Office Depot Balances Risk-Reward - Analyst Blog

Office Depot Inc. (ODP">ODP) 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 growth 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.

Office Depot recently announced its plan of acquiring Swedish office supply company, Svanstroms Gruppen. The acquisition will help Office Depot  expand its European market presence, placing it among the leading office supply companies in Sweden.

However, the company's decision to abstain from the bid to renew the Los Angeles County office supplies contract 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 static 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.

Given the pros and cons, we prefer to be Neutral on the stock. Office Depot, which competes with Staples Inc. (SPLS">SPLS) and OfficeMax Inc. (OMX">OMX), holds a Zacks #4 Rank, which translates into a short-term ‘Sell' recommendation.

 
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