Taking Stock: Office Depot or Staples?

By Malcolm Berko

Dear Mr. Berko:
If you had to make a choice between 600 shares of Office Depot or 200 shares of Staples, which stock would you choose? This investment would be for this year’s simple IRA.
P.W., Elkhart, Ind.

Dear P.W.:
Office Depot (ODP – $6.62) is a schlocky outfit run by overpaid, schlocky people, with a schlocky billing department that many municipalities claim overcharge and over-bill for products and services. The General Services Administration and municipalities in the states of Nebraska, California, Florida, Missouri, Ohio, Texas and Colorado, to name a few, are demanding refunds for products never received, bait-and-switch tactics and costs in excess of what they were quoted. And at the head of this alleged fraud is a lad who is called Steve Odland, an uncommunicative sort who is not held in high regard by many of the rank-and-file employees at ODP’s costly new offices in Boca Raton, Fla.

ODP is a very poorly managed $12.5 billion revenue company that hasn’t made a dime, dinar or deutsche mark in two years and expects to lose money this year, too. ODP sells the same stuff at virtually the same price as Staples (SPLS – $21.43), which in last year’s terrible business environment increased revenues and made a good profit. ODP’s same-store sales declined 16 percent last year, with little improvement in sight for 2010.

ODP’s capital structure has deteriorated, and vendors have expressed serious concerns about its liquidity. Of course, spending millions of dollars on plush new digs hasn’t gone over well with important shareholders who are disappointed in Odland’s management skills. ODP is hurting, and his handpicked, feckless board responded by selling and leasing back a number of its stores and sharply reducing capital expenditures.

Analysts expect additional downsizing charges and other operating losses will ensure ODP reports a loss for 2010. The shares are way down from their $46 high of 2007, with little prospects of recovery in the next few years.

Staples is a superbly managed $25 billion revenue company that has grown its revenues every year since 1988. It has a swell balance sheet, excellent margins and its stock trades just a few points below its 2007 high of $28. SPLS has an impressive product assortment and superb private-label merchandise that retails for 10 percent to 20 percent less than comparable national brands, and account for 25 percent of revenues. The company expects to benefit from its Chinese connections and continued synergies from its Corporate Express merger.

And unlike ODP, in which most on the Street have a neutral to sell recommendation, SPLS is highly regarded by Barclays, BB&T, Credit Suisse, Sanford Bernstein and Wells Fargo.

I’m comfortable owning 200 SPLS as a long-term investment, but until ODP shareholders ship Chairman “Odious” Odland and his “do-da-do-dat” board to reform school in Mogadishu for retraining, I wouldn’t go near it with a hazmat suit.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com. © 2010 Creators Syndicate Inc.

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