Office Depot, Inc.’s (ODP - Free Report) focus on business operating model, growth prospects and omni-channel capabilities have aided the stock to gain and outpace the industry in the past three months. Shares of this Boca Raton, FL-based company have surged 33.5% compared with the industry that advanced 11.5%.
Strategic endeavors, including strengthening of core businesses and expansion of service and subscription offerings fueled the top line that beat the consensus mark for the third time in a row and grew year over year during first-quarter 2018. The company is trying all means to give itself a complete makeover in an environment where demand for office products (paper-based) has shrunk due to technological advancements.
Business Operating Model
Office Depot now focuses on core North American market. It 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.
Management is making incremental investments to catapult it into a product and services-driven enterprise. Service revenue now represents approximately 14% of the total sales and is likely to reach about 20% of the metric. To widen its domain of offerings, Office Depot acquired CompuCom Systems that is helping it to acclimatize to the fast-changing retail landscape along with providing enterprise-level tech services and products to customers. The company also signed a channel partner agreement with MicroCorp, a premier value-added distributor of telecom and cloud solutions.
The company is also incorporating Tech-Zone services desk across its stores. It also launched a 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. We believe that improvement in Business Solutions and CompuCom divisions is likely to benefit the company going forward.
With respect to the cost containment efforts, this Zacks Rank #3 (Hold) company is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs as well as general and administrative expenditures. Office Depot is also gaining from its U.S. retail store optimization plan.
Headwinds to Counter
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. These may have an unfavorable impact on the company's performance. Moreover, higher marketing, advertising and other growth-related investments may hurt margins. Further, stiff competition from online retailers such as Amazon (AMZN - Free Report) has also been playing spoilsport.
The company has been witnessing dismal comparable-store sales run across its Retail division. A look at the company’s performance in fiscal 2017 unveils that comps have declined 5%, 6%, 5% and 4% in the first, second, third and fourth quarter, respectively. The metric slid 4% during the first quarter of 2018 due to lower transactions and fall in average order values.
Certainly, Office Depot is leaving no stone unturned to develop into an omni-channel business services platform, offering end-to-end solutions to enterprise customers as well as small to medium-sized businesses.
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