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 user 2006-08-22 at 12:52:00 pm Views: 43
  • #16001

    Office Depot CEO makes little things count
    DELRAY BEACH — Truck tires and ink-jet cartridges have this much in common: They are generally not the stuff of meteoric stock growth.The CEO of Office Depot Inc. made his chops in the stock market as chief of AutoZone Inc. There, Odland employed many of the same strategies he is now using to strengthen Office Depot:Razor-sharp cuts in costs. Buybacks of company stock. A renewed focus on international and business-to-business sales opportunities.The resulting sky-high jumps in stock price endeared both companies — and Odland — to shareholders and stock market analysts alike.But AutoZone has stumbled since, and many believe deep cost cuts hurt sales growth. Similarly, analysts expressed some disappointment with recent quarterly sales numbers from Office Depot, even though profits were robust.Praise for Odland certainly hasn’t stopped. There was this, from Investors Business Daily: “The 42-year-old CEO is a study in how far you can take an innovative managing idea and succeed.” And this, from Credit Suisse analyst Gary Balter: “Sometimes you wish that he wasn’t at Office Depot and he was actually somewhere in the U.S. government cutting costs.”Odland, who is also chairman of the influential Business Roundtable’s Corporate Governance Task Force, seems uncomfortable with the personal attention. He prefers to attribute Delray Beach-based Office Depot’s strong stock market showing to the company’s 52,000 employees.However, analyst Bill Sims of Citigroup Investment Research puts the emphasis back on the CEO’s shoulders: “We believe Office Depot’s future success will be dependent on the implementation of Steve Odland’s vision.”Pulled from the ranks of grocery industry executives, Odland knows the value of a close shave. That industry works on a tenuous profit margin — as little as 1 to 2 percent — and attention to even mundane details can make or break earnings.For instance, as director of marketing for the Quaker Oats Co.’s Golden Grain unit in the mid-1990s, Odland oversaw the repackaging of Rice-A-Roni — and helped propel a 44 percent hike in sales of the once-stale product. He later led the U.S. subsidiary of The Netherlands food giant Ahold SA as chief operating officer.

    That’s where he was when Eddie Lampert came calling.
    Lampert, the wunderkind financier behind the Sears/K-Mart merger, sat on AutoZone’s board. In 2000, he and AutoZone founder J.R. “Pitt” Hyde went looking for a new CEO.Odland had no experience in the auto parts business. And at first blush, Lampert and Odland had little in common.At 25, a brazen Lampert sweet-talked Hollywood denizens into giving him millions of dollars to invest, eventually growing that early investment into the multi-billion ESL Investments fund. He once famously talked himself out of danger after being kidnapped at gunpoint and held in a motel bathroom for 30 hours. And some say he invented the notion of activist shareholder.By contrast, Odland is a Minnesota native whose first job was stocking groceries. Though he had risen to the top ranks of that industry, Odland had not led another type of retail company.But the two men appeared to share a passion for creating profitability.

    Thinking small
    Plenty of companies buy back shares of stock. Plenty of CEOs take a scalpel to costs. Plenty of stocks benefit from both.However, Office Depot’s attention to bottom-line performance, stock buybacks and rocketing share price feel like a management lesson from Yogi Berra: déjà vu all over again. In fact, TheStreet.com pointedly asked how “The Lampert Doctrine” of cost-cutting would fare at Office Depot.Odland says there’s less to this than meets the eye.”If you look at any company in America,” he said, you would see the same strategies.But they might not be as focused. Having tackled larger costs — shuttering non-performing stores, selling real estate, consolidating operations and offering employee buyouts — smaller bills are being attacked in every nook and cranny, including the length of cash register receipts and energy-efficient light bulbs.That’s led to hundreds of small measures, “and they all sound silly,” admitted Odland.Like the cash receipt. When Odland walked into an Office Depot store to buy two pens, the receipt “was about a foot long and the paper was so thick you could have used it as a fan belt on your car.” Shortening the printout saved about a million dollars, he said. So did changing out light bulbs.”This is not rocket science,” Odland says.Maybe not. But between 2001, when Odland came on board as chairman and CEO of AutoZone, and 2003, the company’s stock ran gravity-defying circles around its competition.

    Here’s part of how he did it.
    Vendors were paid for a product only after a customer purchased it. A new commercial division sold parts directly to auto repair businesses. Expenses were pared. Shares were aggressively repurchased by the company.In the second quarter of 2002, year-over-year earnings rose by 101 percent. Per-share earnings rose by 107 percent. The climb continued in the third quarter, with a 62 percent rise in net income. In 2003, shares hit an all-time high of $103.53, a price only briefly eclipsed since then.

    The market fell head-over-heels in love.
    Odland does not discuss AutoZone, other than to say he enjoyed his time there.However, Wall Street’s affections are nothing if not fickle. In September 2003, BusinessWeek questioned whether earnings growth was distorting the underlying book value of the company. In October 2003, Lampert’s ESL announced it would sell off 5.6 million AutoZone shares. In December, the share price took a 15 percent nose dive, in part because of questions about sluggish same-store sales — those at stores that have been open for at least one year — considered a key indicator of a retailer’s strength.Goldman Sachs analyst Matthew Fassler suggested then that the company focus less on cutting costs and more on fundamentals, even at the expense of dampening earnings. “It’s essential for future profitability, and the company can take its returns from stratospheric to merely solid,” he wrote.By May 2004, competitors were gaining. Profits were strong — up by 29 percent relative to the previous year — and sales grew by more than 5 percent. At 2 percent, though, same-store sales were the soft spot: Advance Auto Parts had grown same-store sales by 6.9 percent. O’Reilly Automotive Inc. grew by 12.4 percent.Still, with share price up roughly 300 percent, influential stockholders such as Lampert had little short-term reason to quibble — until Office Depot persuaded Odland to join their team.AutoZone shares plunged by $12.55, to $85.75, when it was learned the CEO was leaving.Shares of Office Depot shot up by 19 percent to more than $20 and have been going up ever since.

    150% gain in two years
    The attention to bottom-line detail helps explain why share price rose by 150 percent at Office Depot  in a little more than two years; why the company has posted 10 straight quarters of sales growth in its North American retail segment; why its per-share earnings remain strong.This month’s most recent quarterly numbers also looked good overall, but narrowly missed the forecasted $3.51 billion in revenue. That was enough to trigger a brief, if dramatic sell-off — shares tumbled by more than 8 percent before recovering — and raise some familiar issues.Michael Souers, an analyst with Standard & Poor’s, wrote that “while we believe that additional cost cutting can be achieved over the near term, the lack of growth potential… will ultimately hurt the shares, in our view.”There’s plenty of other analyst optimism. In fact, Odland appears willing to spend. He is moving forward with a plan to relocate corporate headquarters from Delray Beach to Boca Raton in a $100 million-plus move. He has two acquisitions under his belt. He does not believe that same-store sales are the best indication of growth; on the other hand, he is speeding up the time frame for remodeling older stores, which could boost those year-to-year sales. Twenty-six new stores have been opened to date; a total of 100 new store openings are planned for the year.And he appears to be distancing himself from his own reputation as a CEO with a cleaver.”I am trying to re-create a culture of thrift,” he said. “My number one priority has always been profitable growth.”