Will Office Depot's (ODP) Efforts Help Revive The Stock?

In spite of Office Depot, Inc.’s (NASDAQ:ODP) concerted efforts to give itself a complete makeover in an environment where demand for office products (paper-based) has shrunk owing to technological advancements, shares of the company have fallen significantly in the past three months. Nonetheless, the company has been focusing on business operating model, viable projects and cost structure. The company is also making incremental investments to catapult it into a product and services-driven enterprise.

We note that shares of this Zacks Rank #3 (Hold) company have fallen 17.9% in the said time frame compared with the industry’s decline of 10.3%. The stock’s dismal run on the bourses can be attributable to lower-than-expected operating performance at the CompuCom division that took a toll on sales and operating income during the first quarter of 2019. Total sales declined 2%, while adjusted operating income plunged 28% year over year.

The company’s CompuCom division reported operating loss of about $15 million during the first quarter of 2019. Weaker-than-anticipated revenues from existing customer projects and less-than-proportionate fall in related expenses acted as deterrents. Additionally, the company’s retail division has been witnessing dismal comparable-store sales for a while now. In the first quarter of 2019, the Retail Division’s sales fell 6%, while comparable-store sales dropped 4%.

Nevertheless, management is not sitting idle and instead looking into every possible opportunity for growth. The company has been closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, concentrating on e-commerce platforms, and focusing on providing innovative products and services. Office Depot’s initiative of buy online and pick up in-store is also gaining traction.

Office Depot also initiated Business Acceleration Program that involves reducing costs, improving operational efficiencies, enhancing service delivery, effective use of technology and automation and identifying strategic investment opportunities. Moreover, in order to control discretionary spending, the company adopted zero-based budgeting approach. As a result, management anticipates cost savings of at least $40 million in the second half of 2019.

Moving on, the company hopes that strategic endeavors such as streamlining operational structure and exploring options to speed-up cross-selling opportunities would help bring the CompuCom segment back on track. The company is focusing on improving conversion, product assortment mix and exploring store-within-a-store opportunities to improve the Retail division’s performance.

All said, we hope these afore-mentioned efforts will help the company achieve the much-required turnaround in an environment where demand for office products is diminishing. We note that in the past month the stock has gained 5.8% against the industry’s decline of 7.2%.

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