Office Depot to Sell Japan Business - Analyst Blog

Office Depot Inc. (ODP), a leading supplier of office products and services across the globe, recently struck a deal with Kakuyasu, a Tokyo-based retailer, to sell its Japanese business established in 1996.

The financial terms of the transaction were not revealed. However, Office Depot did clear that Kakuyasu can license the company's trade names, utilize its sourcing services and continue to provide support to its customers in Japan. The company had closed all its stores in Japan in 2009 amid intense competition but continued with its mail-order and online sales. 

In October 2010, Office Depot unveiled a similar deal, when it entered into an agreement to sell its Israeli business to Hamashibr Lazarchan, a department store operator, at an enterprise value of $49.5 million. Under the terms of the deal, Office Depot, which operated 46 stores in Israel, is entitled to receive royalties every quarter, representing 1.35% of sales.

Office Depot has been reporting a decline in sales due to soft demand for office supplies in a sluggish economy. The company's third-quarter 2010 sales of $2,899.7 million missed the Zacks Consensus Revenue Estimate of $2,954 million, and dropped 4.3% from the prior-year quarter.

On a year-over-year basis, the company's North American Retail division's revenue slid 0.6% to $1,280.1 million, North American Business Solutions' revenue also dipped 4.4% to $841.8 million, and the International division's revenue declined 9.6% to $777.8 million.

Our View

Office Depot is repositioning itself to remain 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 improvement.

Furthermore, the company has always been looking for accretive opportunities to enhance its global footprint. Office Depot is reviewing capital-efficient opportunities to expand its reach in Eastern Europe and South America. The company believes that India and China will provide significant growth opportunities going forward.

However, the company's decision to abstain from the bid to renew the Los Angeles County office supplies contract, which is set to expire on January 1, 2011, may hamper its financial wherewithal and keep the stock under pressure. Office Depot notified that it would try to secure individual contracts and manage its costs to alleviate the negative impact of the lost business.

Moreover, we remain cautious about the torpid job market. The recovery in the economy also continues to lack luster. As a result, consumers and small businesses still remain watchful about their spending on big-ticket items such as business machines and other durable products. We observe that the demand for office products is closely tied to the health of the economy.

We remain Neutral on the stock. 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, and correlates with our view.

 
OFFICE DEPOT (ODP): Free Stock Analysis Report
 
OFFICEMAX INC (OMX): Free Stock Analysis Report
 
STAPLES INC (SPLS): Free Stock Analysis Report
 
Zacks Investment Research