Stock analysts that claim there is no Retail Apocalypse have obviously never heard of Office Depot Inc. (NASDAQ: ODP). The retailer supposedly operates 1,100 stores in North America, yet its shares were trading at $2.19 on 24 April 2019.
Like Barnes & Noble (NYSE: BKS), Office Depot is one of those brands that is no longer supposed to exist but somehow keeps hanging on. It seems to generate just enough money to cover expenses and little else.
For example, Office reported an annual net income of $181 million at the end of 2017, and an operating income of $341 million. Those income numbers came from revenues of $10.240 billion on 30 December 2017.
Yes, Office Depot is Making Some Money
Those revenues fell by 7.09% in 2017 which was actually an improvement over 2016 when revenues fell by 23.91%. That was good news in a very sick way, revenue losses fell off just enough to indicate the business might be viable for another four or five years.
Strangely enough, Office Depot made some money in 2017. It reported annual free cash flow of $275 million and an operating cash flow of $458 million on 30 December 2017. The company was able to accumulate $622 million in cash and short-term investments and assets of $2.871 million in on December 30, 2017.
So yes folks it is possible that Office Depot can survive for a few more years. That raises the interesting question: what survival strategies do retailers like Office Depot have?
Survival Strategies for Office Depot
Some survival strategies that chains like Office Depot can pursue include:
- Cut the size of the stores by 25% or 50% or even 75%. Smaller stores mean less rent, lower utility bills, smaller inventories, smaller payrolls, and greater efficiency. The drawback is customers will no longer find the huge inventories they have come to expect and have another reason to use Amazon. Office Depot is doing some of this by moving to smaller locations in markets like Denver.
- Online pickup and delivery. Turn the stores into pickup and drop locations for online merchandise. Office Depot is well-positioned for this because of its relationship with UPS and delivery services. One option is to expand delivery services to cover work from home businesses.
- Become a service business. Office Depot is doing some of this with its Copy and Print Centers. The problem here is that a lot of the services provided can be done quicker and cheaper by almost any smartphone. My Motorola Moto Z Android phone now scans text. Why do I need to go to Office Depot from copies when I can scan with the phone and send the image to my computer and print at my desk?
- Another service Office Depot is experimenting with is information technology (IT). The company entered into a channel agreement with MicroCorp, which services office machines and computers, a press release indicates. Office Depot has a partner program designed to provide a wide variety of services to small and medium-sized businesses.
- Integrate with other businesses. This is potentially the best option. The smartest move for Office Depot right now would be to open joint locations with totally different kinds of businesses. That will avoid anti-trust actions from the Federal Trade Commission (FTC) which put the kibosh on Office Depot’s Staples merger and diversify income streams.
- Potential partners include: grocers Aldi, Trader Joe’s, Amazon Go, Whole Foods 360, drugstores (Walgreens, CVS), dollar stores (Dollar Tree and Dollar General), discount stores (Walmart Neighborhood Market), department stores (Kohl’s, Macy’s, Nordstrom Local), FedEx Office, the US Post Office, electronics stores (BestBuy), and fast food joints (Shake Shack, Panera Bread, Starbucks, Krispy Kreme, etc.) to name just a few.
- Join Amazon (NASDAQ: AMZN), instead of trying to compete with Amazon team up with it. Install Amazon lockers in the stores, and turn the Copy & Print center into a customer service counter where customers can pick up and drop off Amazon merchandise. Another lucrative sideline would be servicing electronics sold through Amazon at Office Depot.
- Reducing costs by making the operation leaner and meaner. Examples of this might be eliminating the Office Max brand, cutting the number of stores, shrinking store sizes, pulling out of smaller markets, and eliminating categories of merchandise. A good place to start might be by getting out of the electronics business, and selling only office supplies.
- Another smart simplification strategy would be reducing the selection of merchandise and concentrating on a small inventory of well-selling low priced merchandise similar to what Aldi does in groceries.
The only way that Office Depot will be able to survive is by changing everything in its stores. Unless the company can prove it is capable of such a transformation investors should stay far away from this office supply dinosaur.