There Should be a Pause Between the Jumps
Hong is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the recent years, retailers have responded to the economy with caution, due to many concerns of European recession and the ineffectiveness in government policies. According to Bernstein’s McGranahan, the office-supplies retailers are facing declining demand for their products and a weak labor market. The jobless rate rose to 7.9 percent, versus the average of 5.8 percent since January 1948 (data compiled by the U.S. Labor Department).
There is also a trend of relocating and restructuring formats of the chains. Office Depot (NYSE: ODP) has lowered its typical floor plate from 24,000 to 17,000 square feet and also tested a 5,000 square foot format, or the small or mid sized-format. The company reported a net loss after preferred dividends of $70 million in the third quarter of 2012 versus net earnings of $92 million in the same period one year ago. The third quarter 2012 results included approximately $96 million of pretax charges, primarily related to non-cash store impairment charges in its North American Retail segment and intangible asset impairments in the International segment, as well as restructuring activities and actions to improve future operating performance.
OfficeMax (NYSE: OMX), also will finish this year with only one new store and 20 closures. Staples (NASDAQ: SPLS) had opened 20 new stores in 2011, half of its goal. The chain continues to drop the size of its superstores, especially as it continues to grow its online market share. It has dropped their 18,000 square foot template to 16,000 square feet. However the Framingham, Massachusetts – based chain generated $25 billion in revenue last year, two times more than Office Depot and triple OfficeMax’s sales.
Compare to its industry average, Office Depot is still cheaper. Its P/E is 13.2, 2.47 times cheaper than the industry average. However, as we look closer at the peers, the answer seems different.
(Source: Google Finance and Morningstar)
In table 2, Staples appears to be much more attractive than Office Depot and Office Max because of its low Debt/Asset ratio, indicating a healthy balance sheet and operating efficiencies. While Office Depot has the highest gross margin, its operating margin remains the lowest.
Staples is closer to the 52-week low, which is safer for investors than Office Max, which recently reached its 52-week high while there is not much improvement in the financial ratios.
The other potential competitor, Wal-Mart has similar ratios in both gross margin and profit margin, adding to a hard picture of the retail industry. However, due to the differences in the business models and products, it’s hard to tell by ratios only about the disadvantages and advantages among those retailers.
The News and its Effect
Starboard Value LP recently announced its 14.8% stake in Office Depot. The investment fund believes the shares are deeply undervalued and the firm sees a potential merger between Office Depot and Office Max. After the better than expected earnings report, the shares jumped 19.12%. However, investors should be more cautious in their investment decisions at this time.
From the financial analysis above, we can see that both Office Depot and Office Max are currently underperforming, facing some troubles in their operations and business strategies. in my view, a potential merger will compound these problems.
My personal widsom
If you are a long term investor, it seems unwise to buy Office Depot or Office Max at this time. I'd rather keep my eyes on these stocks for a while from the sidelines.
Hong Luu has no positions in the stocks mentioned. The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.