Office Depot Is a Household

Office Depot is a household name with regard to being a supplier of office and business products to both the domestic and international markets. Yet, the success story of the company is limited with regard to the domestic share of the more than 300 billion dollar office supply market. Office depot in fact only demonstrated slightly over 10 billion of sales in the domestic share. Though this is as a result of twenty years of steady growth, with the company marking its 20th anniversary in 2006, the organization needs to garner more of this domestic market share to meet the expectations of shareholders and continue to develop its overall business, while simultaneously creating cost cutting practices that will serve for slower expansion but better overall sales in existing stores. In the past few years the company has spent a great deal of its time and energy securing an international presence, under two brand names and through direct international sales from brick and mortar stores and through distribution of internet sales. The organization has likely not shown the kind of growth ist could have, as a result of fierce U.S. domestic competition in this business niche. The U.S. has a strong infrastructural specialty market that ranges in depth from old Mom and Pop retail office supply stores to department store marketing of such products. Office depot has also seen the simultaneous growth of other one stop office supply stores in the 20 years it has been operating. Additionally, as a result of the expansion to the international market the domestic market may have been limited, in the way of resources for marketing and development. This work will attempt to outline ways in which the domestic market share can be improved over the foreseeable future.

External Analysis:

As the fierce existing and new competition in the office supply industry continues to make inroads into sales of new office products, and especially large contract sales to businesses there needs to be a clear direction for the development of the Office Depot brand in the U.S., beyond the limited domestic growth that has been seen over the last few years. The overall market has been challenged in that specialized products, beyond those items that an individual can purchase in a department store, such as ink and toner supplies have been sold aggressively by direct marketers, and many department stores have expanded sales to large ticket office items such as office furniture as well as computers, printers, digital cameras and other items that have largely been held captive by office supply specialty stores for decades. The market has had significant changes in the manner in which it sells to customers, as the growing home office and small business boom has created a systems where smaller customers dominate the market and large all inclusive box stores (such as Office Depot), after having successfully wrestled large corporate contract accounts from the traditional office supply stores now must seek to heavily expand in small scale sales to individual small business owners. To do so they must continue to expand into the convenience market, locating stores close to other retail resources, especially in strip malls and areas where consumers can continue to do multi-faceted shopping, to compete with department (discount) store markets, which are frequently in the same locations. Office supply sales are driven largely by convenience, as the purchasing of such supplies is often done, especially in small businesses on an as needed basis, and the need arises frequently, mid task, creating a need for prompt delivery of services and supplies, rather than on a price comparison model, such as what might happen when supplies are purchased in bulk. (Brillion Market Analysis "Office Supply Stores" at (http://www.ci.brillion.wi.us/comdev/MA_Sec6_officesup.pdf) the office supply store must be located conveniently and be distributed internally in such a manner that buyers can rapidly find needed merchandise, even when the customer is not familiar with the store. The customer must leave the store feeling as if he or she has always been able to find and purchase, goods at a fair price, or they will not return to such a store, especially if they are able to find office supply items in other locations, just as easily and also for a fair price. Office supply stores, such as Office Depot are poised to take advantage of the demographic changes that have occurred in business, as more and more small businesses dominate the market, as well as continue to grow business contract sales and as in the case of Office Depot market internationally, from a growing international infrastructure, of global market shares. The online market is also substantial, and will continue to grow as more and more individuals become comfortable with the purchase of such goods online.

Internal Analysis:

Office Depot has a significant online presence that will aide in growth and cost cutting, as many services and products are available online at over 50 online locations that serve both international and domestic markets. ODs current financial condition is considered strong, though more emphasis must be placed upon domestic sales, as the infrastructure is now in place for international sales and can now easily be maintained. The 2007 early look gives the stakeholder a better idea of the overall market condition of ODP and can clearly explain the current market trend as well as the future market needs that ODP must essentially be a huge part of if domestic sales becomes the new, needed focus of the company.

Stock

Industry

S&P 500

Price/Earnings

Forward P/E

Price/Book

Price/Cash Flow 9.7

Price/Sales

Dividend Yield %

S&P 500 data through 08-15-07 (Morningstar "ODP" Stock Report at (http://quicktake.morningstar.com/stocknet/Snapshot.aspx?Country=USA&Symbol=ODP)

Total sales for the first quarter increased 7.3% over the year-ago period, driven by a strong performance in the International division. International sales grew 21% (11% in local currency) from the same year-ago quarter, while the North American Retail and Business Solutions divisions increased 3.2% and 2.9%, respectively. Retail sales growth was fueled by 16 new store openings in the quarter, as comparable-store sales, or comps (sales from stores open at least a year) fell 3% over the same year-ago period. Weak comp growth for the quarter was attributable to the delayed release of Microsoft's

MSFT Vista operating system (consumers postponed high-ticket computer purchases until the Vista release) as well as disruptions stemming from store remodeling. The company plans to open 150 and 200 stores in 2007 and 2008, respectively. While aggressive store openings may help fuel top-line growth, we are concerned about potential market saturation considering the store growth from rivals Staples

SPLS and OfficeMax

OMX.

The firm's operating margin (excluding one-time charges) increased to 5.8% in the quarter from 5.5% in the same year-ago period. The company's new store format (80 stores were remodeled during the quarter) has proved to be more efficient and helped trim costs at the retail level. Increased private label penetration (now approximately 20% of retail sales) has also helped boost profitability. In the North American Business Solutions division, which accounts for about a quarter of total revenue, the operating margin sank, primarily due to problems related to the integration of its Allied Office Products acquisition. We don't expect to see much operating margin expansion in the North American Business Solutions division over the next few quarters. We think the firm will likely struggle to leverage its operating costs given the weak sales growth we are predicting from the softening in business spending and decline in furniture demand. In the International division, the firm's operating margin was roughly flat over the same quarter last year, which is impressive considering the investments the company is making overseas to position itself for future growth. We expect slight overall margin expansion over the next couple of years as the company continues to trim costs in its Retail division, and gains efficiencies from its recent investments overseas. (Morningstar "Is Office Depot a Buy, Sell or Hold?" At (http://quicktake.morningstar.com/stocknet/DynamicStock.aspx?Symbol=ODP&Country=USA&referid=A1951&pgid=SU3&vurl=http%3a%2f%2fquicktake.morningstar.com%2fstocknet%2fMorningstarAnalysis.aspx%3fSymbol%3dODP%26Country%3dUSA)

The current scene demonstrates that ODP must be aggressive in cost cutting and must also pay close attention to expansion models, especially with the expansion models of other similar retail outlets, as such outlets could saturate the market and create situations, such as those seen in the last few years with ODP having flat sales, or declining sales at locations that have been open for over a year.

Recommendations/Options:

Refocusing on the market share of the domestic small business must occur over the next five years, possibly in the form of restructuring the existing business to better meet the needs of the domestic small business. As part of cost cutting, which is the current market suggestion for the ODP reevaluating store locations and seeking suppliers with lower cost on bulk items, and specialty direct sale items must be the overall concern (Morningstar Financial "Office Depot" at (http://quicktake.morningstar.com/stocknet/Snapshot.aspx?Country=USA&Symbol=ODP) Taking the existing focus off international expansion, and offering competitive small business contracts and discounts for bulk purchases may be one key, but most importantly the OD must continue to expand its retail market to convenient locations, possibly closing some locations that are not located in competitive areas, such as close to discount department stores and one stop shopping centers. (Morningstar "Office Depot" at (http://quicktake.morningstar.com/stocknet/Snapshot.aspx?Country=USA&Symbol=ODP)