Office Depot Upgraded - Analyst Blog
August 15 2011 - 4:05AM
Zacks
Buoyed by better-than-expected second-quarter 2011 results, we
recently upgraded our recommendation on Office Depot,
Inc. (ODP), the supplier of a range of office products and
services across the globe, to Neutral with a price target of $3.25.
Earlier, we had an Underperform rating on the stock.
The second quarter loss of 6 cents a share, not only improved
from the prior-year quarter’s loss of 9 cents but also the Zacks
Consensus Estimate of a loss of 12 cents. However, Office Depot's
total revenue of $2710.1 million fell short of the Zacks Consensus
Estimate of $2,728.0 million, but increased marginally from the
prior-year quarter's revenue of $2699.5 million.
Office Depot is repositioning itself to keep afloat in a
difficult consumer environment. The company is containing costs,
closing underperforming stores, reducing exposure to higher
dollar-value inventory items, shuttering non-critical distribution
facilities, and focusing on providing innovative products and
services, which should all contribute to margin improvements.
The company in order to enhance its global footprint has made
strategic acquisitions over the past few years, and is still
looking for accretive opportunities. Office Depot is reviewing
capital-efficient opportunities to expand its reach in Eastern
Europe, Asia and South America.
Office Depotin order to drive sales has undertaken initiatives,
which includes, improvement in customer in-store shopping
experience, investment in Copy & Print Depot and Tech Depot
services, remodeling and introduction of smaller format stores, and
margin improvements through rationalization of stock keeping units
and product pricing. Management anticipates that these initiatives
could result in $75 million to $100 million by way of annual
benefits by the end of 2013 at North American Retail division.
However, we remain cautious about the current economic unrest
after Standard & Poor’s downgraded the credit rating of the
U.S. to AA+ from AAA. As the economy continues to be sluggish,
consumers and small businesses remain frugal about big-ticket
spending on items such as business machines and other durable
products. Therefore, we believe that the demand for office products
is closely tied to the health of the economy.
Moreover, due to high exposure to international markets, Office
Depot remains prone to currency fluctuations. The weakening of
foreign currencies against the U.S. dollar may require the company
to either raise prices or contract profit margins in locations
outside the U.S. An increase in price may have an adverse impact on
the demand for the products.
Given the pros and cons, we prefer to be Neutral at this
juncture. Moreover, Office Depot, which competes with
Staples Inc. (SPLS) and OfficeMax
Inc. (OMX), holds a Zacks #3 Rank, which translates into a
short-term ‘Hold’ recommendation.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
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