Take a Pass on Office Depot

1Dividend yield and discounted valuations do not compensate of dire outlook for the brick and mortar operator

Stock: Office Depot Inc(NASDAQ:ODP)

Office Depot, a $2 billion retail store operator, recently experienced a share price drop of 17% after its announcement of its $1 billion takeover of CompuCom. According to Bloomberg, Office Depot also announced a 7-8% decline in same-store sales (critical metric for retail store operator) in the recent quarter and another 5-6% drop in the next quarter brought by the company’s affinity to Florida and Texas post-hurricane aftermath.

Meanwhile, Office Depot has an appealing 4.4x P/E ratio (vs. industry 44x), trades at its book value with a dividend yield of 2.5% with 9.4% payout ratio. Including share buybacks, however, payout ratio rose to 39% in the recent 12 months.

Taking a look at the retail store’s recent six months operations, the company had experienced 25.5% revenue decline to $5.04 billion and a more disappointing 45.3% drop in profits to $140 million. Comparable store sales, which relate to stores that have been open for at least one year, fell 5% in the first half compared to 1% decline a year earlier.

Office Depot’s balance sheet carried a cash of $763 million in cash and cash equivalents and $1.16 billion in debt ($300 million less vs. its year-earlier period). Meanwhile, equity rose $115 million to $1.98 billion. The company’s cash also fell by 25% brought by lower profits, capital expenditures, and borrowing repayments.

In the past three years, Office Depot allocated $397 million in capital expenditures, reduced its debt by $327 million, paid out $158 million in dividends and share repurchases, while having generated $377 million in free cash flow.

Analysts have an average hold recommendation with a target price of $4.53 vs. $3.97 at the time writing. Conservatively, I’d personally wait for the share price to trade about 30% discount off the current book value prior to considering purchasing Office Depot shares.

Despite the focus on debt reduction and a recent acquisition, Office Depot is a pass.

Disclosure: I do not have shares in Office Depot.


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