OFFICE DEPOT CAUGHT IN THE SHREDDER

[Anonymous]

http://www.businessweek.com/bwdaily/dnflash/content/jul2008/db2008078_207095.htm
Office Depot: Caught in the Shredder
The
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
The
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
No
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.

[Author]

July 11, 2008 at 11:39 AM