Update: Office Depot Earnings-Turnaround Progressing Better Than Expected

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 |  About: Office Depot Inc. (ODP)
by: Jeffrey Himelson

Summary

Despite reporting a quarterly loss today, Office Depot is positioned to return to profitability.

The better than expected synergies realized from the merger with Office Max has strengthened my conviction in the prospect of a successful turnaround.

In my previous article, I discussed how the merger with Office Max would be a catalyst for a turnaround.

Office Depot (NASDAQ:ODP) reported its second quarter report today. The company reported a loss of $0.02 per share for the quarter, meeting analysts' consensus estimate. The company also was in-line with revenue estimates of $3.8 billion. Despite reporting a loss, ODP is positioned to perform. The main catalyst for its positioning to return to profitability is cost savings from synergies resulting from the merger between Office Depot and Office Max.

The merger between Office Depot and OfficeMax in November 2013 was a brilliant move that will result in a leaner enterprise. Management initially projected savings of $675 million from the integration, but during the quarterly report, it increased its guidance to saving at least $700 million. Moreover, management increased its full year 2014 outlook for operating income to be not less than $200 million, an increase from prior estimates of not less than $160 million. CEO Roland Smith discussed the success so far with respect to the merger during the press release:

"During the second quarter, our team executed exceptionally well, which enabled us to deliver merger synergies more quickly than anticipated."

Source: Press Release

In my previous article, "Office Depot: Shortsighted Analysis Leads To Gross Undervaluation," I opined that ODP would return to profitability after synergies were realized from the merger. With the merger being executed successfully, ODP remains grossly undervalued. It is set to return to profitability, but trades at an egregious discount to industry competitors such as Best Buy (NYSE:BBY) and Staples (NASDAQ:SPLS), and compared to its actual assets. ODP is clearly a buy at these levels, as the market will soon realize its true potential

Disclosure: The author is long ODP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.