Dead Stock Walking: Office Depot Has Nowhere to Go but Down
It's abundantly clear that by blocking the merger of Staples and Office Depot (NASDAQ: ODP) in 2016, the Justice Department set them on a course to spiral down to oblivion. Staples was saved only because private equity firm Sycamore Partners bought it out for $6.9 billion; Office Depot is still living with the consequences of the government's failure to correctly pick winners and losers in the marketplace.
Shares of the office supplies retailer have lost nearly two thirds of their value since last summer and are down by 75% from their peak three years ago. Office Depot is like a zombie in that it's dead, but doesn't know it.
Ignoring the elephant in the room
Although Staples had said 99% of customers wouldn't see a price increase with the merger, trade regulators instead sided with Fortune 100 companies that might have paid slightly more for reams of paper and toner cartridges. In doing so, they ignored the very real threat posed by Amazon.com (NASDAQ: AMZN), which they felt wasn't a particularly serious concern to the commercial contract business of Office Depot or Staples -- which provided each one with about 40% of its revenue.
Now, however, as the doomed merger partners predicted, Amazon is going hard after the commercial office supplies market. It reportedly is readying a co-branded small-business credit card to lure commercial shoppers to its site, which follows its launch late last year of a Prime membership program directed at business offering fast free delivery.
Last summer, Amazon said the number of customers for its B2B business-supply segment Amazon Business had more than tripled to over 1 million, and the number of business sellers on the site had nearly doubled to 85,000.
Losing customers and sales
Expect those numbers to be vastly inflated again if it updates the segment's progress, but Office Depot will be the wreckage left in its wake. Sales and operating income tumbled in 2017 in both its retail division and business solutions unit as it sold off its international operations in Europe, China, and elsewhere.
In the retail segment, sales fell 11% from the year-ago period as comparable-store sales contracted by 5%, and even on an adjusted basis, sales were off by 10%. It ended the year with 1,378 stores, 63 fewer than it had in 2016, but over 500 fewer than it had after merging with OfficeMax in 2013. In the business solutions division, sales were down 4%.
It's not just Amazon that Office Depot needs to worry about, but also mass merchandisers like Walmart (NYSE: WMT) and Costco (NASDAQ: COST), which are actively trying to steal customers away.
Two years ago, Walmart's Sam's Club launched a delivery service for office supplies, and it reported positive, low single-digit comp sales growth last quarter. Industry site eMarketer pegs Sam's Club technology, office, and entertainment business at 6% of its total revenue.
Costco Business Centers, warehouse clubs for businesses, have grown by nearly 50% over the past two years, and analysts see them expanding by another 50% over the next few years. Between 1992 and 2015, Costco had only 14 such dedicated warehouses operating. But it opened six more over the next two years, and they represented 5% of all Costco store openings.
In short, Office Depot has no end of competition for its commercial business, just as it and Staples warned when they tried to merge, but were ignored. Now the company is quickly withering under the onslaught, and its best hope may be for a buyout itself.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.