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Executive Summary
- Office Depot (OPD) is the #2 retail chain for office supply products
- Office Depot has over 1,200 U.S. Locations and 150 international locations
- Office Depot’s main source of revenue is it’s retail stores, however they also have many different sales channels including the internet, call centers, and direct sales.
- The main target customer for Office Depot is small to medium sized business and individual consumers.
- Office Depot competes in the retail specialty industry particularly in the office supply sector
- The main competitor to Office Depot is Staples Inc.
- Macroeconomic challenges to the U.S. Economy has led Office Depot to expand more internationally and diversify it’s business model by introducing consolidated services for business consumers
- Strengths – Large number of locations allows for quicker expansion
- Weaknesses – Shaky management and accounting practices
- Opportunities – Partnering with other major corporations such as Kodak and Google
- Threats – Competition from Staples and 2nd mover disadvantage
- Ratios showing decreased liquidity and profitability, increasing debt and inventory
- Vertical Analysis shows an increase in COGS and decrease in Gross Profit
- Horizontal Analysis shows Staples has a clear advantage in Return Assets and Equity
- Recommendation: HOLD
Office Depot (Ticker: OPD), herein also referred to as “The Company,” is a global supplier of office products and services. The company competes in the retail specialty industry, particularly in office products retail and distribution. Because of a decline in company financial performance, a fierce competitive landscape, and macro economic challenges for the retail industry overall, Office Depot is not a very attractive stock to buy at the current moment.
Office Depot is a diversified business that sells many different products for the office products retail industry. The company sells everything from tiny paper clips to large office supply furniture. The company sells these products through multiple channels that include large retail stores, a contract sales force, internet sites, direct marketing catalogues, and call centers. All of these has channels has led Office Depot to become the world’s number two office supply chain, behind only Staples Inc. The company operates more than 1,200 stores throughout North America and another 150 locations internationally. The company sells many established brands of office supplies such as Viking Office Products, NiceDay, Foray, and Ativa, as well as its own brand called Office Depot.
Office Depot’s main strategy is to target small to medium sized businesses through its retail locations. This is shown by the aggressive growth by opening 115 new stores in North America alone in 2006, while only closing 4, and which has accounted for 45% of its revenue. However since the US economy slowdown in the past year the company has only been able to open up 71 stores, while closing 7. To counter-act this slowdown, Office Depot has aggressively expanded internationally into 40-plus countries, opening 26 stores, while only closing 3, in 2007. The other major source of revenue, about 30% comes from the business solutions division, which includes catalogue sales, online sales, and contract sales. The company breaks down its sales in 3 different categories including supplies, technology and furniture, which account for 63.2%, 26.0%, and 10.8% accordingly in 2007
Although sales have still grown over the past few years, Office Depot has had some trouble with their financial accounting. In 2007 Office Depot had to restate their financials due to a whistleblower’s complaint. The impact of the errors was a reduction in gross profit and a reduction in earnings per share by $.02. After the restatement in financials Deloitte and Touche gave Office Depot an unqualified opinion. However management is still worried about future growth prospects due to higher fuel prices and a softening of consumer spending. These factors are all important in analyzing a retail specialty firm.
The retail specialty industry is a massive industry that contains a variety of sub industries from anything from Electronic Appliances to Pet supplies and represents $2.01 trillion of sales in the first six months of 2008 in the United States. The specialty retail industry acts as a “category killer” where large superstores chains specialize in a niche market, such as office supplies, auto equipment, or electronics. The office products alone represented $332 billion in sales in 2006. However due to the current economic financial crisis, rising unemployment rates, and inflationary pressures many consumers and business’ are not spending as much on retail and office products. To combat this alarming trend, many of the office suppliers are expanding overseas to capture new markets and countries with growing gross domestic income, particularly China and India. For example, Office Depot has expanded into 40 plus countries, while rival Staples has acquired many international office retailers to grow their presence in countries, such as Argentina and Taiwan. In addition, office retail suppliers are trying to differentiate themselves by not just selling products, but selling services as well to attract a wider customer base. For example, Office Depot has partnered up with Kodak to provide custom office promotional items, while rival Staples now offers in-store copy services so customers do not have to travel to a Copy Center such as FedEx Kinko’s as well. Both Office Depot and Staples also offer installation and delivery services to better serve the needs of their customers. Further, office suppliers are increasing their own private brands, which provide a higher profit margin than 3rd-party vendors. Both Office Depot and Staples offer over 2,000 office products under their brand names. Finally, online sales are continuing to grow and becoming a large driving factor in the industry. Online US Sales in the retail industry are expected to grow to 148 billion in 2008 up from 127.3 billion in 2007. These trends have not only led to major changes in the industry, but also how investors analyze a retail specialty company.
