Recently, Office Depot Inc. (ODP), one of the leading suppliers of office products and services, said that it has received a contract for office supplies, from MDU Resources Group Inc. (MDU).
The company informed that it has been offering office supplies to MDU Resources since 2004. The businesses of MDU Resources comprise electric and natural gas utilities, natural gas pipelines and energy services, natural gas and oil production, construction materials and contracting.
Earlier, Office Depot had notified that it would not participate in the bid to renew the Los Angeles County office supplies contract, which is set to expire on January 1, 2011. The company cited the terms of the new general office supplies agreement as its reason for not bidding for the new contract, which may adversely affect its profitability.
The company hinted that it would be able to maintain its sales performance despite not retaining the contract. Moreover, Office Depot will try to secure individual contracts and manage its costs to alleviate the negative impact of the lost business.
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 innovative products and services, which should all contribute to margin improvements.
Furthermore, the company has always been looking for 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. However, the company’s decision of not participating in the bid to renew the Los Angeles County office supplies contract, may hamper its financial performance, and could keep the stock under pressure.
 


However, we remain cautious about the macroeconomic 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. 

Currently, we remain Neutral on Office Depot, 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, which translates into a short-term ‘Hold’ recommendation and correlates with our Neutral rating.

 
MDU RESOURCES (MDU): Free Stock Analysis Report
 
OFFICE DEPOT (ODP): Free Stock Analysis Report
 
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STAPLES INC (SPLS): Free Stock Analysis Report
 
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