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Office Depot Outlook 2018-2022

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Office Depot has the vision to transform their business but can they execute on the plan? A look into the numbers and the challenges they will face to grow the top line at a relatively modest 4-year CAGR of 2%!

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Office Depot Outlook 2018-2022

  1. 1. An Assessment of the Scale of the Challenge! Office Depot’s business transformation strategy May 12, 2018
  2. 2. 2018 Basis & Assumptions • Adopt Office Depot management guidance for Full Year 2018 sales at $10.8 billion • Operating Income of $460 million (4.3% of sales) prior to Merger & Restructuring Costs, Interest Payments and Other Income • Adjusted Operating Income of $360 million (3.4% of sales) after Merger & Restructuring Costs, Interest Payments and Other Income Extracted from OD Management Presentation May 9, 2018
  3. 3. A conservative goal for top-line sales growth • We have assumed management adopts a conservative sales growth target of 2% per year • Disclosed management projection for 2018 is $10.8 billion in sales • 2% CAGR means 2022 sales will need to be $11.7 billion • With 86% of sales currently coming from a declining market in a transactional sales environment: • What’s it going to take to get there? • Assume retail product sales decline at 10% per year • Assume BSD product sales decline at 5% per year • Assume CompuCom product sales increase at 10% per year (cross-sell OD products to CompuCom customer base) • Then the balance must come from service based sales!
  4. 4. Sales Trend Assessment by Category and Channel Channel 4-Year Trend Retail Products Sales decrease at CAGR of -10% Retail Services Sales increase at CAGR of +19% BSD Products Sales decrease at CAGR of -5% BSD Services Sales increase at CAGR of +40% CompuCom Products Sales increase at CAGR of +10% CompuCom Services Sales increase at CAGR of +18% Overall Top Line Sales increase at CAGR of +2%
  5. 5. Sales % Change by Category and Channel Channel 2019 2020 2021 2022 Retail Products -10% -10% -10% -10% Retail Services +10% +20% +25% +20% BSD Products -5% -5% -5% -5% BSD Services +50% +45% +40% +25% CompuCom Products +10% +10% +10% +10% CompuCom Services +45% +19% +5% +6% Overall Top Line +2% +2% +2% +2%
  6. 6. Sales outlook by Category and Channel Channel 2018 2019 2020 2021 2022 Retail Products 3,791 3,412 3,071 2,764 2,487 Retail Services 379 417 501 626 751 BSD Products 4,793 4,553 4,326 4,109 3,904 BSD Services 587 880 1,276 1,786 2,233 CompuCom Products 166 182 200 220 242 CompuCom Services 1,084 1,571 1,863 1,955 2,072 Overall Top Line 10,800 11,016 11,236 11,461 11,690
  7. 7. The Sales Outlook by Channel & Category Sales projected to increase at 2% CAGR from $10.8B to $11.7B
  8. 8. The Four Pillars Underlying Depot’s Foundation for a Transformation to Services Extracted from Office Depot slide deck published by Office Depot in conjunction with their 2018 Q1 earnings call
  9. 9. The Transition to Services
  10. 10. Depot’s Transformation & the Importance of the Expansion of the CompuCom Business Model • 10 million devices under management at closing (Nov 2017) • Avg. Revenue per device $84 per year • Maintain Avg. Revenue per device at $84 • Increase devices under management from 10 million to 24.5 million (CAGR 18%) in 5 years
  11. 11. The Changing Profile of Sales Revenue Services projected to increase from 14% of sales (Q1 2018) to 43% by 2022 Product sales expected to decrease at a CAGR of -7% as Service sales increase at a CAGR of +25% from current (Q1 2018) annualized run-rate of $1.6B to $5.0B
  12. 12. How far has Depot’s retail performance deteriorated? • Year 2000 • 864 stores • $6.5 billion in annual sales • $300 in sales per sq. ft. • Year 2018 • 1,366 stores • $4.2 billion in annual sales • $150 in sales per sq. ft. • Key changes 2000 - 2018 • 60% increase in store count • 50% decrease sales per sq. ft. • 35% decrease in annual sales
  13. 13. The Changing Profile of the Retail Footprint Legacy Stores: 20,000 Sq. Ft. Profile Store-of-the-Future: 15,000 Sq. Ft. Profile
  14. 14. The Changing Retail Footprint • Reduce overall store count from 1,376 to 1,071 (-22%) • Year 2022 store mix target: • 756 ”legacy” (15.2 million Sq. Ft) • 315 “store-of-the-future” (4.8 million Sq. Ft) • Reduce retail square feet 28% from 27.5 million Sq. Ft. to 20 million Sq. Ft. • Increase sales per Sq. Ft. from $153 to $163 (+7%) • Sales per Sq. Ft. at $163 are 30% higher than they would otherwise be ($125) but still down 45% from year 2000 These details should not be construed as an Office Depot plan. They are based on our view of a necessary reduction in retail square footage.
  15. 15. Office Depot’s “BizBox” Division – Consultative offering from the retail footprint Built on the CompuCom platform New division called BizBox launched November 2017 To sell business services: • Payroll & other accounting functions • Digital Marketing • Logo design • Website design • Social media marketing • Email marketing Monthly Subscription Service starting at $70 per month Target market: 9 million small business owners
  16. 16. What could Operating Income look like?
  17. 17. Conclusions Product sales are likely to decrease 25% from the FY 2018 outlook of $8.75 billion to $6.6 billion by 2022 If Depot fails to increase sales of its service offering, (and the current run-rate of $1.6 billion), then it will become an $8.2 billion enterprise by 2022 – 25% down on the current 2018 outlook To achieve 2% CAGR on the current 2018 sales outlook, Depot must achieve $5 billion in service related sales by 2022 This requires a 5-year CAGR of 25% on the existing $1.6 billion base of service related products
  18. 18. Service Proposition Risks • Changing the sales culture from transactions to services • 9 million small businesses form the target market • In a Depot survey – almost 30% don’t even have a website • This sounds like a good opportunity for BizBox and CompuCom, but … • Can Depot sell a value proposition most business owners are likely to have difficulty understanding the full value of? • How many subscribers will they signup? • How much will they be prepared to pay? • How profitable will the service be?
  19. 19. Product Proposition Risks • Product sales may shrink faster than expected • Customer churn increases (Amazon & OEM Direct) • Market shrink accelerates (paperless transition) • Margins decrease faster than expected • Online competition • Attempts to protect market share • A declining topline combined with compressed margins will endanger the transformation to a higher mix of service related sales
  20. 20. Other Questions What happened to the 5,000 Sq. Ft. store footprint? Is the transition from 20K to 15K stores aggressive enough? Why not transition to 5K stores and aim for sales of $300 per Sq. Ft.? Does Depot have access to sufficient cash to fund the transformation? • Current debt availability: approx.: $2 billion (based on 4x EBITDA) • Annual free cash flow: projected at $500 million + So, yes, they should have plenty of cash available It just comes down to execution!
  21. 21. Disclaimer • We have no affiliation with Office Depot • Office Depot has not contributed to this analysis although we have relied on information extracted from publicly disclosed documents available at their website • We own no stock in Office Depot • We are not financial analysts • The assessments contained in this presentation are our own opinions and are based on market knowledge and industry experience • We have not sought any comment from Office Depot and we have no way of knowing if Office Depot management agrees or disagrees with our assessment

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