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 user 2008-07-11 at 11:39:55 am Views: 33
  • #19973
    Office Depot: Caught in the Shredder
    office-supply retail chain was hit by big drops in its same-store sales
    and stock price—but the troubles don’t end there.The pressures of
    rising prices and falling sales that small businesses are feeling have
    hit home for office-supply stores as well. On July 8, the sector was
    shaken up after Office Depot (ODP) said sales at stores open for at
    least a year sank nearly 10% in the second quarter. The chain will
    release results for the quarter July 30.The news sent Office Depot’s
    shares on a 32% plunge, to 7.10. Rival OfficeMax’s (OMX) shares also
    fell, by 12% to 12.18. Shares of Staples (SPLS), the industry leader,
    fell only slightly—by 2.5% to 22.55—as investors bet that it might be
    in position to pick up market share from its weaker competitors.In a
    release, Office Depot said its margins would shrink as well compared
    with last year due to “a very difficult business environment.” Kate
    McShane, an analyst at Citigroup Investment Research (C), says profits
    could come under even more pressure in coming months.

    Added Pressure
    slump in office supplies might not seem all that surprising, given the
    generally desperate state in retailing these days. Hundreds of stores
    have closed in recent months as consumers tightened their spending at
    everywhere from apparel and shoe retailers including Ann Taylor (ANN)
    and Foot Locker (FL) to home-goods stores such as Linens-N-Things.But
    office-supply chains had held up generally well, bolstered by their
    core business customers. The last major store closings at any of the
    big chains came in 2006, when OfficeMax closed 109 stores. Now, though,
    businesses are also feeling the pinch of reduced consumer spending and
    tightening credit. According to a May survey conducted by the National
    Federation of Independent Business, small business optimism is at its
    lowest since the oil embargo of 1979. And 17% of respondents said
    inflation is a top concern, compared with 8% only three months ago.
    “The first concern of small business owners today is inflation—the
    first time since January 1981,” says NFIB chief economist William
    Dunkelberg.In a recent report, Stephen Chick, an analyst at JPMorgan
    (JPM), said the office-goods sector is “under severe pressure, with
    some of the sharpest same-store sales declines in retail.” He added:
    “We believe some combination of store closings and consolidation is
    essential over time.”

    Consolidating Purchases
    Adding to the
    woes of the office-supply stores is the low-price lure of Wal-Mart
    (WMT). As consumers look to cut back on $4-and-up gasoline, they’re
    consolidating purchases of all manner of products into a trip to one
    store. Recently Wal-Mart also has been aggressively pursuing small
    businesses with its Sam’s Club warehouse club unit, where it has beefed
    up its office-supplies line with such offerings as ink and toner
    cartridges and office furniture.The pressure is showing up in the
    financial results of the office-supply chains. OfficeMax’s
    first-quarter results were short of forecast and its same-store sales
    declined 8.7%. Staples is trying to mitigate the effects of the
    weakened American consumer by expanding overseas—last month it bought
    Dutch office-supplies company Corporate Express for $2.6 billion.
    Still, Staples’ same-store sales fell 6% in its first quarter ended May
    3, and it has cut its outlook for the fiscal year. “The current
    economic environment is tough,” said Ronald Sargent, chief executive
    officer of Staples, in the first-quarter conference call.

    Questioning Management
    doubt, Office Depot has problems that are all its own. Shareholders
    have questioned management’s ability to run the business efficiently,
    and pushed to close some of the chain’s 1,600 stores. Dissident
    shareholders had waged a proxy battle earlier this year and threatened
    to place their own nominees to the board of directors. But big
    shareholders Woodbridge Equity Fund and Levitt pulled out of the proxy
    fight at the last minute, saying they had achieved their goal of
    drawing attention of the board and shareholders to the unacceptable
    performance of management. Still, they asked that shareholders withhold
    their votes for the company’s nominees: Chairman and CEO Steve Odland
    and former Chairman David Fuente.Chuck Rubin, president of North
    American retail at Office Depot, acknowledged in a conference call on
    Apr. 29 that many of the company’s new stores have cannibalized sales
    at existing stores. Consumers in California and Florida, which together
    make up 26% of the company’s total sales, were especially hard hit by
    declines in the housing market.