Is Office Depot Taking Care of Business?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of my most successful short positions last year was shorting Office Depot (NYSE: ODP) on the thesis that their business was deteriorating due to competitive threats. In hindsight the price where I closed was much too early -- that price just happens to be right around their current 52-week high as shares have continued to slide well past any point my inner bear had thought possible. Is it time to rethink this bear trade to see if it still has legs or is the stock such a bargain that it should be bought instead?
Office Depot is facing two very large obstacles it must overcome or else they will be their downfall. The first is the intense competition with brick and mortar rivals OfficeMax (NYSE: OMX) and Staples (NASDAQ: SPLS). The office supply industry is one that seems to lack any real branding, as I’ve heard countless people confuse OfficeMax and Office Depot and use their names interchangeably. Staples has done a better job with marketing thanks to their “that was easy” campaign. However, in a business where price means everything, margins have crimped profits thanks to the heated competition. Office Depot has seen its revenue shrink from $14.5 billion in 2008 to $11.49 billion last year and they had negative earnings in seven of their past 12 quarters. Office Max hasn’t seen quite as big a revenue hit as it has gone from $8.27 billion in 2008 to $7.12 billion last year. Combined these two still are dwarfed by Staples and their $25 billion in sales, which they’ve grown from $23 billion in 2009.
They second major obstacle is the changing consumer shopping behavior that is seeing them shift away from brick and mortar stores altogether. In this space they rate a distant third as Amazon (NASDAQ: AMZN) is really working to push everyone over the edge. Staples also has a very good presence online and they raked in $11 billion in online sales last year, which made up 40% of their revenue. Incidentally, that was about the total sales number for Office Depot, which on the other hand only sold an estimated $4 billion online last year.
Still, the real threat here comes from Amazon, which just recently announced a further push into this space with their AmazonSupply.com site giving them further leverage to do to office suppliers what they did to book stores. While some lament the closure of Borders and are concerned about the future of Barnes & Noble, no one is going to notice if an office supply store disappears. While B&N has been working feverishly to fend off sharing the fate of Borders thanks to their Nook product line, there is no innovation to fend off extinction from any of the office suppliers. While they all have websites that pull through billions of dollars of sales, there is no real competitive moat to keep consumers from shifting their sales to Amazon.
For some anecdotal evidence, at my current job we actually have a partnership with Office Depot that is supposed to deliver cost savings to our organization and others that are in our program. However, the service we receive is, well, we don’t seem to receive any. It’s a very poor reflection of the company and so only a handful of organizations take part in the program. Not only is the service lacking, but the preferred pricing really doesn’t seem to be any better than Staples and we seem to be shifting more of our purchases that direction. One thing we have noticed is that we receive our Staples online orders about half a day earlier -- both have next-day delivery but Staples delivers in the morning and Office Depot sometimes doesn’t come until quitting time, which can put a damper on productivity if you are out of a key office supply. Again, these are just personal qualms I have with the company based on my own limited experience.
It can be really hard to separate personal experience from your investing brain. I’ve enjoyed being short the company in the past as my earnings were nice pain relievers from issues I’ve had with the company. Whether or not this is the corporate culture isn’t the real issue. What’s at issue is that Office Depot is on the decline with no real catalyst for a turnaround on the horizon. I’d stay away from this one on either side of the equation. There is enough value in the franchise and the online business for someone to be tempted to take them over, however, we’ve seen too many storefronts become vacant as firms were unable to overcome either the competitive landscape or changes to consumer behaviors.
latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Staples. Motley Fool newsletter services recommend Amazon.com and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.If you have questions about this post or the Fool’s blog network, click here for information.