Office Depot is repositioning itself to keep 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 improvements.
All these initiatives helped the company post improved second-quarter 2010 results. The quarterly loss of 7 cents a share portrayed a substantial improvement from a loss of 22 cents witnessed in the prior-year quarter, and also fared far better than the Zacks Consensus Estimate of a loss of 17 cents.
Despite a 4.4% decline in the top line, the office supplies retailer was able to narrow its bottom-line loss during the quarter by containing costs. Cost of goods sold and occupancy costs fell 6.2%, store and warehouse operating and selling expenses tumbled 7.1%, whereas general and administrative expenses slipped 10.9% during the quarter.
The company is targeting $100 million of cost savings annually by the end of 2013.
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, Asia and South America. The company believes that India and China will provide significant growth opportunities.
The company has been also actively managing its cash flows. The company expects to generate free cash flows between $50 million and $70 million in fiscal 2010. In addition, the company's strong liquidity, driven by solid cash balance, position it to drive future growth.
However, the company's decision of not participating in the bid to renew the Los Angeles County office supplies contract, which is set to expire on January 1, 2011, may hamper its financial performance, and could keep the stock under pressure.
Moreover, we remain cautious about the macro-economic environment and sluggish job market. The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain watchful about their spending for 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 remain Neutral on Office Depot Inc. (ODP), the operator of office supply stores under brand names such as Office Depot, Foray, Ativa, Break Escapes and Worklife with a target price of $4.25.
Office Depot, which competes with Staples Inc. (SPLS) and OfficeMax Inc. (OMX), holds a Zacks #3 Rank, translating into a short-term ‘Hold' recommendation and correlating with our Neutral rating on the stock.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
Zacks Investment Research
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Loading...
Posted In: Consumer DiscretionarySpecialty Stores
Benzinga simplifies the market for smarter investing
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
Join Now: Free!
Already a member?Sign in
