On May 13, we downgraded our recommendation to Underperform on
Office Depot, Inc.
), the supplier of a wide range of office products and services,
based on the company's dismal first-quarter 2013 results and
Why the Downgrade?
Estimates for Office Depot have been portraying a downward
trend ever since it posted first-quarter results on Apr 30. The
company delivered breakeven bottom-line results for the quarter
that fell short of the Zacks Consensus Estimate of 5 cents and
went down significantly from the year-ago earnings of 11 cents.
Soft top-line performance muted the company's cost containment
Total revenue of $2,718.3 million decreased 5.4% from the
prior-year quarter and was below the Zacks Consensus Estimate of
Management now forecasts a sales decline of 3% to 4%, during
the second quarter of 2013, attributable to mid-single digit fall
in sales across the North American Retail and International
segments, partially offset by improved sales performance at North
American Business Solutions.
Following the release, the Zacks Consensus Estimate for 2013
and 2014 has gone down 66.7% and 45.5% to 2 cents and 6 cents,
respectively. Recently, this Zacks Rank #3 (Hold) company decided
to merge with
) to better compete with the industry leaders. The decision
augurs well for both the companies, which have been struggling
with soft sales.
Cause for Concern
Business budget remains tight, consumers remain more cautious
than ever and companies are trying hard to navigate through the
challenging economic environment. Consumers and small businesses
remain frugal about big-ticket spending on items such as business
machines and other durable products. We believe that the demand
for office products is closely tied to the health of the
Stocks that Warrants a Look
While we prefer to avoid Office Depot until we see signs of
improvement in the company's performance, other stocks worth
considering in the non-food retail wholesale industry are
Big 5 Sporting Goods Corp.
), both the stocks hold a Zacks Rank #1 (Strong Buy).
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