Office Depot’s future doubted against Amazon effect

Office Depot recently unveiled a new advertising campaign slogan: “Taking care of business.”

The 1970s song by Canadian rock group Bachman-Turner Overdrive was used by the office supplies retailer back in the early 1990s. And the campaign revival was meant to evoke its early days of growth that was fuelled by selling directly to businesses rather than relying on foot traffic at its stores.

Investors’ skepticism that Office Depot can indeed take care of business with a new sell-moreto-businesses strategy was dramatically highlighted Wednesday when the company’s stock shed more than a quarter of its value after it released second-quarter earnings.

The fact that the Boca Raton, Fla.-based company missed analysts’ estimates for sales and earnings certainly contributed to the brisk sell-off Wednesday. But what seems to have troubled analysts and investors more was its executives’ admission during the call that the Amazon-effect was spilling over into its business sales division, once thought to be more immune to the e-commerce giant’s reach.

Office Depot’s business solutions division, which sells office supplies, equipment and furniture directly to business owners and corporate clients, reported a six per cent sales decline to $1.2 billion in the second quarter. That was an accelerated pace of decline from a four per cent drop in the first quarter, says Anthony Chukumba, an analyst at Loop Capital. “People like Amazon are pulling business from our core customer base,” chief financial officer Steve Hare told analysts in a conference call. “That’s a phenomenon we’re dealing with.”

Amazon Business, launched in 2015, is a relatively new market entrant in the business of selling and delivering office equipment and supplies directly to customers’ offices. And analysts believed it’d eventually disrupt office supplies retailers, just not at such a quickened pace, Chukumba said.

In 2015, Office Depot sought to merge with Staples to fend off encroaching competition and gain buying power against suppliers. But a federal judge blocked it in 2016, citing that the post-merger companies would wield too much pricing power over corporate customers.

Trying to complete that deal distracted Office Depot’s management and dried up its list of business customer contracts. And the company has since been focused on rebuilding that list. But simply having business customers sign a contract to buy its products doesn’t mean they actually follow through with purchases.

Rebuilding the sales “pipeline” for the business solution division is “taking longer,” Hare said, adding the company anticipates business customer sales would improve in the second half. “That market is always competitive. We are happy with the pace of wins, but it’s taking longer to realize sales improvement that we had hoped for.”

Meanwhile, its retail business — selling directly to consumers through its big-box stores and the website — continues to decline. Sales of the retail division dipped to $1.1 billion in the second quarter from $1.2 billion a year ago.

Office Depot has unveiled a set of initiatives to reinvigorate its businesses. Starting later this month, it will introduce same-day delivery service in Atlanta, Los Angeles and the Fort Lauderdale-Miami area.

The company remains profitable.

Net income from continuing operations fell to $21 million from $232 million a year ago. Sales were $2.36 billion, a 8.5 per cent decline.

“The outlook is very grim,” Chukumba said. “It’s like they have cancer. It’s going to go to stage 4.”