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Office Depot’s Comeback Still Looks Like a Longshot

Posted on Wednesday, February 26th, 2020 by Chris Markoch

Office Depot’s Comeback Still Looks Like a Longshot

One of the stocks that did well for itself this earnings season is Office Depot (NASDAQ:ODP). The stock rose nearly 10% after the company reported higher earnings but lower revenue.

From a technical standpoint, ODP stock is well above its 200-day moving average. However, it is having trouble staying north of its 50-day moving average. Investors will be watching to see if the stock can make a meaningful move above this level. The stock’s Relative Strength Index (RSI) is hovering around 53 which suggests the stock could go either way at this point.

Is there a bullish case for Office Depot?

Showing more profit than analysts expected on less revenue suggests the company is getting leaner and more efficient.  "Our Business Acceleration Program continued to exceed expectations, streamlining our operations and positioning us to invest in additional growth opportunities in the coming year. Profit margins were up in all three divisions in the quarter, driving a 10% increase in adjusted operating income in the fourth quarter, and a 2% increase for the year," notes Office Depot CEO Gerry Smith.

The company also is showing no net debt on its books. To that end the company’s tangible book value jumped from$1.35 to $1.57 per share.

Since 2018, the company has made strides to diversify into recurring revenue streams such as information technology (IT) solutions that are not dependent on a physical store. And Office Depot does provide a nice dividend with a yield of nearly 4% that helps suggest the company’s management is confident about its balance sheet. And to that end, the company did initiate a share buyback program in 2019.

Where is the revenue coming from?

All of those are valid points for a company that is making a valiant effort to survive. In fairness to Office Depot, the company was set to merge with Staples before the Federal Trade Commission soured on the deal. That was probably a fatal blow to Office Depot. Although both companies compete in the brick-and-mortar world, a merger would have kept the two companies from competing for sales. There would have undoubtedly been economies of scale. And Office Depot would have benefited from Staples more developed e-commerce presence.

 At some point, the company is going to have to generate revenue. At its peak, revenues for the company exceeded $15 billion per year. Now revenue is below $10 billion per year and shrinking. And that’s in what is arguable one of the strongest economies of our time. The company appears to be in a race against time.

Furthermore, it’s never a good sign when analysts are avoiding your stock. The only analyst that has rated ODP stock gives it a sell rating and a price target of $1.20. That’s not a growth story.

And in 2019, when other analysts were covering the stock, they were saying sell. At that time they predicted that earnings would stagnate but decline during 2020 and 2021. Plus, revenue is expected to continue its downward trend. The company has gotten better at meeting analysts’ expectations. But it is also climbing over a bar that continues to get lower.

The company maintains a hefty retail footprint. The company still has 1,350 stores across the United States, Canada, Puerto Rico, and the U.S. Virgin Islands.

The bottom line on Office Depot stock?

Office Depot is a brick-and-mortar store that is being left behind in the digital world. I can’t help but look at the company and think of Dunder Mifflin, the fictitious paper company made famous by The Office. Except it’s actually a stranger story because now even the big box stores that threatened mom and pop paper companies are being threatened by online storefronts that require little to no retail footprint.

And that’s not a world that Office Depot is currently positioned to compete in.

Office Depot may be an opportunity for traders hoping to capitalize on a little momentum from the earnings report. But the long-term fundamentals for the company do not bear out a long-term position.


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