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Office Depot (ODP) |
HenryTo
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 Posted: Wed Dec 10, 2008 1:31 pm Post subject: Office Depot (ODP) |
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Morningstar's latest notes on Office Depot:
| Quote: | | Continuing a theme among retailers, Office Depot ODP announced that it will close a number of underperforming stores and slow the pace of new store openings in order to combat the challenging consumer environment. Management plans to close 112 stores over the next three months across all U.S. regions and Canada, bringing the store count to about 1,160. It's reducing new store openings for 2009 to 20 from the previous estimate of 40. Additionally, the company will close 6 of its 33 distribution facilities, consistent with its plan to consolidate the retail and direct channel supply-chain infrastructures. These decisions should help the firm more effectively operate in the highly competitive office supply retail category. However, we do not think these actions are enough to significantly close the gap between the mass merchants and industry leader Staples SPLS. As a result of the store and distribution center closings, management anticipates incurring charges of $270 million-$300 million in 2008 and 2009 ($40 million in cash charges) for lease payments on closed stores, severance for terminated employees, and fixed asset write-offs, partially offset by cash received for liquidated inventory and assets. The company believes these measures will improve earnings before interest and taxes by about $90 million next year and lead to $70 million in incremental free cash flow. These estimates appear realistic to us, given the number of store and distribution center closings. Management also anticipates that capital spending will be about $200 million in 2009, a reduction from $275 million this year, because of the moderated store opening schedule. That said, we are st ill concerned about potential operating expense deleverage next year, as rent, labor, and distribution costs could outpace sales growth because of economic difficulties, especially for the firm's small-business customers. As a result, we are leaving our fair value estimate unchanged. |
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Office Depot (ODP) Replies |
HenryTo
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Posts: 11740
Location: Los Angeles, California
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| Posted: Tue Oct 25, 2011 4:02 pm Post subject: |
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Morningstar on ODP's 3Q earnings:
| Quote: | | Office Depot's ODP revenue continued to slide in the third quarter, down 3%, affirming our thesis that the firm's ability to survive amid intense competition is shaky at best. Operating margins (excluding charges) were the bright spot, up 60 basis points thanks to lower costs as a percentage of sales (technology sales with notoriously razor-thin margins have been weak for the office product distributors of late), but were still barely positive at 0.9%. For 2011, we expect top-line growth to be down in the low single digits and only slight margin expansion as investments in the business should be slightly offset by restructuring savings such as pricing initiatives and business process improvements ($80 million-$90 million). In our view, investors seeking exposure to office products would be better off looking at Staples SPLS, which is trading at around 10 times our forward fiscal-year earnings per share estimate and an enterprise value/EBITDA of 5.4 times. Although near-term results from Staples may also reflect the challenging environment for office product distributors, we contend that this firm is best positioned to compete over the long haul, thanks to its superior business-to-business capabilities and scale advantages. By segment, despite a strong back-to-school season, North American retail comparable-store sales were off 2% primarily because of a 2% decline in traffic, which led to a nearly 4% decline in total sales. North American business solutions sales were down 3% as transactions declined, which management attributed to customers not retained upon the expiration of the U.S. Communities contract earlier this year. In constant currencies and adjusted for asset dispositions in 2010 and the acquisition of Swedish office supply company Svanstroms Gruppen in February 2011, international sales declined 2% as strength in the U.K and German contract business was not enough to offset the retail side and weakness in other parts of Europe. |
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HenryTo
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| Posted: Tue May 24, 2011 11:32 am Post subject: |
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Morningstar on ODP's recent executive problems:
| Quote: | | Office Depot ODP made the long-awaited announcement of its CEO appointment Monday, and we are disappointed that the firm didn't go in a different direction. Neil Austrian, who had been serving as interim CEO and chairman, was named to the permanent position. He had previously served as interim chairman in 2004 and has been with the Office Depot since 1998, when the firm merged with Viking. Steve Odland, who had been CEO since 2005, stepped down last October; at the time, we said it was a positive move for a company that needed to go in a different direction. After its swift restructuring following the onset of the recent recession, we believe the firm has lacked clarity regarding plans to operate in the fiercely competitive office product market. It had been our hope that under new leadership, Office Depot could structure a cohesive turnaround strategy with measurable--and, more important, achievable--targets. As such, Austrian is an underwhelming choice, in our view, given his tenure with the company. Office Depot had said it hired an outside firm to conduct the search, which was clearly unsuccessful. There is no change to our fair value estimate, as we don't view this announcement as a signal that the firm will institute a much-needed change in strategic direction. We continue to believe the shares are overvalued. Also, this announcement contradicts an October 2009 revision to Office Depot's corporate-governance guidelines, which indicated the intention to separate the posts of CEO and chairman. There are exceptions, such as if no other independent director is willing to serve as chair, so Austrian's appointment is not a violation. Still, we would have preferred a separation in the roles to improve corporate governance, as this has been an area of concern in the past. We believe the hurdles for the nonequity incentive plan compensation have been too low, and we find the existence of a car allowance and personal aircraft use egregious, especially given the firm's barely positive operating margins. |
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HenryTo
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Location: Los Angeles, California
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| Posted: Tue Feb 22, 2011 6:32 pm Post subject: |
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Morningstar on ODP's 4Q results:
| Quote: | | Office Depot's ODP dismal fourth-quarter results look even worse when compared with those of OfficeMax OMX, affirming our thesis that Office Depot's ability to survive amid intense competition is shaky at best. Total sales declined 3.4% in the fourth quarter from the prior-year period and profitability is still barely positive. While restructuring boosted margins 110 basis points in the fourth quarter, they were still a razor-thin 0.9% because of weakness in the international segment. We're pleased with the firm's announcement of a new three-year restructuring plan, which is expected to produce $190 million of cost savings, but wish it had come sooner. OfficeMax, which had also struggled to remain profitable amid increasing competition from industry leader Staples SPLS and other retailers, managed to expand fourth-quarter operating margins to nearly 2%. Details on Office Depot's 2011 outlook were sparse, save for increased capital expenditures to invest in the business. We expect to hear more on the conference call. For 2011, we forecast flat top-line growth and only slight margin expansion as investments in the business should slightly offset cost savings from the new initiatives. We believe the shares are overvalued, but are mindful of Office Depot's strong potential as a takeout candidate. Our fair value estimate does not include a takeout premium, and further takeover speculation could push the stock higher. By segment, fourth-quarter retail sales declined 2.3%, primarily because of a same-store sales decline of 1%. Operating margins expanded 110 basis points to 1.3%. Business s olutions revenue declined 2.8% in the fourth quarter as sales volume to contract customers is still weak even as we emerge from the economic downturn. Margins expanded 210 basis points to 4.7% thanks to facility consolidation. Revenue in the international segment declined 5%, but was flat on a constant currency basis. Operating margins fell 430 basis points to 6.5%, hurt by cost increases and promotional activity. |
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HenryTo
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Posts: 11740
Location: Los Angeles, California
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| Posted: Wed Dec 22, 2010 12:20 pm Post subject: |
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Morningstar on the implications of ODP's latest 8-K filing:
| Quote: | | Office Depot's ODP 8-K filing late Tuesday increases our conviction that strategic or financial buyers may be circling the beleaguered office product distributor. The firm entered into a new change-in-control agreement with CFO Michael Newman, Charles Brown (president, international), and Steven Schmidt (president, North American business solutions) in order to "diminish the potential distraction due to personal uncertainties and risks that inevitably arise when a change of control is threatened or pending." This new agreement is pretty lavish, in our view, though not surprising. (We find the existence of a car allowance and personal aircraft use as egregious, given the firm's barely positive operating margins.) The agreement guarantees the three executives employ ment for a year after a change of control, paying them 12 times their highest monthly salary plus a bonus equal to the highest received in the prior three years and quite a bit of cash if they decide to leave--accrued salary and bonus plus 2 times base salary. Before this filing, we'd discussed a number of reasons Office Depot could be a buyout target. Besides a $355 million investment from a private equity firm in 2009 and the departure of the CEO in October 2010, the smoking gun was a filing last month that discussed the CFO's retention agreement, which provided for the immediate vesting of his two-year retention payout if his employment was terminated for a reason other than cause. |
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HenryTo
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| Posted: Tue Oct 26, 2010 12:07 am Post subject: |
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Morningstar on the departure of ODP's CEO:
| Quote: | | Office Depot ODP announced that Steve Odland, CEO since 2005, will step down effective Nov. 1. We believe this is a positive move for a company that needs to go in a different direction. After its swift restructuring following the onset of the recent recession, we believe the firm has lacked clarity regarding plans to compete in the fiercely competitive office product market. It is our hope that under new leadership, Office Depot can structure a cohesive turnaround strategy with measurable--and, more important, achievable--targets. Odland will be retained as a consultant until the end of the year. A company has been hired to conduct the search; former interim CEO and lead director Neil Austrian will act as interim CEO until the permanent post is filled. We suspect that BC Partners' involvement in this change was critical. The private equity firm has three members on Office Depot's board following a $355 million equity infusion in June 2009 and is reportedly looking to raise a new EUR 6 billion leveraged buyout fund. There is no change to our fair value estimate as a result of the announcement, though we may revisit our assumptions once there is greater visibility on the firm's new leadership and its strategic direction. In conjunction with Odland's resignation, Office Depot announced that it expects a drop in third-quarter sales but improved profitability. Management's outlook for a 4% decrease in sales does not come as a surprise, given the firm's dwindling competitive position and continued economic pressures, but projected earnings before interest and taxes of $20 million and earnings per share of $0.03 (excluding $0.15 in one-time tax and interest expense benefits) put the company on pace to modestly exceed our full-year expectat ions. In our view, Office Depot's improving profitability indicates that facility consolidation and underperforming store closures are bearing fruit, and we plan to adjust our near-term assumptions. However, we still contend that more aggressive restructuring measures are needed to position Office Depot to compete over the long haul. |
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HenryTo
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| Posted: Tue Feb 23, 2010 4:06 pm Post subject: |
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Morningstar's latest analyst notes on ODP. Office products still not catching on despite the economic recovery, although a significant part of it has to do with competition coming from alternative forms of distribution:
| Quote: | | There is no change to our fair value estimate following Office Depot's ODP fourth-quarter update, which confirmed several of our thoughts about the daunting consumer and small-business climate that still faces office product retailers. Although the firm has solidified its liquidity position and streamlined its cost structure, we still have concerns about the company's ability to defend market share over a longer horizon amid increased mass merchant and online competition. As expected, the rate of sales declines diminished because of easier comparisons, falling 6% for the quarter. Comparable-store sales fell 4% during the fourth quarter, but it appears the firm is on track to meet our 2010 forecast of slightly negative comps (tracking at a 3% decline halfway throug h the fiscal first quarter). There should be modest improvement in top-line trends for the North American business solutions division as the year progresses, but we still anticipate low-single-digit sales declines for the year. International division sales increased 2% for the quarter, which was largely the result of favorable foreign currency translation. We expect a nominal pickup in local currency sales trends during 2010 (compared with the 6% decline in the fourth quarter), but positive sales growth may prove difficult for the international division this year because of persistent global economic head winds. Even though we anticipate Office Depot's operating losses to narrow over the coming periods because of a re-engineered cost structure and modestly higher product margins, we still have a difficult time believing the firm will ever achieve anything greater than low-single-digit operating margins, given sluggish demand for office products and mounting competition from low-cost competitors. |
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HenryTo
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| Posted: Wed Jul 29, 2009 8:32 am Post subject: |
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Office Depot still struggling mightily - despite its turnaround and cost-cutting plans:
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On Tuesday July 28, 2009, 7:00 am EDT
BOCA RATON, Fla.--(BUSINESS WIRE)--Office Depot, Inc. (NYSE:ODP - News), a leading global provider of office products and services, today announced results for the fiscal quarter ending June 27, 2009.
SECOND QUARTER RESULTS
Total Company sales for the second quarter decreased 22% to $2.8 billion. Total Company operating expenses, adjusted for Charges, decreased by $143 million from the second quarter of 2008. EBIT, adjusted for Charges, was a loss of $62 million in the second quarter of 2009 or negative 2.2% as a percentage of sales, compared to a positive $21 million or 0.6% as a percentage of sales in the prior-year period.
The Company reported a net loss of $82 million in the second quarter of 2009, compared to a net loss of $2 million in the same period of 2008. The loss per share was $0.31 for the quarter, versus a loss per share of $0.01 in the second quarter of 2008. Adjusted for Charges, the Company reported a loss of $60 million and a loss per share of $0.22 for the second quarter of 2009, versus earnings of $10 million and earnings per share of $0.04 in the same period one year ago.
In the second quarter of 2009, the Company’s cash flow from operations was $9 million and cash flow before financing activities was $55 million.
“Second quarter business results met our expectations given the challenging economic conditions and the period’s normal seasonality,” said Mike Newman, Office Depot’s chief financial officer. “However, the successful execution of our liquidity initiatives generated positive cash flow before financing activities in the second quarter, significantly exceeding our expectations.”
(1) Includes non-GAAP information. Second quarter results include impacts of previously announced programs (“Charges”). Additional information is provided in our Form 10-Q filing. Reconciliations from GAAP to non-GAAP financial measures can be found in this release, as well as on the corporate web site, www.officedepot.com, under the category Investor Relations.
North American Retail Division
Second quarter 2009 sales in the North American Retail Division were $1.1 billion, down 21% compared to the same period last year, due in part to having 114 fewer stores open in the second quarter of 2009 versus the prior year period. Comparable store sales in the 1,138 stores in the U.S. and Canada that have been open for more than one year decreased 18% for the second quarter compared to the prior year period. The decrease in comparable store sales was driven by macroeconomic factors as consumers and small business customers continued to reign in their spending, especially on large ticket items like furniture and computers, and the Division’s commitment to proactively reduce promotions in certain low margin categories.
The North American Retail Division had an operating loss of $13 million for the second quarter, compared to an operating loss of $4 million reported in the same period of the prior year. The increased operating loss was driven by the impact of the sales volume decline outpacing the benefits related to reduced operating expenses, lower charges for shrink and inventory valuation, the comparative benefit from closing the underperforming stores identified as part of the strategic review and an improvement in product margins for the fourth straight quarter.
During the second quarter, Office Depot closed five stores, opened three and relocated one store, bringing the total store count for North America to 1,158 as of June 27, 2009.
Inventory per store was approximately $714 thousand at the end of the second quarter of 2009, down about 21% from the prior year. This decrease is primarily due to improved inventory management and reduced exposure to big ticket inventory items.
North American Business Solutions Division
Second quarter 2009 sales in the North American Business Solutions Division were $868 million, down 18% compared to the same period last year, driven by continued significant spending cuts across the Division’s customer base.
The North American Business Solutions Division reported an operating profit of $23 million for the second quarter of 2009 compared to $49 million for the same period of the prior year. The decrease in operating profit during the second quarter of 2009 primarily relates to the impact of the sales volume decline and the negative impact of product margins, including a less profitable product mix and cost increases that were not fully passed on to customers. Partially offsetting the operating profit decline was a benefit from reduced selling and G&A expenses, lower customer rebates tied to volume and lower charges for shrink.
International Division
The International Division reported sales of $830 million in the second quarter of 2009, a decrease of 25% compared with the same period last year, while sales in local currency decreased by 12%.
International Division operating profit was $3 million in the second quarter of 2009 compared to $51 million in the same period of the prior year. The decrease in operating profit was driven by the impact of the sales volume decline, the non-recurrence of a gain booked in the U.K. in 2008 following the curtailment of the local pension plan, increased promotional activity, product cost increases that could not fully be passed on to customers and a change in foreign exchange rates. Partially offsetting the operating profit decline was an improvement in operating expenses due to reduced selling and distribution costs.
Other Matters
On June 23, 2009, the Company announced that funds advised by BC Partners, a leading international private equity firm, had invested $350 million in the Company by purchasing approximately $275 million of the Company’s newly created 10% Series A Redeemable Convertible Perpetual Preferred Stock and approximately $75 million of the Company’s newly created 10% Series B Redeemable Conditional Convertible Perpetual Preferred Stock. Office Depot received cash, net of fees paid in the quarter, of $327 million and will use the proceeds for general corporate purposes.
The Company recognized about $35 million of pre-tax Charges related to the strategic business review actions taken in the second quarter of 2009. The Charges related primarily to lease accruals, severance expenses and asset impairments associated with sale-leaseback transactions that closed during the period. During the balance of 2009, the Company expects to recognize between approximately $85 million and $115 million in additional Charges as activities are completed and accounting recognition criteria are met. The Company expects these activities and Charges to be completed by the end of 2009 and should benefit full year EBIT and cash flow by approximately $130 million and $85 million, respectively.
In addition to the cash flow benefits provided by the actions taken as part of the strategic business review, the Company continues to pursue other internal sources of liquidity. In the second quarter of 2009, Office Depot realized approximately $97 million in cash from these initiatives, including sale-leaseback transactions of owned properties in the U.S. and Europe, and benefits from the strategic business actions and reduced capital spending.
At the end of June 2009, the Company had not drawn on its asset-based loan (ABL) facility and had $753 million of availability. Office Depot’s borrowing base increased in the second quarter versus the first quarter as inventories were ramped up to support the third quarter Back-to-School season. With $753 million of ABL availability and $559 million in cash on hand at the end of June, the Company exited the second quarter of 2009 with over $1.3 billion in total available liquidity. |
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