Office Depot, OfficeMax Joining Forces

Updated on

Like most other companies, specialty retailers were not spared during the recession. However, many of these companies are now staging a strong comeback. Office Depot Inc (NYSE:ODP), Barnes & Noble, Inc. (NYSE:BKS), and OfficeMax Inc (NYSE:OMX) are among the companies which look good for a variety of reasons. Here is a closer look:

Office Depot, OfficeMax Joining Forces

Office Depot Inc (NYSE:ODP) is an international player in office supply space. Until last year, speculations were rife that the company was going out of business as it was closing many store locations at a frantic pace. However, this painful restructuring has led to the company’s revival to better compete against Staples, Inc. (NASDAQ:SPLS) – the largest office supply chain, which controls about 39 percent of the U.S. market. Over the last 12 months, the stock has almost doubled as it became clear Office Depot was making inroads into competitors’ territory.

Office Depot Aims to Acquire its Rival

During the last couple of quarters, the company has reported narrower losses even though top line growth remained under pressure. In 2012, the company booked a loss of $77.1 million on revenues of $10.7 billion but the December quarter indicated a strong comeback. Despite the stock popping by a wide margin, it clearly remains one of the most attractive stocks in the space.

Its current market price put a premium of just 23 percent to the book value per share of $3.6. At the same time, Office Depot Inc (NYSE:ODP) has a debt equity ratio of just 0.64. However, this is set to increase as the company aims to acquire its rival OfficeMax Inc (NYSE:OMX) by the end of the year.

OfficeMax Inc (NYSE:OMX) operates in the same business and is not very small in terms of market capitalization than Office Depot Inc (NYSE:ODP). Since it has become a takeover target, its valuation has seen a tremendous growth of over 150 percent during the last 12 months. The proposed merger of the equals appears to be a good development for both companies as the move will likely result in hundreds of store closures where both companies have overlapping outlets. Faced with a common problem of declining sales, this is probably the best solution that promises to control costs and boost margins.

OfficeMax Inc (NYSE:OMX) registered a 2.8 percent decline in revenues last year to $6.92 billion. Pressure was visible on margins too, although net income surged to $416.8 million from $34 million last year due to gains on extinguishment of debt. Going forward, profitability is unlikely to see a boost on standalone basis as its price earnings ratio, currently at 2.4, is expected to increase to 17.7 on a forward basis. The stock currently trades at a price by book value ratio of 1.02 and has a slightly higher debt equity ratio of 0.89.

Nook Leads Hopes at Barnes & Noble

Barnes & Noble, Inc. (NYSE:BKS), another specialty retailer, has seen a revival in its fortunes. The stock has gone up 44 percent so far in the year although its financial performance has not improved and in fact has deteriorated in recent quarters. For the nine months ended January 2013, Barnes & Noble posted a 3.3 percent drop in revenues to $5.56 billion but losses grew fourfold to $47.6 million. The company’s hopes are pinned on the Nook e-book reader which seemed to be a worthy product in the competition in its early days.

However, Barnes & Noble, Inc. (NYSE:BKS)’s digital sales accounted for only 15 percent of total sales in the most recent quarter, a full 5 percent below the 20 percent seen in the same period last year. For the first nine months of the current financial year, Nook sales have merely followed the declining trend of other segments and fell 13.2 percent to $668.3 million.

Overall, the surge in Barnes & Noble, Inc. (NYSE:BKS)’s stock price does not appear to be supported by fundamentals and as such, it may be a better idea to wait. Meanwhile, Office Depot Inc (NYSE:ODP) and OfficeMax Inc (NYSE:OMX) look like attractive options at current levels.

Leave a Comment