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Stock Analyst Update

Office Depot's Swimming in Quicksand

Despite a massive restructuring plan, the company may be sinking.

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What Happened?
Office Depot (ODP), the world's largest office supply retailer, announced Wednesday it will immediately undertake a massive restructuring. The plan, for which the company will take a $300 million one-time charge, includes closing 70 North American stores, laying off 10% off its contract salesforce, reducing the number of items it sells by 20%, and writing down about $45 million of investments in Internet companies. Office Depot also announced it expects to miss already-reduced Wall Street estimates for its fourth quarter, which ended December 31, and that comparable-store sales for the quarter declined 5%-6%.

What It Means for Investors
We see little reason for investors to buy the stock despite its valuation of only 10 times trailing-12-month earnings. The company is the largest office supply retailer on the basis of sales, but its total market cap is less than half that of arch rival Staples (SPLS)--and for good reason: Staples has executed on its big-box retail model much better than Office Depot has. Now this mass restructuring could give Staples a golden opportunity to exploit Office Depot's weaknesses while it's highly vulnerable.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.