Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Office Depot Inc (ODP), OfficeMax Inc (OMX),, Inc. (AMZN): Shaking Up the Office Supply Space

Through a merger announcement that surprised virtually nobody, Office Depot Inc (NYSE:ODP) agreed to buy OfficeMax Inc (NYSE:OMX) for roughly $1.2 billion on Feb. 20.  The two companies, along with industry leader Staples , Inc. (NASDAQ:SPLS), control the office supply store sector.  However, the mass merchandisers and online merchants, like Costco Wholesale Corporation (NASDAQ:COST) and, Inc. (NASDAQ:AMZN), have been using their purchasing power and free shipping offers to eliminate the superstores’ profit margins.  While the Feds broke up a potential industry merger years ago, this one looks pretty solid.  So, which companies are winners in this shake-up?

Office Depot Inc (NYSE:ODP)The #2 chain finally made its big move, after receiving unrelenting pressure from its institutional shareholder base over the past year.  The company has over 1,100 domestic stores, as well as a smaller international segment that sells products in 59 countries.  Office Depot Inc (NYSE:ODP) also offers printing, mailing, and tech support services in select stores through its Copy and Print Depot unit.

The past five years have been tough for the company, with declining revenues, store closings, and marginal profitability.  In FY2012, Office Depot Inc (NYSE:ODP)’s results remained true to form, with declines in revenues and adjusted operating income of 6.9% and 11.4%, respectively, versus the prior year.  The company’s results were hurt by a 5% decline in domestic comparable store sales, as well as relative weakness in its international division.

On the upside, Office Depot Inc(NYSE:ODP)’s gross margin has benefited from less promotional activity and lower occupancy expenses in its smaller store formats.  The merger with OfficeMax Inc(NYSE:OMX) should also improve Office Depot Inc(NYSE:ODP)’s financial profile, given OfficeMax Inc(NYSE:OMX)’s strong net cash and investment holdings.  Management expects $400 million to $600 million in operating synergies from the merger, with the combined company’s $18 billion in sales vaulting it into the industry leadership position.

The #1 chain is roughly the size of its two nearest competitors combined and it should benefit from the removal of a major industry player.  Staples has similarly suffered from a lack of sales growth, with notable weakness in its European and Australian markets.  In response, the company has closed select stores and initiated the sales process for its European printer systems division.

In FY2012, Staples reported generally weak results that led to a poor performance for its stock price.  For the year, the company reported decreases in revenues and adjusted operating income of 2.6% and 9.6%, respectively, compared to the prior year.  Its international operations were especially weak, with a 12% decline in sales, due to Staples’ significant presence in Europe gained through its 2008 purchase of Corporate Express.  However, the company has the highest operating margin in the industry, which should be further enhanced by its restructuring activities and its focus on contract business.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.