On Aug 7, 2013, we upgraded leading office supplies company,
Office Depot Inc.
), to Neutral based on its improved prospects.
Why the Upgrade?
Office Depot came up with in line bottom-line results for the
second quarter of 2013, marking an improvement from the
prior-year quarter. The company is containing costs, closing
underperforming stores, concentrating on its e-Commerce
platforms, and focusing on providing innovative products and
services, which should all contribute to margin improvement.
In a move to uplift itself, Office Depot decided to merge its
),which would help the company capture incremental market share,
streamline its cost structure and better compete with the
) and online rivals such as
The merger will result in annual savings of $400 million to
$600 million by the third year of the deal. The transaction is
expected to be concluded by the end of 2013. The company stated
that it expects to generate $130-$200 million savings from
purchasing efficiencies, while supply-chain initiatives are
projected to result in $70-$100 million cost savings.
Selling, general and administrative efficiencies are expected to
result in $130-$200 million in savings, while it expects to
generate cost synergies of $70-$100 million from advertising and
Amid these positives, the company continues to disappoint on
the sales front. Sales decreased 4% during the recently concluded
quarter on account of sluggish demand for big-ticket items. In
the near future, we expect demand for office products to remain
Currently, Office Depot holds a Zacks Rank #3 (Hold).
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