Survivor: Office Depot Strengthens Itself for Office Supplies Showdown

Is Office Depot about to turn around?

That's a fair question, now that the struggling retailer reported better-than-expected results during its fourth quarter.

Though the company posted a loss of $77 million, it was a major improvement over the $1.5-billion dive during the same year-ago period, and management expects a profit in the current quarter.
An Office Depot bounce back could mean that big-box chains in the office supplies space might see a different fate than in other retail sectors where only one national leader remains. After Circuit City went away, Best Buy (BBY) is the clear-cut electronics leader. The demise of Linens 'n Things made Bed Bath and Beyond (BBBY) the dominant large-format home-furnishings chain.

Right now OfficeMax (OMX) and Staples (SPLS) share the retail space with Office Depot. Of the three, Staples is by far the most successful. In its third quarter (fourth-quarter results come out on March 2), net income rose 72 percent year over year, hitting $269 million, and sales at U.S. stores open at least a year were flat. Like Depot, OfficeMax's fourth-quarter loss narrowed, to $3.2 million, a significant improvement from a $396-million slide the year before, and management expects sales to rise in 2010.

So what does the future hold for these three office-supplies chains? Burt Flickinger III, retail analyst and managing director at Strategic Resource Group, told BNET Retail that all three should survive until at least 2011 and 2012 when he expects lower-end shopping centers to start folding because of low vacancy rates and high mortgages. Since Staples is already in better locations, he sees a battle ensuing between Office Depot and OfficeMax. (He doubts the two would be allowed to combine for anti-trust reasons.)

"There's going to be room for Staples and one other," he concludes.

For his part, Flickinger choose OfficeMax to survive because he said its management team has more experience in a variety of different retail environments and Office Depot has too much exposure to troubled areas in Florida and California.

Whatever the outcome, even Staples should look over its shoulder, Flickinger warned. As it is in practically every other retail category, Walmart (WMT) is also boosting its office-supplies offerings and could prove to be a formidable competitor.