UBS Downgrades Office Depot: 'The Train Has Left The Station'

UBS’ Michael Lasser expects Office Depot Inc (NASDAQ: ODP) shares to be under pressure going forward, due to the termination of the merger agreement with Staples, Inc. (NASDAQ: SPLS).

Lasser downgraded the rating on the company from Neutral to Sell, while lowering the price target from $5.50 to $4.00.

Reasons For A Cautious Stance

The analyst listed several reasons that warranted a cautious stance on Office Depot, such as the possibility the company would continue to see “a downward trajectory on its sales of core office supplies and related products for the foreseeable future.”

Related Link: UBS's Thesis On Staples Was Just "Shredded"

Some of the other reasons listed by Lasser included the erosion of Office Depot’s competitive positioning due to uncertainties regarding the acquisition, which will take time to recover.

In addition, most of the synergies from the OfficeMax merger have already been realized, while Lasser does not expect the market to pay a “very high multiple for ODP’s earnings stream given the risks it is facing.”

Looking Ahead

“We think there are several strategic imperatives facing ODP. First, it needs to stabilize its core business,” the analyst stated, while elaborating that this would require the company to “re-energize” its employees and re-engage with customers, while re-building its pipeline.

Secondly, the analyst believes that the company needs to re-accelerate its integration efforts. “Finally, it needs to further rationalize it store base, define a new retail prototype, and diversify its contract business. It has lagged behind its industry rival in these efforts,” Lasser added.