On May 6 the oft-struggling retailer Office Depot (ODP) reported a jump in earnings, while concomitantly announcing the closure of some 400 storefronts. The company’s stock, in turn, rose by as much as 20 percent in early trading action. The addition by subtraction method seems to be working for the big-box-chain, and their strategy has shown that success, or at least-short-term success, can be had by closing underperforming stores. That is, that the key is to get bigger by getting smaller.
It’s a move that fellow long-suffering retail throwback RadioShack (RSH) needs to take a cue from. RadioShack shares tumbled earlier this month when plans to shut down a sizable chunk of its storefronts was stonewalled when shareholders and management were unable to come to an agreement.
Office Depot eventually plans to refocus on its best-performing outlets while excising the laggards. By 2016 the chain will downsize from its current lot of 2,085 stores to just over 1,500. RadioShack’s downsizing plans are far more drastic, with some activist investors calling for the closure of as many as a quarter of their 4,300 outlets.
While RadioShack and Office Depot are not in exactly the same line of retail, with RadioShack favoring small locations to Office Depot’s big box model, they both share the struggle of trying to adapt in a retail environment ruled by Amazon (AMZN) and its e-commerce ilk. And, as industry analyst Jeff Kagan suggests, the more RadioShack can follow companies like Office Depot lead, the higher chance the brick-and-mortars have of surviving the consumer sea change to online shopping.
Office Depot’s earnings report showed the company was not as hard-hit by the unusually cold winter as expected. But more importantly, the store closures mean that Office Depot is now expected to soon erase their ongoing net loss problem. And for the non e-commerce retail segment, mere profitability is a major win.
For their first quarter 2014 earnings report, Office Depot reported a net loss of $109 million, or $0.21 per share, versus the net loss of $17 million, or $0.06 per share, from the same period a year ago. Excluding items, the company reported a profit of 7 cents a share. Revenue for the quarter was $4.35 billion, as compared to $2.72 billion from the previous year. Analysts were expecting a profit of $0.03 per share (excluding items) on revenues of $4.28 billion.
As of 1:30 EST shares of Office Depot had risen 16.67 percent to hit $4.89 a share. Looking forward, the company has now said they expect to become profitable in 2015, largely thanks to the cost-cutting measures.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer