BOCA RATON -- Office Depot will close 400 or more stores as it streamlines after its merger with OfficeMax, the company said Tuesday.
Shares of Boca Raton-based Office Depot (NYSE: ODP) soared as much as 19 percent Tuesday morning. The company also boosted its profit outlook for 2014 and raised the projected cost savings from the merger to $675 million, up from an earlier estimate of $600 million.
"Investors are heartened to see management become very aggressive about cost cutting," said Liang Feng, an analyst at Morningstar in Chicago. "It's not so much that the stores now are performing well. It's that they see a lot of room to cut costs."
Office Depot, which had 1,912 retail outlets in North America at the end of 2013, said it will shut 150 stores this year alone. The retailer will wait until after the back-to-school shopping season to close most of the
stores, Chief Executive Roland Smith said.
"The overlapping retail footprint resulting from the merger provides us with a unique opportunity to consolidate and optimize our store portfolio, while maintaining the retail presence necessary to serve our customers," Smith said in a statement.
Glut of office supply stores
Years of fierce competition among Staples, Office Depot and OfficeMax led to a glut of office-supplies stores, even as the companies that buy office supplies shifted to online shopping.
Smith didn't identify which stores would be closed, but the merger of Office Depot and OfficeMax left hundreds of stores near one another. In Wellington, Office Depot has two stores about 2 miles apart on State Road 7. In Boca Raton, there are stores 3 miles apart. Fewer than 2 miles separate stores on Federal Highway in Fort Lauderdale.
Smith predicted the store closings would save $75 million a year by 2016.
Office Depot also said total sales for the quarter ended March 29 were $4.4 billion, compared to $4.5 billion a year ago for the combined Office Depot and OfficeMax. The two struggling retailers merged in late 2013.
Office Depot posted a first-quarter net loss of $109 million, or 21 cents a share. The company reported $96 million in merger-related charges.
Whether the chain can shrink its way to long-term success is another matter. While Office Depot seems a company on the rebound, observers wonder how long it can survive. Demand for office paper and printer cartridges has waned, and Wal-Mart and Amazon are vying for sales of office supplies.
"The problem is that much of these cost savings over the long term will be offset by top-line weakness," Morningstar's Feng said.
David Tawil, president of New York hedge fund Maglan Capital, agreed. The store closings are a wise move, he said, but they underscore the bigger challenges Office Depot faces.
"Technology is an enormous disruptor for commoditized consumer products," Tawil said. "The chain will have an increasingly smaller footprint."