Market Mad House

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

The Death Spiral

Office Depot: inside a Dying Retailer

Those who want to see what the death spiral looks like, need to examine Office Depot’s (NASDAQ: ODP) financial numbers. These numbers read more like an autopsy for a once proud retailer, than an earnings report.

The gruesome highlights contained in the numbers I found at include:

  • A $1.47 billion drop in revenue over the past year. Office Depot reported revenues of $15.62 billion in March 2015 that fell to $14.15 billion in March 2016.


  • A net income of $9 million at a company with $14.15 billion in revenue.


  • A free cash flow of -$165 million.


  • A market capitalization of $3.313 billion.


  • An enterprise value of $3.814 billion.


  • A diluted earnings per share number of .0058 (no I’m not making this up).


  • $33 million in cash from operations, that’s right folks, Office Depot only generated $33 million from $14.15 billion in sales. This number is particularly frightening because Office Depot reported $184 million in cash from operations in March 2015. The company’s cash from operations decreased by $151 million in just a year.


  • $879 million in cash and short-term investments.


Judging by these figures; it is only a matter of time before Office Depot runs out of cash, and starts operating at a loss. My prediction is that it will probably report a loss just after the second quarter earnings report – which is due in June.

The next logical step at Office Depot is obvious; it will have to start selling off assets in a bid to raise cash to keep the doors open. Most likely we will see a massive new round of store closings; accompanied by liquidation sales and real estate selloffs, in a desperate attempt to raise cash.

Office Depot Blames FTC for Problems

Meanwhile, Office Depot’s management team has found a new scapegoat for the company’s problems; the Federal Trade Commission or FTC. Office Depot’s CEO Roland Smith blamed the company’s lousy earnings report on the FTC’s opposition to his efforts to merge Office Depot and Staples (NASDAQ: SPLS).

The FTC sued to stop the merger; which was announced last year; on the grounds the combination would limit competition. The Wall Street Journal reported that the case is still in court.


Mr. Smith did not explain how merging two ailing companies would solve either retailer’s problems. Earnings numbers reveal that Staples is in as bad or worse shape than Office Depot.

Staples’ revenues fell by $1.43 billion between January 2015 and January 2016. Staples ended first quarter 2015 with revenues of $22.49 billion; that fell to $21.06 billion a year later. This indicates that like Office Depot, Staples is faced with rapidly falling sales.

Staples has a little more float than Office Depot. The problem is that Smith and company would presumably use that float, to bail out their store. Staples reported $978 million in cash from operations on January 31, 2016, down slightly from $1.043 billion a year earlier.

The real losers in a merger would be Staples’ shareholders; who would lose their dividend of 12¢. Mr. Smith would presumably use that money to shore up Office Depot, and ward off the death spiral for another year. In other words he would take the dividend cash and flush it down the toilet.

Merging Staples and Office Depot would not Stop Amazon

How such a merger would counter the underlying cause of the sales loss – the rise of online retailers like (NASDAQ: AMZN) – is beyond me. Amazon and its archrival; Walmart Stores Inc. (NYSE: WMT), are definitely the source of Office Depot and Staples’ woes.

My recent office supply shopping experiences demonstrate how the online giants are killing Office Depot and Staples. I recently needed to buy a toner cartridge for my laser printer – I found it at Amazon for just $19.99 with free shipping. 200 shipping labels; which sell for around $38.99 at Office, were selling for around $22 at Amazon. The price was less than $7 if you bought the bargain brand.


Amazon is undercutting the office supply retailers’ prices on a wide variety of items and offering free shipping for those who buy Prime; or order $49 worth of stuff. Walmart is right behind Amazon; I found the Avery shipping labels Office Depot sells for $38.99, listed for $23.65 at

Office Depot and Staples are caught in the crossfire of a destructive war between two bigger rivals with far better resources. The online giants are using deep discounting of office supplies as a loss leader to lure in new customers, and it is working.

Investors need to stay away from Office Depot, because this chain is heading for a crash and soon. The only hope for survival here would be for Office Depot to convert itself into an online discounter; or a chain of shipping centers like the UPS Store.

My prediction is that Office Depot will be gone by 2019. There seems to be no way for this company to survive in today’s retail environment.