Office Depot debuts 'interactive' store, as merger rumors boosts stock

Brick and mortar business continue to have to transforn themselves due to the internets continued  business model disruption. Aivars Lode Avantce

Office Depot debuts 'interactive' store, as merger rumors boosts stock

By Marcia Heroux Pounds, Staff Writer

6:07 p.m. EST, February 8, 2013

Savvy customers sip on coffee while surrounded by the latest gadgets. They surf the Internet on laptops or tablets, check out some new headphones or ponder their next electronic purchases in a soothing, relaxed manner.

Office Depot's new "interactive'' stores are a little Apple-like, a little Starbucks-like. The stores still will sell basic office supplies and provide copy and print services for small businesses, but now it comes with a twist, a bit of modernization and hip as the company gets away from its old big-box mentality.

The new versions are already in six states and will be rolled out in Florida and elsewhere later this year as the office-supply giant trends toward smaller-format stores.

"We're looking at drawing traffic and new customers," said Juan Guerrero, senior vice president of Office Depot's North American retail division. The store is trying to attract the 18- to 35-year-old population — not the typical Office Depot shopper. Most current customers are small-business owners or mothers shopping for school supplies for their kids.

Office Depot's latest retail concept caps more than two years of initiatives to turn around the company in a difficult economic environment. The initial phase, introduced in 2011, was to reduce store sizes. The average 23,000-square-foot store is being reduced to units more like 5,000 to 15,000 square feet.

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The idea is to attract new customers and inject some excitement into Office Depot stores, which customer surveys revealed were "somewhat clinical and cold," Guerrero said.

While some analysts cast doubt on a younger demographic shopping at Office Depot, most say the smaller-store strategy is beginning to work.

Major stockholder Starboard Value LP could force a bolder move, a merger with rival OfficeMax. The industry is ripe for consolidation, with both retailers smaller than Staples, which leads in sales and profitability, analysts say.

Starboard Value, an activist shareholder that holds nearly 15 percent of Office Depot's stock, may seek seats on the company's board this spring at the company's annual meeting. Speculation of industry consolidation pumped some life into the stock, now over $4 a share, though still down nearly 70 percent from five years ago.

"If Office Depot can turn things around, [Starboard Value] is going to be happy. If that doesn't happen, they may have to do an OfficeMax deal," said Anthony Chukumba, analyst with BB&T Capital Markets.

Starboard has retained former Home Depot CEO Bob Nardelli and former Staples executive Joe Vassalluzzo as consultants, according to a securities filing.

When comparing the rival office-supply stores, "Office Depot is clearly ahead of OfficeMax in terms of small-format stores," said Chukumba, whose firm buys and sells both stocks.

Office Depot already is investing more than $60 million a year reducing its store count, with plans to downsize or relocate 500 stores — nearly half its U.S. outlets over the next five years.

OfficeMax also plans to debut a new, smaller store format this spring, comparable in size to the Office Depot transformations, said Nicole Miller, spokeswoman for the Naperville, Ill.,-based retailer.

"The goal is to focus on innovation and roll it out gradually," she said.

But a merger?

OfficeMax "has a long-standing policy that we do not comment on market rumors or speculation," Miller said.

Morningstar analyst Liang Feng said while Starboard may seek a seat on Office Depot's board, the power still rests with BC Partners, which holds three seats whose directors are contractually obligated to vote with Office Depot management. In 2009, Office Depot sold a 20 percent stake in the company for a $350 million investment.

Chief Executive Neil Austrian has said the company's strategies to shrink stores and increase profits are paying off. Austrian was not available to address recent company issues or plans, spokesman Brian Levine said.

Office supplies continue to be a tough sector. Office Depot's sales decreased 5 percent in its latest quarter, compared to same period in 2011. And during an investor presentation in November, Office Depot forecasts annual sales to be down by 3 percent in 2013, down 1 percent in 2014, and flat in 2015.

If Office Depot and OfficeMax did merge, they would face significant costs. BB&T estimates the companies would have to spend $300 million to $500 million to close 200 North American stores.

Yet savings from a merger also could be significant, according to Goldman Sachs, with lower costs for purchasing and distribution, advertising, and general and administrative expenses.

Another hurdle would be the Justice Department, which could have antitrust concerns.

If a merger is proposed, it would go before the federal official who once denied Staples' proposed acquisition of Office Depot. Former Federal Trade Commission official William Baer was recently confirmed to head the U.S. Justice Department's antitrust division.