail landscape along with providing enterprise-level tech services and products to customers. The acquisition is likely to add approximately $1.1 billion in revenues and help realize cost savings of more than $40 million within a period of two years. The company also launched a new subscription-based business services platform, BizBox, to assist start-ups and small businesses on host of things such as website designing, financing and accounting service, HR/payroll support and others.
Bottom Line
Certainly, the company is leaving no stone unturned, and we sincerely hope that these endeavors may help revive this Zacks Rank #3 (Hold) stock in 2018. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>