Office Depot Is a Dud

by Jeff Reeves | July 26, 2012 8:00 am

AskTheEditor logo2 Office Depot Is a Dud[1]That dividend drum just keeps on getting beaten by readers. But let’s take a break from the dividends theme to talk back-to-school stocks — this time, via a question from Leeor about Office Depot (NYSE:ODP[2]) and whether the retailer is a good buy.

The short answer: No way.

The slightly longer answer is that Office Depot continues to sell office products based on the old bricks-and-mortar model, and is struggling in a digital age. It can’t get the margins on in-store sales that e-tailers can, and its online operations still lag the competition.

Here’s the detailed answer…

Office Depot should send off warning signals to all investors because it is barely profitable, and regularly posts quarterly losses. Its forecast is for a measly 7 cents per share in earnings this year, down from EPS of 22 last year. The top line is ugly, too. Sales dropped from $14.5 billion in fiscal 2008 to just $11.5 billion in 2011 – a 20% decline. Another slip is predicted for this year as well, to under $11.2 billion.

Why? Well, look at this ranking of online retailers by sales according to e-commerce trade publication Internet Retailer:

  1. Amazon.com (NASDAQ:AMZN[3])
  2. Staples (NASDAQ:SPLS[4])
  3. Apple (NASDAQ:AAPL[5])
  4. Walmart (NYSE:WMT[6])
  5. Dell (NASDAQ:DELL[7])
  6. Office Depot

Amazon, Apple and Dell are bigger online destinations for electronics. Staples and Walmart are bigger destinations for office and school supplies. ODP is lagging big-time and that is proven out by the numbers.

It’s also proven out by a five-year return of -93% in this dog.

Now, while the digital shift has eviscerated Office Depot, it is certainly not going bankrupt anytime soon like Borders or Blockbuster did. The company has a very manageable debt load (which is the #1 driver of bankruptcy filings) and assets are significantly higher than liabilities.

So you could take a flyer on ODP if you believe it will somehow tap into bigger internet sales in the future … though don’t ask me how it will leapfrog rivals like SPLS. The best ODP can hope for in my opinion is simply riding the secular growth of internet sales and getting out from under some bad commercial real estate.

Or you could take a flyer that Office Depot is buyout bait. After all, big box stores are on the decline and someone may want to take ODP private to streamline it or acquire the operations to bolster their retail footprint.

But both of those options are clearly long shots, and I don’t see much hope for Office Depot. It’s a risky bet – and in this market environment, it’s a risk I don’t advise taking.

Do you have a stock that’s on your mind? Drop me a line at editor@investorplace.com[8] and I’ll take a look at it.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[9] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

Endnotes:
  1. [Image]: mailto:letters@investorplace.com
  2. ODP: http://studio-5.financialcontent.com/investplace/quote?Symbol=ODP
  3. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  4. SPLS: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPLS
  5. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  6. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  7. DELL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DELL
  8. editor@investorplace.com: mailto:editor@investorplace.com
  9. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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