UBS Stays Bearish On Office Depot After Q4 Print

Although Wednesday's fourth-quarter results indicate that Office Depot Inc ODP has made progress with its turnaround, the company continues to face challenges, according to UBS.

The Analyst

Analyst Michael Lasser maintained a Sell rating on Office Depot and raised the price target from $2.30 to $2.50.

The Thesis

The business services division generated growth for the fourth straight quarter, and CompuCom grew by 4 percent on a pro forma basis.

The BSD growth would have been flat had it not been for acquisitions, while CompuCom's operating margin contracted 230 bps year-on-year, Lasser said in a Thursday note. 

The key question ahead is whether Office Depot will be able to maintain the pace of topline growth in its services category while boosting underlying margins, the analyst said. Achieving this will not be easy, as the company may face intensifying competition due to the pending merger between Staples SPLS and Essendant Inc. ESND, he said. 

The turnaround of the retail business continues to be among the biggest near-term challenges for Office Depot, Lasser said. The slowdown of retail same-store sales was mainly traffic-driven, likely reflecting secular challenges, he said. 

The analyst further pointed out that Office Depot has not generated sales growth as well as margin expansion in the same full year since 2014, and that maintaining its pace of turnaround could be challenging in a year of slower economic growth.

Price Action

Office Depot shares were down more than 3 percent at $3.44 at the time of publication Thursday. 

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