Office Depot 2011

Forest David

A.

Case Abstract
Office Depot is a comprehensive strategic management case that includes the companys year -end 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Boca Raton, Florida, Office Depots common stock is publicly traded under the ticker symbol ODP. The world's #2 office supply company behind Staples, Office Depot sells office supplies through about 1,145 company-owned and licensed locations throughout North America and at another 95 locations overseas. The big-box retail stores sell to both consumers and small- and medium-sized businesses. In addition to typical office supplies (66 percent of sales), Office Depot stores offer computer hardware and software, office furniture, art and school supplies, and printing and copying services. Office Depot also sells office products through catalogs and call centers, the Internet, and a contract sales force. Office Depot of late has been closing stores and exiting markets due to weak economies and stiff competition.

B.

Vision Statement (proposed)

To become the number one office supply store in the world.

C.

Mission Statement (proposed)

Our mission at Office Depot is to be a global (3), leading innovator (7) as a supplier of office products and services (2) for consumers (1) and businesses of all sizes while creating a positive impact on the environment (8). We continually strive to deliver our customers favorably-priced products, beneficial services, and the latest in digital imaging and printing technology (4). We will earn the trust of our stakeholders by being open, honest, and faithful in all that we d0 (6, 8). We will also be responsible for achieving and sustaining unprecedented results (5) that create value to our customers, employees (9), and stakeholders through personal commitment, sensible thrift, collaboration, and shared leadership. 1. 2. 3. 4. 5. 6. 7. 8. 9. Customers Products or services Markets Technology Concern for survival, growth, and profitability Philosophy Self-concept Concern for public image Concern for employees

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D.

External Audit
Opportunities 1. 2. 3. 4. 5. 6. Gift card popularity increase of 7.3% in specialty retail during 2009. Online sales increasing faster than traditional retail sales. World economy is slowly on a rebound. "Emerging economies" have accounted for nearly 70% of world growth in the last five years. Value of the USD decreasing by .07 in long-term over the last five years against the EUR. OfficeMax reported negative net income in 2008 and 2009 with marginally positive net income in 2010. 7. Staples has Debt of $2.54 billion. 8. CEA projects a 6.0% increase in electronics sales for 2010 and a 3.5% increase in 2011 (to $186.4 billion). 9. 5 yr. average ROA for OfficeMax is -4.93 compared to -2.93 for Office Depot. 10. 5 yr. average ROE for OfficeMax is -21.61 compared to -7.91 for Office Depot. Threats 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Staples' EasyTech support service offering. 86% of companies plan to spend more on social media in 2011 for marketing and customer service. Staples has, as of 2009, 954 more retail stores worldwide than Office Depot. 5 yr. average ROA for Staples is 8.89 compared to -2.93 for Office Depot. 5 yr. average ROE for Staples is 16.38 compared to -7.91 for Office Depot. Unemployment rate continues to be just below 10%. Consumer spending has been flat over the last 2 years. National customer satisfaction has been flat over last 2 years. Staples had sales growth of 5% in 2010. Staples has around 20 standalone Copy & Print stores.

Competitive Profile Matrix

Office Depot Critical Success Factors Financial Stability E-Commerce Customer Service Product Quality Advertising Market share Price Competitiveness Global Expansion Sales Distribution Organizational Structure Totals Weight 0.18 0.12 0.08 0.09 0.16 0.09 0.07 0.06 0.05 0.10 1.00 Rating 2 2 2 2 3 3 2 2 3 2 Score 0.36 0.24 0.16 0.18 0.48 0.27 0.14 0.12 0.15 0.20 2.30 Staples Rating 3 3 3 3 4 4 3 4 4 3 Score 0.54 0.36 0.24 0.27 0.64 0.36 0.21 0.24 0.20 0.30 3.36 Office Max Rating 1 1 1 1 2 2 1 1 2 1 Score 0.18 0.12 0.08 0.09 0.32 0.18 0.07 0.06 0.10 0.10 1.30

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EFE Matrix
Opportunities 1. Gift card popularity increase of 7.3% in specialty retail during 2009. 2. Online sales increasing faster than traditional retail sales. 3. World economy is slowly on a rebound. 4. "Emerging economies" have accounted for nearly 70% of world growth in the last five years. 5. Value of the USD decreasing by .07 in long-term over the last five years against the EUR. 6. OfficeMax reported negative net income in 2008 and 2009 with marginally positive net income in 2010. 7. Staples has Debt of $2.54 billion. 8. CEA projects a 6.0% increase in electronics sales for 2010 and a 3.5% increase in 2011 (to $186.4 billion). 9. 5 yr. average ROA for OfficeMax is -4.93 compared to -2.93 for Office Depot. 10. 5 yr. average ROE for OfficeMax is -21.61 compared to -7.91 for Office Depot. Weight Rating Weighted Score 0.03 2 0.06 0.07 0.02 0.07 0.06 0.07 0.07 0.06 0.06 0.06 4 2 3 2 2 2 2 2 2 0.28 0.04 0.21 0.12 0.14 0.14 0.12 0.12 0.12

1. 2. 3. 4. 5.

Weight Rating Weighted Score Threats Staples' EasyTech support service offering. 0.06 1 0.06 86% of companies plan to spend more on social media in 2011 for 0.03 2 0.06 marketing and customer service. Staples has, as of 2009, 954 more retail stores worldwide than 0.04 2 0.08 Office Depot. 5 yr. average ROA for Staples is 8.89 compared to -2.93 for Office 0.03 2 0.06 Depot. 5 yr. average ROE for Staples is 16.38 compared to -7.91 for 0.03 1 0.03 Office Depot. 0.04 0.04 0.05 0.05 0.06 1.00 2 2 2 1 2 0.08 0.08 0.10 0.05 0.12 2.07 Consumer spending has been flat over the last 2 years. National customer satisfaction has been flat over last 2 years. Staples had sales growth of 5% in 2010. Staples has around 20 standalone Copy & Print stores. TOTALS

6. Unemployment rate continues to be just below 10%. 7. 8. 9. 10.

E.

Internal Audit
Strengths 1. 2. 3. 4. 5. Acquired Swedish office supply company Svanstrms Gruppen. Most North American retail stores contain a Copy & Print Depot. Total general and administrative expense decreased by 17% from 2008 to 2010. Recognized as America's Greenest Large Retailer in Newsweek Magazine's Annual Green Ranking. One of America's Top Corporations for Women's Business Enterprises by the Women's Business Enterprise National Council (WBENC) for the ninth consecutive year.

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6. 7. 8.

Became an ENERGY STAR Commercial Buildings Partner. Sells to customers directly or through affiliates in 53 countries. Operate global sourcing offices in Shenzhen and Hangzhou, China, which allows more direct control of product sourcing, logistics and quality assurance.. 9. Produce a Green Book catalog, which features products that are recyclable, energy efficient, or otherwise have a reduced impact on the environment. 10. Only 19 million in goodwill on the balance sheet. Weaknesses 1. 2. 3. 4. 5. 6. Being a seasonal business impacts operations and financial position. Total company sales were down 20% from 2008 to 2010. Cash flow from operating activities was $204 million in 2010, compared to $468 million in 2008. Closed 143 stores since 2009. EPS is -$0.22. Of the $253 million of 2009 Charges, approximately $194 million either have or are expected to require cash settlement, including longer-term lease obligations that will require cash over multi-year lease terms. 7. North American Retail Division operates stores in only 46 U.S. states. 8. North American Business Solutions Division sales decreased 16% in 2009 and another 6% in 2010. 9. Recorded significant charges of $253 million and $199 million in 2009 and 2008, respectively from reorganization efforts and asset impairments. 10. ROE ratio of -9.5. Financial Ratio Analysis Growth Rate Percent Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Profit Margin Percent Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) Liquidity Ratios Debt/Equity Ratio Current Ratio Quick Ratio Profitability Ratios Return On Equity Return On Assets Return On Capital Return On Equity (5-Year Avg.) Return On Assets (5-Year Avg.) Return On Capital (5-Year Avg.) Office Depot -2.20 NA 148.90 -4.02 NA NA Industry 7.80 NA 26.50 8.45 6.86 8.80 S&P 500 14.50 NA 48.60 8.30 8.72 5.61

29.4 -0.5 -0.2 28.9

42.9 8.9 5.9 41.6

39.5 18.2 13.2 39.7

0.62 1.4 0.8

0.49 1.7 0.9

0.98 1.3 0.9

-9.5 -0.6 -1.1 -13.5 -4.2 -7.7

14.4 7.7 10.6 12.4 6.4 8.9

26.0 8.8 11.8 23.8 8.0 10.8

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Efficiency Ratios Income/Employee Revenue/Employee Receivable Turnover Inventory Turnover Net Worth Analysis (in millions)

-615 287,044 12.1 7.0

25,229 433,187 30.3 6.1

126,792 1 Mil 15.2 12.4

Stockholders' Equity Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price Method Average

$ 1,051 $ (220) $ 380 $ 652 $ 466

IFE Matrix
Weight Rating Weighted Score Strengths 1. Acquired Swedish office supply company Svanstrms Gruppen. 0.05 4 0.20 2. Most North American retail stores contain a Copy & Print 0.02 3 0.06 Depot. 3. Total general and administrative expense decreased by 17% from 0.08 4 0.32 2008 to 2010. 4. Recognized as America's Greenest Large Retailer in Newsweek 0.06 3 0.18 Magazine's Annual Green Ranking. 5. One of America's Top Corporations for Women's Business Enterprises by the Women's Business Enterprise National 0.04 3 0.12 Council (WBENC) for the ninth consecutive year. 6. Became an ENERGY STAR Commercial Buildings Partner. 0.04 3 0.12 7. Sells to customers directly or through affiliates in 53 countries. 0.05 3 0.15 8. Operate global sourcing offices in Shenzhen and Hangzhou, China, which allows more direct control of product sourcing, 0.06 3 0.18 logistics and quality assurance. 9. Produce a Green Book catalog, which features products that are recyclable, energy efficient, or otherwise have a reduced 0.04 3 0.12 impact on the environment. 10. Only 19 million in goodwill on the balance sheet. 0.10 3 0.30

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Weaknesses 1. Being a seasonal business impacts operations and financial position. 2. Total company sales were down 20% from 2008 to 2010. 3. Cash flow from operating activities was $204 million in 2010, compared to $468 million in 2008. 4. Closed 143 stores since 2009. 5. EPS is -$0.22. 6. Of the $253 million of 2009 Charges, approximately $194 million either have or are expected to require cash settlement, including longer-term lease obligations that will require cash over multiyear lease terms. 7. North American Retail Division operates stores in only 46 U.S. 8. North American Business Solutions Division sales decreased 16% in 2009 and another 6% in 2010. 9. Recorded significant charges of $253 million and $199 million in 10. ROE ratio of -9.5. TOTALS

Weight Rating Weighted Score 0.02 0.08 0.05 0.03 0.03 0.03 0.02 0.06 0.04 0.10 1.00 2 1 1 2 2 2 2 1 2 1 0.04 0.08 0.05 0.06 0.06 0.06 0.04 0.06 0.08 0.10 2.38

F.

SWOT
SO Strategies 1. 2. Increase advertising by 15% (S2, O1, O3). Build 50 new stores in China (S7, S8, O3, O4).

WO Strategies 1. 2. Close the 100 worst performing US based stores (W3, W4, W9, O3, O4). Actively market gift cards for Office Depot in particularly the Copy and Print Depot (W8, O1).

ST Strategies 1. 2. Build 20 stand alone copy and print stores in the US (S2, S3, T10). Include the environmentally green philosophy in advertising (S4, S5, S9, T2, T7).

WT Strategies 1. 2. Close the 100 worst performing US based stores (W2, W3, W4, T2, T8). Develop a service to better compete with Staples EasyTech support (W2, T1).

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G.

SPACE Matrix
FP 7 6 5 4 3 2 1

Conservative

Aggressive

CP

-7

-6

-5

-4

-3

-2

-1 -1 -2 -3 -4 -5 -6 -7

IP

Defensive

SP

Competitive

Internal Analysis: Financial Position (FP) Return on Equity (ROE) Current Ratio Debt/Equity Ratio Gross Margin Inventory Turnover Financial Position (FP) Average Internal Analysis: Competitive Position (CP) Market Share Product Quality Customer Loyalty Technological know-how Control over Suppliers and Distributors Competitive Position (CP) Average

1 4 4 2 6 3.4

External Analysis: Stability Position (SP) Rate of Inflation Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry into Market Stability Position (SP) Average External Analysis: Industry Position (IP) Growth Potential Financial Stability Ease of Entry into Market Resource Utilization Profit Potential Industry Position (IP) Average

-2 -2 -2 -5 -3 -2.8

-4 -3 -3 -3 -4 -3.4

5 4 4 4 5 4.4

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H.

Grand Strategy Matrix

Rapid Market Growth Quadrant II Quadrant I

Weak Competitive Position

Strong Competitive Position

Office Depot

Quadrant III Slow Market Growth

Quadrant IV

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I.

The Internal-External (IE) Matrix

The Total IFE Weighted Scores
Strong 4.0 to 3.0 4.0 I Average 2.99 to 2.0 II Weak 1.99 to 1.0 III

High

3.0

IV

VI

The EFE Total Medium Weighted Scores

Office Depot

2.0

VII

VIII

IX

Low

1.0

Division North American Retail North American Business Solutions International

2010 Revenues (in millions) $4,962.8 $3,290.4 $3,379.8

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J.

QSPM
Build 50 new stores in China

Increase Advertising
AS 3 3 2 2 0 0 0 3 2 2 TAS 0.09 0.21 0.04 0.14 0.00 0.00 0.00 0.18 0.12 0.12

1. 2. 3. 4. 5. 6.

Opportunities Gift card popularity increase of 7.3% in specialty retail during 2009. Online sales increasing faster than traditional retail sales. World economy is slowly on a rebound. "Emerging economies" have accounted for nearly 70% of world growth in the last five years. Value of the USD decreasing by .07 in long-term over the last five years against the EUR. OfficeMax reported negative net income in 2008 and 2009 with marginally positive net income in 2010.

Weight 0.03 0.07 0.02 0.07 0.06 0.07 0.07 0.06 0.06 0.06

AS 1 1 4 4 0 0 0 1 1 1

TAS 0.03 0.07 0.08 0.28 0.00 0.00 0.00 0.06 0.06 0.06

7. Staples has Debt of $2.54 billion. 8. CEA projects a 6.0% increase in electronics sales for 2010 and a 3.5% increase in 2011 (to $186.4 billion). 9. 5 yr. average ROA for OfficeMax is -4.93 compared to -2.93 for Office Depot. 10. 5 yr. average ROE for OfficeMax is -21.61 compared to -7.91 for Office Depot.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Weight Threats Staples' EasyTech support service offering. 0.06 86% of companies plan to spend more on social media in 2011 for 0.03 marketing and customer service. Staples has, as of 2009, 954 more retail stores worldwide than 0.04 Office Depot. 5 yr. average ROA for Staples is 8.89 compared to -2.93 for Office 0.03 Depot. 5 yr. average ROE for Staples is 16.38 compared to -7.91 for 0.03 Office Depot. Unemployment rate continues to be just below 10%. 0.04 Consumer spending has been flat over the last 2 years. 0.04 National customer satisfaction has been flat over last 2 years. 0.05 Staples had sales growth of 5% in 2010. 0.05 Staples has around 20 standalone Copy & Print stores. 0.06

AS 0 1 4 2 2 0 1 1 0 0

TAS 0.00 0.03 0.16 0.06 0.06 0.00 0.04 0.05 0.00 0.00

AS 0 3 1 3 3 0 2 3 0 0

TAS 0.00 0.09 0.04 0.09 0.09 0.00 0.08 0.15 0.00 0.00

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Build 50 new stores in China

1. 2. 3. 4. 5. Weight Strengths Acquired Swedish office supply company Svanstrms Gruppen. 0.05 Most North American retail stores contain a Copy & Print 0.02 Depot. Total general and administrative expense decreased by 17% from 0.08 2008 to 2010. Recognized as America's Greenest Large Retailer in Newsweek 0.06 Magazine's Annual Green Ranking. One of America's Top Corporations for Women's Business Enterprises by the Women's Business Enterprise National 0.04 Council (WBENC) for the ninth consecutive year. Became an ENERGY STAR Commercial Buildings Partner. 0.04 Sells to customers directly or through affiliates in 53 countries. 0.05 Operate global sourcing offices in Shenzhen and Hangzhou, China, which allows more direct control of product sourcing, 0.06 logistics and quality assurance. Produce a Green Book catalog, which features products that are recyclable, energy efficient, or otherwise have a reduced 0.04 impact on the environment. Only 19 million in goodwill on the balance sheet. 0.10 AS 0 1 0 1 0 1 4 4 TAS 0.00 0.02 0.00 0.06 0.00 0.04 0.20 0.24

Increase Advertising
AS 0 2 0 3 0 2 2 2 TAS 0.00 0.04 0.00 0.18 0.00 0.08 0.10 0.12

6. 7. 8.

9.

1 0

0.04 0.00

2 0

0.08 0.00

10.

Weaknesses 1. Being a seasonal business impacts operations and financial position. 2. Total company sales were down 20% from 2008 to 2010. 3. Cash flow from operating activities was $204 million in 2010, compared to $468 million in 2008. 4. Closed 143 stores since 2009. 5. EPS is -$0.22. 6. Of the $253 million of 2009 Charges, approximately $194 million either have or are expected to require cash settlement, including longer-term lease obligations that will require cash over multiyear lease terms. 7. North American Retail Division operates stores in only 46 U.S. 8. North American Business Solutions Division sales decreased 16% in 2009 and another 6% in 2010. 9. Recorded significant charges of $253 million and $199 million in 10. ROE ratio of -9.5.

Weight 0.02 0.08 0.05 0.03 0.03 0.03 0.02 0.06 0.04 0.10

AS 0 2 1 4 2 0 0 0 0 0

TAS 0.00 0.16 0.05 0.12 0.06 0.00 0.00 0.00 0.00 0.00

AS 0 3 2 2 3 0 0 0 0 0

TAS 0.00 0.24 0.10 0.06 0.09 0.00 0.00 0.00 0.00 0.00

TOTALS

2.03

2.53

K.

Recommendations
1. Build 50 new stores in China at $1.5M each. 2. Build 20 stand alone copy and print stores in the US at $250K each.

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3. Close the 100 worst performing stores in the US at $10M. 4. Increase total advertising by $20M.

L.

EPS/EBIT Analysis (in millions)

Amount Needed: $110 Stock Price: $2.19 Shares Outstanding: 280 Interest Rate: 5% Tax Rate: 30%

EBIT Interest EBT Taxes EAT # Shares EPS

Common Stock Financing Recession Normal Boom $0 $2 $5 0 0 0 0 2 5 0 1 2 0 1 4 282 282 282 0.00 0.00 0.01

Recession $0 6 -$6 -$2 -$4 $280 -$0.01

Debt Financing Normal $2 6 -$4 -$1 -$2 $280 -$0.01

Boom $5 6 -$1 $0 $0 $280 $0.00

EBIT Interest EBT Taxes EAT # Shares EPS

Recession $0 4 -4 -1 -3 280 -0.01

20 Percent Stock Normal $2 4 -2 -1 -2 280 -0.01

Boom $5 4 1 0 0 280 0.00

Recession $0 1 -1 0 -1 281 0.00

80 Percent Stock Normal $2 1 1 0 1 281 0.00

Boom $5 1 4 1 3 281 0.01

M.

Epilogue
In October 2011, Office Depot was recognized in Newsweek magazines annual Green Rankings, as the greenest large retailer in America for the second year in a row. Office Depot not only achieved the highest aggregate green score in the U.S. retail industry, but also led in Environmental Management, and disclosure of performance data. Across all industry sectors, Office Depot was ranked as Americas 8th greenest large company, a move up from 10 place the prior year. Office Depot was the only retailer in the U.S. top 10 list in 2011. Were immensely proud to be named the top U.S. retai ler in Newsweeks Green Rankings for the second consecutive year, said Kevin Peters, President, North America for Office Depot. We know there is a large and growing set of customers who choose Office Depot in part because of our unique ability to support their environmental goals and Newsweeks recognition provides further evidence that Office Depot is the supplier-of-choice for organizations seeking a greener way to get their office products. Two specific environmental programs at Office Depot is their GreenerOffice Delivery Service which is on track

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to save over 3,000 tons of wood and approximately $1.5 million a year by delivering goods in paper bags rather than cardboard boxes. Also Office Depot provides its largest customers, including cities, states, and large corporations with effective reporting tools which help explain their greener purchasing and the environmental and financial tradeoffs of their greener purchasing decisions. Office Depot recently formed a partnership with Microsoft Corp. to provide digital print solutions through the Bing Business Portal. This new service is available at www.bing.com/businessportal and provides small business customers with the ability to create advertisements, sales collateral, and presentations online through the Bing Business Portal. Materials are then sent to Office Depot retail stores for order completion and customer pickup. Office Depot is all about helping small business customers succeed, and this new collaboration with Microsoft and the Bing Business Portal is a testament to our dedication, said Kristin Micalizio, Vice President of Office Depots Copy & Print Depot. Through this unique service, small business customers will have access to professional quality printing at a price that wont impact their bottom line. Bing Business Portal provides great tools and services for a business to market itself both on and offline, said Ginny Sandhu, Group Product Marketing Manager, Microsoft. With the launch of Digital Print Solutions, users will now be able to get high-quality marketing collateral printed at the touch of a button, saving time and money.

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