Office Depot. Financial Condition Review. (ODP), Office Depot’s Common Stock, is listed on the New York Stock Exchange. The firm is also included in the S&P 500 and the Fortune 500. Additional information about the company is available on its website www.officedepot.com. Below are the Income Statement and Balance Sheet for 1999. All figures in 000’s
| Office Depot | ||
| Balance Sheet | ||
|
1998 |
1999 |
|
| Assets | ||
| Current assets: Cash and cash equivalents |
$704,541 |
$218,784 |
| Short-term investments |
10,424 |
0 |
| Receivables |
721,446 |
849,478 |
| Merchandise inventory |
1,258,355 |
1,436,879 |
| Deferred income taxes |
52,422 |
68,279 |
| Prepaid expenses |
33,247 |
57,632 |
| Current Assets |
2,780,435 |
2,631,052 |
| Fixed assets |
1,244,848 |
1,645,131 |
| Total Assets |
4,025,283 |
4,276,183 |
| Liabilities and Equity | ||
| Current Liabilities | 1,487,065 | 1,944,045 |
| Long-Term Debt | 509,339 | 424,418 |
| Shareholders’ equity | 2,028,879 | 1,907,720 |
| Liabilities and Equity |
4,025,283 |
4,276,183 |
| Office Depot | ||
| Income Statement | ||
|
1998 |
1999 |
|
| Sales |
8,997,738 |
10,263,280 |
| Lest Cost of Sales |
6,484,464 |
7,450,310 |
| Gross Profit |
2,513,274 |
2,812,970 |
| Less: Operating expense |
2,108,515 |
2,399,697 |
| Operating Income |
404,759 |
413,373 |
| Interest |
22,356 |
26,148 |
| Income before taxes |
382,403 |
387,225 |
| Less: Taxes |
149,207 |
129,587 |
| Net Income |
233,196 |
257,638 |
What do the numbers tell us?
- The Net Income has been relatively stable over the past three years from 1997 to 1999.
- Sales have been on the rise, with a sharp increase experienced between 1998 and 1999, from $ 8,997 million to $10,263 million.
- Operating profits have also been on the rise from 1997 to 1999 indicating the fact that management is efficient at controlling its operating costs.
- Current assets rose between 1997 and 1998 by $399 million but fell again in 1999 by $149 million to reach a figure of $2,631 million. The decline is due, to a great extent, to the fall in the level of cash and cash equivalents and short-term investments.
- Total current liabilities have been rising consistently for the past three years, by $243 million from 1997 to 1998 and by $456 million between 1998 and 1999.
- Long-term debt has been experiencing a downward trend since 1997, by $ 6.2 million between 1997 and 1998 and $84.9 million in the following year.
What does this tell us?First it tells us that ODP is still a profitable enterprise with respectable sales and reasonable profit margins. By themselves the numbers tell a good story, however when you compare ODP’s market capitalization with Staples (a competing firm), there is some cause for concern. Staples, with slightly lower sales and slightly higher profit margins, commands a market capitalization of 5.6 Billion dollars compared to ODP’s market cap of 2.1 Billion dollars. Why is the market treating ODP like this?
First it tells us that ODP is still a profitable enterprise with respectable sales and reasonable profit margins. By themselves the numbers tell a good story, however when you compare ODP’s market capitalization with Staples (a competing firm), there is some cause for concern. Staples, with slightly lower sales and slightly higher profit margins, commands a market capitalization of 5.6 Billion dollars compared to ODP’s market cap of 2.1 Billion dollars. Why is the market treating ODP like this?The first clue is ODP’s increasing reliance on short-term seasonal credit and working capital loans. Although long-term debt has decreased, ODP’s current liabilities have been on the rise. This impression is also re-enforced by the sharp decline in short-term assets. Beyond these two items, ODP has also been in the market for share repurchases, which has put additional pressure on ODP’s cash situation.
The first clue is ODP’s increasing reliance on short-term seasonal credit and working capital loans. Although long-term debt has decreased, ODP’s current liabilities have been on the rise. This impression is also re-enforced by the sharp decline in short-term assets. Beyond these two items, ODP has also been in the market for share repurchases, which has put additional pressure on ODP’s cash situation.Why is all of this important now? First, reliance on seasonal rather than long term financing arrangements is a standard ‘red flag’. Is it because management cannot raise money at good terms or is it because it is not paying attention? Both situations are signs that there will be more bad news ahead.
Why is all of this important now? First, reliance on seasonal rather than long term financing arrangements is a standard ‘red flag’. Is it because management cannot raise money at good terms or is it because it is not paying attention? Both situations are signs that there will be more bad news ahead.
The problem is further compounded in a rising interest rate environment (US circa August 2000). A difficult economic situation would make it even more difficult to renew short term financing arrangements and to attract long term financing on favorable terms.
All of these are real concerns. Let’s see what ratio analysis can tell us about ODP.