Specialty Retail Leah Constan-Tatos

Specialty Retail - Industry Overview Includes stores that sell stationery, school and office supplies “Sub-industries” such as office stationery manufacturers and wholesalers provide goods to office supply stores in the U.S. Schools, universities and households demand these resources Products offered by this industry generally constitute normal goods These stores can offer a wide range of other products too – from furniture to jewelry to automotive parts Normal goods imply that as income increases so does demand. Expected weakness in consumer spending could imply negative growth in this industry. The use of internet services as an alternative means to delivering goods directly to the home also has an adverse impact on the specialty retail industry

Industry Financials Revenue $20.3bn Profit $811.3m Wages $2.3bn Number of businesses involved 9,757 Historical growth is -3.2% Expected growth is -0.4%

Industry Segmentation

Porter’s Five Forces Threat of Entry…..…………………………...Medium Threat of Substitution………………………Medium Bargaining Power of Buyers………………Medium Bargaining Power of Suppliers……………Low Industry Competition………….…………...Medium Threat of new entrants – light barriers to entry but big competitors make it harder for small firms to gain market share Threat of substitute products or services – competitors offer similar products Bargaining power of customers (buyers) – although prices are typically non-negotiable buyers have a range of alternatives from which to purchase their goods Bargaining power of suppliers – low due to large retail chains having a significant impact on suppliers’ revenue and profitability Intensity of competitive rivalry – medium due to a number of large retailer competition – this makes it harder to gain majority market share; large rivals include Staples, Office Depot, and Amazon

Relationship between per capita disposable income and corporate profit -Normal goods -Per capita disposable income forecasted to increase in 2014 but a decrease in overall corporate profit is expected due to: Increased competition from other stores – department stores, supercenters etc. Recession which has an adverse impact on purchasing power Highly concentrated industry – smaller players are merging to oppose the two dominant stores – Office Depot and Staples which currently host 76.8% market share. Larger stores are reducing store space to remain competitive – in order to avoid higher operating costs

Office Depot Overview Second largest retailer of office supplies in the U.S. with 35.7% market share Consists of three segments: North American Retail(this is the only segment that is a part of the Specialty Retail Industry) – 42% revenue North American Business Solutions -30% revenue International Division – 28% revenue North American retail-includes 1,112 stores in the United States and Canada; North American business solutions - which represents the company's direct catalog, phone and online businesses; International division-which is responsible for the firm's retail and direct sales in 57 countries across North America, Europe, Latin America and Asia. Only sales generated from the retail division in the United States are relevant to this industry.

Staples and Barnes and Noble are two of the many special retail companies registered under the S&P 500

Office Depot Valuation Market Capitalization - $1.39B Versus industry leader Amazon $2.384B Beta - 3.5922 Beta coefficient > market (1), thus more volatility and risk is expected regarding returns Market share decline forecasted to date with a drop of approximately 9% over the past five years due to reduction in household spending as a result of the recession

Office Depot Valuation Calculations   2012 2011 2010 EPAT -40350 83632.1 -68311.4 NEA 1250530 1446745 FCF -1290880 -1363113  -68311.4 EPAT – enterprise profit after tax shows the items associated with enterprise operations using the income statement NEA – net enterprise assets shows the items associated with enterprise operations using the balance sheet FCF – negative forecast of free cash flows

Office Depot Financials   2012 2011 2010 Net Earnings (Loss) -77,111 95,694 -44,623 Comprehensive Income (Loss) -58,916 66,423 -60,443 CF from Operating Activities 179,332 199,667 203,126 CF from Investing Activities -29,727 -157,158 -191,520 CF from Financing Activities -55,182 -98,576 -30,898

SWOT Analysis Strengths Opportunities ODP hosts the second largest market share (approx. 36%) Expansion into other markets/industries ODP is multinational Merging with Staples, its largest competitor Weaknesses Threats Limited product scope/expansion Increased use of the internet to purchase items It is difficult to compensate for shifting consumer demand Recession/economic turmoil Positive factors – merging with Staples could enhance operational efficiency through lower costs and in terms of market cap, could oppose its largest competitor in the specialty retail industry – Amazon Expansion into underdeveloped countries could help diversify its risk exposure to lower forecasted sales as internet accessibility may be more limited in those regions Negative factors – limited product scope and expansion at higher prices could cause competitors to have a better hand on entrance into the industry In the case of recession/turmoil consumers cut spending and this adversely impacts operations as people are less willing to spend money on transport and purchasing consumables that are not of extreme necessity

Websites Accessed IBIS World http://clients1.ibisworld.com.proxy.library.nd.edu/reports/us/industry/default.aspx?entid=1098 Bloomberg - Office Depot Form 10-K, 2013 http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=ODP Yahoo Finance http://finance.yahoo.com/q/in?s=ODP+Industry

S&P Capital IQ http://www. netadvantage. standardandpoors. com. proxy