Susan and John Kim,
ODP
This may be of interest:
<<<Office Depot Inc.
Dow Jones Newswires -- July 21, 1999
DJ BARRON'S ONLINE: Office Depot May Become
Staple Again
This story was originally published late Tuesday. By Vito J. Racanelli
Weekday Trader
NEW YORK (Dow Jones)--In the office products world, Coke and Pepsi appear to have changed
places.
Fed up with declining sales momentum, the market has been pounding the stock of Office Depot, the
largest office products retailer in sales and, until not too long ago, "the Real Thing" as far as investors
were concerned.
But recently Office Depot has given ground to its once much smaller and now faster-growing rival,
Staples. This year, Office Depot shares have fallen by nearly a third to 17 9/16 from their 52-week
highs of 26, set January 6. Indeed, Office Depot shares now sit below the prices at which they
changed hands in late 1995.
Most of the damage came about after the company announced that retail division same-store sales
growth, which had been steadily weakening since 1997, fell to zero in the first quarter. And the stock
lost more ground recently on (unfounded, it turns out) fears the company would miss second quarter
earnings expectations.
Meanwhile, over at Staples, same-store sales growth has been hovering around 9% a year, and since
1997 its shares have outperformed Office Depot's by a factor of six. Right now, the valuation
discrepancy between Office Depot and Staples is the biggest it's been since about 1991.
But with underperformance often comes opportunity: Some analysts and investors are becoming
more and more bullish on the Delray Beach, Fla., company.
"Its low price-to-earnings (P/E) multiple [relative to Staples] makes Office Depot the best, cheapest
company in the industry," asserts Stewart Kalter, an analyst at investment boutique Spencer Clarke
LP.
The bulls point out that Office Depot's same-store sales growth picked up smartly in the second
quarter - and is likely to accelerate in the second half of 1999 and into 2000, thanks to a spate of
new store openings.
And triple-digit sales growth at the company's websites is being overshadowed by concerns about
short-term "bricks and mortar" stores, the bulls maintain.
"Office Depot shares have suffered from shortsighted individuals and near-term fears," says Jeff
Stinson, an analyst at Midwest Research. But investors are missing the big changes made last year
that will positively affect 1999 and 2000 earnings, adds Stinson, who initiated coverage of Office
Depot with a Buy rating in May. He predicts that same- store sales growth at the retail level should
climb back to 5% by the first quarter of 2000.
How? Ryan Beck/Southeast Research Group analyst Peter McMullin points out that the company's
store-opening program has recovered from the slowdown caused by its failed merger with Staples in
1997.
During that 10-month merger process - ultimately blocked by the government - Office Depot sharply
curtailed new store openings. And because stores that are open one to two years show the best sales
growth, that 1997 drop took a big bite out of 1998 and 1999 same-store sales growth, notes
McMullin, who rates Office Depot stock a Buy.
Now, with about 100 new Office Depots a year opening in 1998 and 1999, that should help narrow
the gap in same-store sales growth between Office Depot and Staples. In fact, last week the
company reported higher-than-expected second-quarter same-store sales growth of 3%, points out
Glenmede Trust analyst Robert Neimeyer. (Glenmede held about 2.3 million shares of Office Depot
stock as of March 31, 1999, according to Federal Filings.)
"I refuse to believe that Staples is that much better a merchandiser than Office Depot," he says.
Another potential catalyst being overshadowed is the retailer's fast growing Internet business,
maintains Kalter who initiated coverage of Office Depot with a Buy recommendation in May.
In the second quarter, for example, sales from its websites increased 474% to $70 million. That's
more than total Internet sales for 1998 and nearly six times the $12 million in sales the sites generated
in the second quarter of 1998.
But by the looks of the price, right now investors aren't giving Office Depot credit for much of
anything, Kalter argues-even after it was recently added to the S&P 500 index.
Office Depot shares currently change hands at less than 15 times First Call's consensus 2000
earnings estimates of $1.22 per share - a nice discount to its estimated 24% earnings growth next
year and to projected long-term growth of about 23%. By contrast, Staples trades at about 35x
consensus estimates of 88 cents a share in the fiscal year ending January 2001 - a premium to its
projected earnings growth of 29% next year and 30% in the long term.
That kind of a discrepancy is unwarranted, says McMullin, who believes that Office Depot's stock
will return to a 20x multiple on next year's earnings. That would produce a 12- to 18-month target
price of 25-27.
More bullish still is Kalter, who says Office Depot merits a multiple about 70% to 80% that of
Staples. That 30x-35x range would give Office Depot a 12- to 18-month target price of 40, more
than double current prices. Eventually, he says, "investors will start asking themselves 'Why go to
Staples when you can have the industry leader for half the multiple?"'
The market currently likes Office Depot about as much as it would a paper cut. Yet, as new stores open and sales growth in existing stores accelerates, investors may find that Office Depot goes down as easily as Coke. The Old Coke, that is.>>> |
