Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is it the End for Office Depot?

The end of office-supply stores as we know them appears to be at hand. The retail apocalypse has claimed Staples. That retailer was just acquired by the private-capital company known as Sycamore Partners and taken completely private.

That leaves just Office Depot (NASDAQ: ODP) standing in the segment and it won’t last much longer by the looks of things. That chain achieved a stock value of just $3.85 a share on October 13, 2017.

The horrendous share price gave Office Depot a market capitalization of $1.988billion and an enterprise value of $2.338 billion on 13 October 2017. This makes Office Depot an acquisition target because it had assets of $5.412 billion on June 30, 2017.

Office Depot is now an Acquisition Target

A hedge fund or private-equity firm can make money by buying Office Depot and selling off its assets. That’s probably what Sycamore plans to do with Staples. Office Depot has quite a few assets including 1,100 stores in North America, and 400 elsewhere in the world.

Office Depot is a little more valuable because it just bought the tech services organization hurricane CompuCom for $1 billion, Bloomberg Technology reported. The hope is to drive sales by adding technology services and competing with BestBuy’s (NYSE: BBY) Geek Squad.

CompuCom is supposedly the largest computer-services firm in North America with around 6,000 licensed technicians and 5.1 million clients. Another hope is offset falling sales of office supplies, Office Depot’s sales are expected to fall by 5% to 6% during Third Quarter 2017.

This might make Office Depot more of an electronics services firm and put it in a good position to form some sort of partnership with Amazon (NASDAQ: AMZN). An obvious future for Office Depot would be a service center for Amazon electronics and a brick and mortar location for Amazon returns and pickups. A logical move for Amazon would be to buy Office Depot.

Is Office Depot Making Money?

Okay, so Office Depot is valuable but it is making money? After all, this retailer has been hit hard by competition from both Amazon and Walmart (NYSE: WMT). The two online giants regularly undercut Office Depot’s prices and offer free delivery to boot.

The answer to the all-important question is yes, Office Depot made some money during second quarter 2017 in the form of $413 million in net income. That was a definite improvement for $277 million in June 2016 and a loss of -$68 million in June 2015.

Office Depot also generated a little cash in the form of $2 million in free cash flow during the second quarter far below the $294 million in reported a year earlier on June 30, 2016. It also brought in $359 million in cash from operations on the same day. This was down from $521 million a year before.

It looks as if Office Depot’s turnaround has stalled but it still has some float. There was $763 million in cash and short-term investments on June 30, 2017. This was down from $1.118 billion a year earlier.

Why Office Depot Needs Amazon Now

Office Depot is making money, but its capacity to do so is slowly disappearing. This is why the CompuCom deal is so important. It also why Office Depot should seek some sort of accommodation with Amazon before it is too late.

Since Amazon is seeking deals with French grocery stores and lets Kohl’s (NYSE: KSS) handle returns it should be interested in working with Office Depot. The Office Depot electronics department would be an ideal place to display and sell items like Kindle, Fire, Amazon TV and Echo.

Office Depot’s Copy and Print Centers, which already do FedEx (NYSE: FDX) shipping would be ideal places to handle Amazon returns and pickups of Amazon orders. Another advantage is that Office Depot’s delivery infrastructure could handle some Amazon orders.

I still have to wonder why Amazon bought Whole Foods and not Office Depot. Office Depot seems like a more logical fit. Working with Amazon would also protect Office Depot from private-equity vultures such as Sycamore.

Is Office Depot a Value Bargain?

All this will make some investors wonder if Office Depot is a value bargain because it is so cheap. I would say no because the company is simply too vulnerable, and the market it operates in, too volatile.

Nor can investors make money here, Office Depot paid a dividend of just 2.5¢ on August 23, 2017. That payout is not likely to go up anytime soon.

Although the 21.76% return on equity looks pretty good. That is not likely to be repeated with falling sales. Therefore stay away from Office Depot until it reinvents itself or gets into Amazon. Until then, this retail is not worth that much money.