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ODP & OMX - Global Retail Conference

September 06, 2012 | About:
The Science of Hitting

The Science of Hitting

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As part of updating my thesis for Staples (SPLS), I thought it would be appropriate to highlight changes/updates from their closest competitors; here are the notes for both Office Max (OMX) and Office Depot (ODP) from the Global Retail Conference hosted by Goldman Sachs (GS):

Office Depot

“The first half was challenging from a revenue perspective”, with specific mention of North American Retail (particularly technology related sales) and International Operations (particularly European direct channel via Viking); the company is working to stop the declines in both markets – for example, with Viking, they are moving their marketing spend to largely focus on ecommerce.

The company’s plan in North America is to have a definitive real estate strategy in place by the announcement of Q3 earnings in late October; this will address the list of possible actions for individual stores – with my belief continuing to be that store closures and downsizings will materially outnumber lease renewals (500 locations reaching end of lease period through 2014, with an additional 250 through 2016 – more than 60% of ODP’s North American stores).

“We could envision significantly increasingly the capital commitment in 2013 and beyond to double the current rate to accelerate the process of reducing our occupancy costs [see closing or downsizing stores] or driving a better customer experience. As a result, we could impact over 100 stores in 2013 through both downsizes and relocations with almost all of those stores seeing significant square foot reductions.”

When asked if consolidation was within companies (meaning stores closures, downsizings, etc) or among companies (meaning mergers), Mr. Austrian said "all of the above", while then saying that he couldn't say an further - this is an interesting comment that might be meaning for the industry down the road.

Office Max

CEO Ravi Saligram mentioned the need to focus on contract (where OMX had a strong Q2 showing) and digital, while “optimizing retail”. His view (a common one in the industry) is that the place to be is the delivery business; unfortunately for him, he was put in a tough spot by his predecessors, who got raked over the coals by Staples for the better part of the last decade.

It’s a tough industry and there are some issues that need to be addressed, particularly on the retail side… We closed 25 stores in the last quarter, more than the entire year last year [2011]… and we’ll continue to do that [being aggressive with underperforming stores].” For anybody who read my Staples thesis and questions my estimates for store closures, listen to this call – the tone from Mr. Saligram suggests that, if anything, I’m conservative with my numbers.

Office Supply Business - “This is a $200B industry [globally] with a lot of fragmentation and a lot of opportunity.”

In terms of retail, the company has just over 800 stores in the United States, plus 80 or so in Mexico (where the company plans to add 10 stores this year). “In the United States, at this stage for us, we’re not looking to expand the number of stores or enter markets where we might not have a significant presence right now…. What we’re looking at is, especially if we have stores that are negative EBITDA and negative ROIC, we want to be pretty brutal about it [on a market by market basis].”

“Many of our stores [average of 23,000 square feet], as well as our competitors, I think are too large.” With a majority of their leases coming up in the next four years, Mr. Saligram has made it clear: the company will be brutal with their financial projections, and downsize or close any stores that do not pass the hurdle set (“we want to use the next four year renewal cycle to optimize our portfolio”). Target sizes by format as given by Mr. Saligram are 4-6K and 12-15K.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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