Suggests Shaving Off Some 7 Mil. SF of Store Space
Now that it has rolled up a 13.3% ownership stake in Office Depot Inc., Starboard Value LP has a thing or two to tell the company's chairman about how to run the business.
New York-based Starboard delivered a letter to Office Depot chairman and CEO Neil Austrian and the company's board of directors, expressing its opinion that, based on its research and analysis, Office Depot is deeply undervalued and a substantial opportunity exists to improve the company's performance and valuation.
Share this story with your followers
In the letter, Starboard outlines a number of opportunities to improve operating performance and increase EBITDA. For CRE purposes, among the suggestions was that Office Depot could downsize to smaller store formats in order to drive higher operating margins. Starboard suggested the retailer cut store space by nearly 75% -- a cut that could reduce Office Depot's square footage by about 7 million square feet.
"In its North American Retail business, we believe Office Depot has a compelling opportunity to dramatically improve the economics of its stores by downsizing to smaller store formats," the letter stated. "Currently, Office Depot's average square footage per store of approximately 23,500 square feet is larger than Staples at approximately 21,500 square feet and OfficeMax at approximately 22,500 square feet."
"According to the company, the new 5,000-square-foot format store, relative to its existing 24,000-square-foot format, can retain up to 90% of total store sales, while at the same time significantly reducing occupancy costs, improving labor utility, and reducing inventory investment by 50%," the letter continued.
"Given these economics, we believe this new store format can substantially increase operating margins compared to the company's current store format. Further, the leases of approximately 45% and 67% of the company's domestic store fleet come up for renewal over the next three and five years, respectively," the letter said.
The investment group believes the lower rent expense and higher mix of services in the 5,000-square-foot stores will improve four-wall operating margins from approximately 5.8% in the 24,000-square-foot stores to well over 10% in the smaller 5,000-square-foot stores.
"Assuming the company downsizes between 250 and 375 stores to the new 5,000-square-foot format, or 50% to 75% of stores which come up for lease renewal over the next three years, we believe operating income could be improved by approximately $50 million to $75 million," the letter concluded.
Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages.
Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.