Why Did Office Depot, Inc. Shares Drop 18% in March?

MarketsMotley Fool

Office Depot (NASDAQ: ODP) has struggled since its attempt to merge with Staples failed. The company is attempting to change its business model, adding technology solutions to its original model of selling office supplies. It's too early to know if that will work, but fourth-quarter and 2017 results, which the company reported on Feb. 28, were somewhat disappointing.

What happened

Continue Reading Below

Sales in Q4 dropped to $2.6 billion from $2.7 billion the previous year. Full-year sales came in at $10.2 billion, a drop of 7% year over year. Perhaps most importantly, Office Depot reported a net loss of $48 million, or $0.09 per diluted share, down from a profit of $0.10 in the same quarter last year.

The company noted that the loss was due to "a net tax expense of approximately $68 million associated with changes to the Company's U.S. deferred tax assets and tax valuation allowance due to recent tax law reform." Still, even if you factor out the tax loss, adjusted earnings fell slightly for the quarter and the year.

So what

Office Depot is a company that's transforming itself. Since its new CEO Gerry Smith has only been on the job since January, it's fair to say he has not yet had time to remake the company, though he said everything is on track in his remarks in the Q4 earnings release:

Smith may have the right plan, but so far, investors aren't buying it. After closing February at $2.63, according to data from S&P Global Market Intelligence, shares fell to $2.15 to close March, an 18% drop. That drop is nearly identical to the decline Office Depot posted in February.

Now what

Give Smith time. He wants to make Office Depot less reliant on stores, while improving sales at those same brick-and-mortar locations. Those aren't easy tasks and they're not going to happen quickly.

This is a retailer that's in transformation and turnaround mode. One quarter, or even a few, will not likely determine whether it succeeds or not.

10 stocks we like better than Office DepotWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Office Depot wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 2, 2018

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.