Office Depot: Take a Flyer on ODP Stock

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My editor asked if I thought it was too early to call a bottom on Office Depot (ODP). The answer is “yes.”

And “no.”

In other words, “maybe.”

ODP merged with the struggling OfficeMax last year, and while there will be some huge cost savings in the coming years, it doesn't change the fact that office supply businesses are having problems.

Let's take a look at what the quarterly results tell us, bearing in mind they include results from the combined entity.

Office Depot Earnings

Office Depot’s fourth-quarter sales increased 33% to $3.5 billion. The operating loss came to $118 million compared to operating income of $5 million in 2012. This resulted in a net loss of $144 million, or 34 cents per share, compared to a net loss of $17 million, or 6 cents per share the previous year.

Full-year numbers were not impressive, either. Sales increased just 5% to $11.2 billion. Office Depot reported an operating loss of $205 million compared to an operating loss of $31 million. That's a net loss of $93 million, or 29 cents per share, compared to a net loss of $110 million, or 39 cents per share — so, that’s technically at least some improvement.

Also, this includes some $123 million in merger-related charges. Filtering all that stuff out, we end up with Q4 adjusted operating income of $5 million compared to $26 million. The adjusted net loss was $14 million, or 3 cents cents per share, compared to $1 million, or breakeven in the year-ago period. For the full year, adjusted operating income of $66 million compared to $97 million, and an adjusted net loss of $36 million, or 11 cents per share, compared to adjusted net income of $9 million, or 3 cents per share.

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Feel better? I don't.

Neither does Office Depot CEO Roland Smith, who said, "While (fourth-quarter) results were clearly disappointing, they shouldn't be a big surprise."

Looking Ahead

There’s more bad news afoot for ODP stock when it comes to what to expect in 2014.

Office Depot warned that it expects sales to decline in 2014. Moreover, ODP guided to adjusted operating income of $140 million for the full year 2014, and assumes continuing declines in total sales "because of market trends in some of our key product categories and overall competitive activity."

That doesn't sound good at all. It’s worse when you realize this will include $300 million of depreciation and amortization of approximately $300 million.

Merger cash expenses? Yep … $300 million worth, too.

The Office Depot-OfficeMax merger seems necessary to keep both chains afloat, but combining the entities in an environment where office supply needs are changing, where businesses continue to struggle in a weak economy, and where one can buy office supplies from not only competitors like Staples (SPLS), but Amazon (AMZN) and other e-tailers, does not bode well. It was a move made for survival.

On the flip side …

ODP stock trades at only $5 per share and has nearly $1 billion of cash on hand. Yes, its debts are greater at roughly $1.55 billion, but most of that isn’t due until 2019. I don't see any danger in bankruptcy here.

Should You Buy ODP Stock?

What we’re seeing in the macro picture is that this is a company that is going through a complicated merger, in an economy that is struggling, with competition.

And yet, even considering all this and Office Depot’s weak sales, I still consider ODP stock a speculative buy.

There’s no complex thesis here. Office Depot will get through its merger — most companies do. And if the economy improves, business definitely will improve.

Simply put, office supply superstores are like hardware superstores — the stuff is usually stuff you need right away, and not something you are willing to wait for via mail order. Ergo, while Amazon might be able to take away certain sales, such as electronics, it can’t swallow what Office Depot does completely.

Meanwhile, ODP does hold market share, and it’s a viable competitor to Staples and Uline.

The downside actually appears limited at this point — certainly more limited than ODP stock’s potential for a rebound.

If you have money to play with, Office Depot might be worth a shot.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets @ichabodscranium.