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Office Depot Upgraded to Neutral - Analyst Blog

Posted: 8/9/2013 6:20:00 PM
Referenced Stocks: AMZN;ODP;OMX;SPLS

On Aug 7, 2013, we upgraded leading office supplies company, Office Depot Inc. ( ODP ), 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 business with OfficeMax Incorporated ( OMX ),which would help the company capture incremental market share, streamline its cost structure and better compete with the industry bellwether, Staples Inc . ( SPLS ) and online rivals such as Inc. ( AMZN ).

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 marketing efficiencies.

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 soft.

Currently, Office Depot holds a Zacks Rank #3 (Hold).

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