Office Depot Inc. (ODP) is repositioning itself in this difficult consumer environment by 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.
This should all contribute to margin improvements.
All these initiatives helped the company to post better-than-expected fourth-quarter 2010 results. Quarterly earnings of 9 cents per share improved substantially from a loss of 6 cents in the prior-year quarter.
It also fared better than the Zacks Consensus Estimate for a loss of 3 cents.
Despite a 3.4% decline in the top-line, the office supplies retailer was able to earn a profit on the heels of cost containment. Cost of goods sold and occupancy expenses fell 4.2%, store and warehouse operating and selling expenses tumbled 5.5%, whereas general and administrative expenses slipped 9% during the quarter.
The company is targeting a $180 million to $190 million annual benefit by the end of 2013.
Furthermore, the company in order to enhance its global footprint has made strategic acquisitions over the past few years, and is still looking for accretive opportunities. 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.
Office Depot has been actively managing its cash flows. The company generated free cash flows of $30.2 million during fiscal 2010, and projected free cash flows of approximately $50 million for fiscal 2011. In addition, the company’s strong liquidity driven by healthy cash balance, positions it to drive future growth.
We also appreciate Office Depot’s rational approach to slow the pace of stores openings in North America, given the weak consumer environment. The company opened 6 stores in fiscal year 2009, significantly down from 59 stores opened in 2008 and 71 stores opened in 2007. However, with signs of recovery in the economy, the company opened 17 stores in fiscal 2010.
However, 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 durables. We observe that the demand for office products is closely tied to the health of the economy.
Moreover, due to high exposure to international markets, Office Depot remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or suffer a contraction in profit margins in locations outside of the U.S. An increase in price may have an adverse impact on the demand for the products.
Given the pros and cons, we prefer to have a long-term ‘Neutral’ rating on the stock. Office Depot, which competes with Staples, Inc.(SPLS) and OfficeMax Inc. (OMX) holds a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and correlates with our long-term view.
OFFICE DEPOT (ODP): Free Stock Analysis Report
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