Office Depot: Another Retail Sector Tragedy?

We all know the story by now; consumers are strapped for cash, businesses are counting paper clips, and gasoline stations are going defunct despite prices at the pump skyrocketing (operators surprisingly make very little in the way of margin as prices rise, and in fact most cases lose money). Today, the market is faced with another retail sector tragedy: Office Depot (ODP). No, the company is not filing for Chapter 11 protection in the spirits of Sharper Image and Bombay. But, the news was so grim (one could argue that it has been for some time) that one must begin to ponder whether the office supply retail sector will have one less stalwart once the economy awakens from its slumber.

Office Depot is among the worst performing stocks in the market today after management at the office supply chain issued a material 2Q08 earnings warning. Does this news really come as a surprise? The company peddles such items as pens, notebooks, and paper to small and medium-sized business owners, not to mention an array of other consumers, most of which are closing up shop, being laid off, or curtailing discretionary spending. The company noted that North American retail comparable store sales (comps) declined a worrisome 10.0% in 2Q08 year on year, which is accelerated from the 1Q08 drop of 9.0%. EBIT margins are anticipated to have declined 400 to 450 basis points year on year, revised from a 200 to 250 basis point expected decline, and also a quicker pace of erosion from the 1Q08 fall of 281 basis points.

In light of this news, the company's stock is trading at a 41.0% discount to book value, which may start to gain the attention of private equity in this fundamental analyst guru's eyes (see Circuit City (CC)). Additionally, the stock is trading at a PE of 5.7 times estimated 2009 earnings, a discount to the sector average, and its closest peer Staples Corp. (SPLS) at 13.22 times. Nonetheless, one could make a strong case that the stock should get even cheaper in the months ahead, pending visibility as to when comps or EBIT margins stand to bottom (perhaps not well into 2009). Management signaled that key fundamental trends could stabilize in the second half of 2008, though we have our doubts given economic conditions, the company's high level of debt, and misaligned inventory balance at this point in the year.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.

Disclosure: none

Comments

[The Grimm Reaper]

Office Depot is not in trouble jus because of the massive failure of is retail division. What most analysts fail to understand in that 52%of Ofice Depot's revenue comes from the Business Solutions Division (BSD), the contract/delivery arm of OFFICE DEPOT.
Of total BSD sales, $1.4 billion is in the public sector, or contract government sector. Currenly, scathing audit reports by the states of GEORGIA, NEBRASKA NORTH CAROLINA AND CONNETICUT, have caused widespread concern throughout OFFICE DEPOT'S entire base of government business. In April of 2008, an ex-senior account manager for BSD, came forward with allegations to STATE & FEDERAL authorities that OFFICE DEPOT, was engaged in a wide ranging scheme to violate certain large government contracts and agreements with systematic overcharging. The ATTORNEY GENERAL OF FLORIDA, after being presented with a detailed presenaion of the allegations opened a full blown FRAUD INVESTIGATION of OFFICE DEPOT. The highly specialized, ECONOMIC CRIMES DIVISION, of the Florida Attorney General's Office, is well into their second month the investigation. Additionally, federal agencies have launched their own inquiries. The lucrative US Communities/Los Angeles County/Office Depot, national contract for school and office supplies is at serious risk, as the investigation claims over $70 million dollars per year in overcharges on this $700 million dollar a year (annual) agreement used in all 50 states by state and local government agencies. OFFICE DEPOT has failed to disclose the contigent liabilities associated with these investigations in their financial statements as required, as such, the Securities and Exchange Commission is now conducting a preliminary inquiry. Office Depot should see a serious degrading of all their core government business in the second half of 2008, with civil and criminal action on the horizon concerning their government sector of business. STOCKHOLDERScanalso be expected to launch a class action lawsuite as details of the investigations become more public.

[The Grimm Reaper]

OFFICE DEPOT,stuck with horrible upper level management and leadership, is destined to be the bigest corporate stock failure of 2008.
My updated end of year range will be between $2.80 and $3.40 per share. This will end Office Depot's existence as we know it today, as it will certainly be consumed by a venture group, so long as the contigent liabilities, resulting from the many ongoing investigations of its BSD government business, does not completely devastate the financials. This will be the WORST STOCK OF 2008

[The Total Story]

Here is a link that reports the government contract story.

www.palmbeachpost.com/...

[Inkfeather]

Even before the bad turn of the economy, the Office Depot store in my neighborhood always had parking in front of the door - never had a line - and sales assistants were abundant but scarce when it came to offering service.
It is no wonder that they are in the position they are in -- and BSD --- I have dealt with them -- even when they were selling me at 2.00 over their cost they could not get things right - nope - sticking with Staples ....

[austinchu]

I'm no expert in the economy, but I'm comfortable talking about the retail sector of the economy. First and foremost, I work for a company that manages and tracks gift cards, and I follow the retail world, especially gift cards on savvywallet.com. One thing that I've noticed is the retailers that are filing for BK, all expanded heavily together in recent years. Land was cheap, and credit was low. Now the times are tough, and the retailers expanded well beyond what they were capable of going through. It's shame, they had to be in every strip mall, but I don't blame them. Everyone was in every strip mall, if they weren't there, then they weren't competing. Now only do the workers suffer, consumers suffer as well. There is currently millions of unredeemed and voided gift cards. Office depot may be next. Steve and Barry filed of BK on Wednesday.

[The Grimm Reaper]

The Lastest News From The Grimm Reaper:
OFFICE DEPOT
Dateline: Florida
Office Depot stock has fallen over 8% today, just before noon EST.
Analysis indicates that there will now be significant degrading of the companies value in the next 90 days.
OFFICE DEPOT needs to make bold moves to re-assure the investment community, such moves would include the sacking of CEO Steve Odland as well as BSD President Steve Schmidt; closing of all non-producing stores; hiring an out side accounting group to work with FLORIDA investigators to resolve the questions surrounding their government contracts; and refunding unilatterally, signiicant dollars to the numerous GOVERNMENT accounts that have been overcharged. Unless OFFICE DEPOT, take these types of bold steps, the investigations, in FLORIDA and CALIFORNIA, could result in irreparable damage to the OFFICE DEPOT brand name. Over all out look for 2008 is not good, even with bold action.

[FLBLUE]

Wait until they move to the new Taj Mahal Global HQ in Boca Raton! Even more expenses loom on the horizon for ODP.

[wallstreeter]

On Barron's website, ODP's debt ratio's are listed as:

Long-Term Debt to Equity: 0.19
Long-Term Debt to Total Capital: 0.16
Total Debt to Total Capital: 0.19
Total Debt: $748M

total debt to assets: 10%

[we want out....]

I work for the Office Depot BSD group in Canada.

We are newly acquired, being purchased in June of 2007.
(we we're called Axidata Inc. at the time, privately owned, by a group of 16 shareholders, which was the whole management team)

Knowing what we know now, and seeing what's unfolding, do you experts believe that OD would be interested in selling off it's Canadian BSD division?
I know of a decent majority of employees that wouldn't mind buying back the company, and get out of this Office Depot turmoil!

Most employees fear for their jobs, as HQ comes in, cuts out jobs without analysing or questionning present management....
shoot first, ask questions later type of management just doesn't work for Canada, and it would be probably best if OD would get out of Canada, and sell back the business to those who built it from the ground up.

Odland, time to go pal.
and give back your 14 millions dollars in bonuses....
you don't deserve them.
your employees who actually do all the heavy lifting and hard work, those who actually make the sales come in every month, THOSE are the people who should share your 14 millions in bonus.......

[bjr]

ODP is finished. Have you walked into a store lately? Empty. Few employees, no customers, zero deals, product thrown around with no organization. If you still own stock you should be officially banned from the stock market.

Upper level management is a joke, I know from first hand experience. My job changed earlier this year so I left the company, clearly a great career move, I knew it then and only now does everyone else.