AABP Award 728x90

Continued slump foreseen for Office Depot


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Dear Mr. Berko:

I bought some good stocks from your recent column recommending 10 issues selling below $10. Now I wonder why you failed to include Office Depot in your list. Office Depot is the second-largest office supply company in the United States, with 1,500 stores and revenues of $14 billion. I know the company lost money in 2008, but this will turn around because it has excellent management, excellent products, very good prices and stores in 30 countries. I believe the stock will rebound to $30 a share in the next couple of years, which would be a sixfold improvement at the current $5 price.

W.T., Delray Beach, Fla.

Dear W.T.:

I suspect you are either employed by Office Depot Inc., a large shareholder, or members of your family have shaky jobs at corporate headquarters. Do you know that Office Depot’s (ODP-$5.13) 2009 revenues are expected to fall to $12.4 billion, which would be down from last year’s $14.4 billion, or about $5.7 million dollars a day less in revenues than 2008? Did you know that your company reported a loss of 88 cents a share in 2008 and Wall Street believes ODP will end 2009 with a moderately lower loss of 65 cents a share? And the years ahead don’t look too good, either, W.T.

ODP has three big problems:

1. Nearly 80 percent of its customers are small businesses, and the economic slowdown is forcing these firms to reduce purchases, become more efficient and to search for less expensive products.

2. Office products are a lucrative $350 billion market and are attracting the attention of big-box merchants. So companies like Wal-Mart, Costco, Target and Internet retailer Amazon.com have increased their office supply assortments and sell these products for less than ODP. Unfortunately, ODP has failed to acquire the scale advantages or supply chain efficiencies to compete with these lower-cost providers.

3. Office Depot’s management really “stinx.” Proof of the stink is the ignominious failure of management’s multiyear plan to improve profitability, remodel stores, expand inventory of private-label merchandise, streamline operations, improve efficiency of store employees and increase working capital.

Staples Inc. (SPLS-$20.68) sells the same pens, pencils, furniture, computers, binders, paper clips, staplers, tape dispensers, etc., and prints the same stationery, business cards and invoices as ODP. However, Staples and even OfficeMax Inc. (OMX-$7.71) earned a profit in 2008. Both expect to be profitable in 2009 and 2010. So the question you must ask is: Why are SPLS and OMX making money while ODP just molts?

The answer is simple as Simon or Garfunkel. Chairman and CEO Steve Odland, who is well-regarded by neither his management team nor the rank and file, has exceeded his level of competence. Odland, who is not a people person, is perhaps a good CEO when the economy is booming. But when times get tough, this guy sulks, gets angry and manages in circles. Even in good times, Odland’s operating margins of 5 percent are embarrassingly feeble compared to Staples’ operating margins of 10 percent. And Odland’s net profit margins of 2 percent are significantly lower than Staples’. Meanwhile, Odland oddly received more than $12 million in compensation in 2008, nearly six times what Staples paid its CEO, Ronald Sargent, and more than eight times what Dow Chemical and AT&T paid their CEOs.

Observers on Wall Street recognize that ODP’s weakness is Odland, who came to the company in 2005 after leaving as head honcho of AutoZone Inc. In March 2008, some ODP executives and large shareholders launched an unsuccessful proxy fight to oust Odland and David Fuente, an influential board member who was the former chairman and CEO. Needless to say, the proxy battle failed. But the unrest at ODP’s new headquarters will continue, because Odland soon may be forced to pink-slip a chunk of ODP’s 43,000-employee work force. In the process, some of ODP’s management also will be looking for new jobs. ODP’s stock is a dog, but it is Odland who should be in the doghouse.

Oh, by the way, have you shopped at ODP recently? Their store service people, if you can find one, are poorly trained, and their “don’t bother me” attitudes are very off-putting. Rather than walk with you to the item you can’t find, they just point in its general direction and walk away.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.

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