Update on My Favorite Long-Term Short: ODP

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Back in May 2011, I originally posted about shorting Office Depot.  The idea is finding a sector with three competitors, with margin compression, struggling for survival in a crummy economy.

At the time, ODP was at $4.16.  Since then, its only bright spot was during the rising Ctrl+P tide of early 2012; but reality seems to have returned… and as of this writing, the stock sits at $1.63.


ODP reported an earnings loss of (-$.14)/share yesterday, on expectations of (-$.08)/share… a miss of 75% in the wrong direction. 

So do I think the ODP ship continues to sink?  Short answer – yes.

First, full disclosure, this morning I covered enough shares so that everything remaining short is house money.

Second, with my finger over the “cover” button, I’ve been watching for any signs of life over the past year + ½ … nothing.  The fliers I get in the mail are dull and do not appear to have any offers significantly more special than I could get at Staples (SPLS) or Target (TGT). 

Third, I can see nothing in their revenue that suggests a comeback… revenue growth yoy (-1.3%).  Everyone’s revenue dropped in 08 & 09… but ODP just kept going down:


Fourth, ODP has no dividend… so it’s not like this will be a flight to safety during the next pullback.

Fifth, ODP is burning cash.  My recent cover target was $1.72, which was exactly their cash/share on the balance sheet.  As of yesterday, the new target is $1.48.  At this rate, they have 7 quarters of air left with a debt:equity ratio of .6.

So what are they spending all of that money on?  Certainly not the mailings I’ve seen… how about Tony Stewart’s NASCAR co-sponsorship?  Per my Google search, in 2009-2010, Old Spice and Office Depot combine to pay about $25-30 Million to Stewart-Haas Racing for sponsorship of Tony Stewart's Sprint Cup car.  In 2010, management at Old Spice had the common sense not to continue pissing money away:

"Based solely on a change in our marketing strategies, the Old Spice contract with Tony Stewart and Stewart-Haas Racing will expire at the end of 2010 and will not be renewed," Mike Norton, Old Spice Brand spokesman, said in a statement.

Apparently Exxon’s (XOM) deep pockets are Tony’s new sponsor with Mobil1.  At least gasoline & oil make sense… when someone mentions auto racing the first things I think of are after-shave and toner cartridges.


So where else might ODP be burning cash?  How about this “hip” back to school advertising?


Being relatively old & out of touch with these things, I had to look up who in the world Nick Cannon is… actor, comedian, rapper, entrepreneur, record producer, and tv personality… also Mr. Mariah Carey.  Ok– so what is he doing on an Office Depot commercial? 

As an entrepreneur, he owns/is a significant part of N'Credible Entertainment, which as you would expect, has a handful of artists signed on his label.  Additionally, as of January 2012’s C.E.S. in La Vegas, N'Credible also appears to have a line of lifestyle products developed through a previously announced alliance with Monster Products (private consumer electronics manufacturer and former naming rights owner of Candlestick Park).  Personal sidebar: I, for one, am happy the corporate naming rights fad has died-down somewhat… There’s something unholy about seeing a game in Enron Field, 3com Park or the M&T Bank Stadium rather than Fenway, Lambeau or Soldier Field.

N'Credible/Monster’s showcased lifestyle products include a backpack, book bag, as well as two smaller "messenger" type carry bags; as well as the new N-Tune On-Ear Headphones (SRP: $129.95) and the N-Ergy In-Ear Headphones (SRP: $69.95).  FYI: Monster appears to have done the branded headphone thing before with Dr. Dre’s Beats series.

So I watched all of the commercials more closely… the entire back-to-school campaign “Depot Time” featuring Cannon appears focused on teens.  It also explains why the ODP ads flash split-second shots of backpacks, pencils and laptops yet all specifically highlight the headphones.  Apparently, ODP gets a tv personality for their ads and Cannon gets corporate sponsorship for his philanthropic interests as well as free (?) N'Credible marketing (note the logo clothing and jewelry).

Let’s assume for a moment the N'Credible/Monster headphones are the “must-have” item this season and such a draw that the teen back-to-school foot traffic (along with the also-purchased items) would significantly help ODP’s top line; as I would expect from an exclusive merchant (think AT&T + iPhone release).  Oh wait – there is no exclusivity agreement: you can get the N-Tune and N-Ergy just about anywhere:


So ODP is fighting for the back-to-school dollar by trying to draw-in fickle teens, with a non-exclusive product, at a parallel price point; against competitors who are better-suited to meet all of one’s back-to-school needs.  Last I heard, those teens know about the Google and the interweb.  Sounds like a winner to me.

I’m sticking with the remainder of my long-term (and now house-money) short.  I see absolutely nothing in ODP which would suggest otherwise.

P.S. – at least those Old Spice guys seem to be doing well… and they certainly have way better commercials“I am breaking up with Heather Graham because I need my space…”