Steve Odland’s arrival at Office Depot had an instant galvanising effect on the company’s share price. Now he will be looking to work his magic in transforming fortunes on the bottom line
If the performance of a company’s share price on the day it announces a new CEO can be any barometer as to the popularity of the choice, Office Depot appears to have made a sound decision in Steve Odland.
After many months in the doldrums, investors appeared happy with the hiring of the former AutoZone chief, with Depot’s share price on the New York Stock Exchange soaring to a new 52-week high. Correspondingly, AutoZone itself slumped by nearly $10. But whether this reflected genuine Wall Street disappointment at his departure, or more accurately concern at the news that Q3 comp sales were down 7 per cent, also announced on the same day, is difficult to say.
Generally speaking, the reaction to Odland’s appointment as chairman/ CEO has been positive, but with some qualification.
It is interesting to note that Odland is not the first AutoZone executive to have joined Depot, and that previous ones did not last too long. Back in 1998, Depot lured Shawn McGhee to the sunshine state and under Dave Fuente’s leadership he swiftly rose up the ladder, first being promoted to president of merchandising and then months later, at the beginning of 2000, was named president of Office Depot North America.
But when Bruce Nelson took over the CEO’s reins from Fuente that summer, McGhee was gone, despite being tipped to take on the vacant president of North America stores role. Instead, that position fell to an outsider – former AutoZone colleague Jerry Colley.
Colley came with something of a reputation as a turnaround expert, with "a focus on operational execution and improving customer satisfaction". He retired in March of last year, and how successful he was in turning Depot’s domestic retail fortunes around is open to scrutiny, but clearly the job was only half done.
Longevity
Odland, too, would like to consider himself as something of a turnaround expert and it is upon this that he will be judged. It will be hoped, however, that he has more longevity than both McGhee and Colley.
Indeed, Depot has not been enjoying the best of fortunes recently and many will be hoping Odland can become an invaluable asset at Depot in a way that Ron Sargent has become at Staples.
He is very much seen as a numbers guy. There is nothing too much wrong with Depot’s top-line figures, it is the bottom line which ultimately cost Bruce Nelson his job and this will be Odland’s #1 priority.
Immediately following Nelson’s departure in October, the interim but very much proactive CEO Neil Austrian wasted very little time in cutting costs with the bottom line in mind. And observers anticipate that Odland will not be shy in making further cuts. One AutoZone insider believes there could be severe cost-cutting ahead: "Within 60 days, you could see 20 per cent of the headquarters staff laid off. Steve adheres to the Al Dunlap school of thought [whereby] any organisation can chop off 20 per cent and the work will still get done.
"The first to go could be many sacred cows, especially long-term employees that haven’t had a fresh thought in years. Every position will be reviewed for elimination, and for a person/position to remain, it will have to be justified.
"It is all about earnings. Depot has tremendous revenues. Little of it falls to the bottom line. For the people that survive the first six months, and are bonus eligible, I think they will be very happy. Bonus plans will pay out big time, because executive comp will be tied to that as well. The first year Steve was at AutoZone, bonus paid out at 321 per cent of target. You can expect much of the same, but the numbers will have to be there, and with fat cut out and spending reduced, EBITDA will soar.
"Steve is a numbers guy. It is all about shareholder value."
Reputation
Buckingham Research senior analyst Dan Binder agrees. He says: "Odland has a reputation as a strong turnaround executive and cost cutter and in some respects, part of Office Depot’s challenge is just getting what they have more profitable.
"His appointment reinforces our belief that more cost-cutting and rationalisation are coming. There is plenty of room to close operational and profit gaps with Staples, which now holds a nearly 400 bps operating margin lead. This is an unusually large gap between the top two operators in a given segment, particularly when we consider that the store sales productivity gap is only about 7 per cent and Office Depot’s international business is so much more profitable than Staples’.
"While Staples may have some structural advantages in real estate, its management has openly admitted that a lot of its success has been a function of better overall business execution. While this can’t be replicated overnight, we think stronger leadership at Office Depot is a good start.
Tortoise
Goldman Sachs says Odland "could be the right executive at the right time" for Depot, although writing for CBS MarketWatch, seasoned AutoZone watcher Herb Greenberg seems to suggest that it could be the other way around.
He claims Odland is something of a spin doctor, holding AutoZone up as a growth company when the facts don’t quite seem to bear out. "AutoZone is really little more than a tortoise dressed up as a hare," he says, "and now the costume is starting to fall off."
He points to the fact that in announcing Odland’s departure, AutoZone also revealed at the bottom of the same press release – maybe hoping it might go unnoticed – Q3 comp sales down 7 per cent, after being flat in Q2. And this at a time that main competitors – Advance Auto Parts and O’Reilly Automotive – were reporting significant same-store gains.
This would imply that the company is losing share, but speaking on a conference call Odland said: "We do not think we are losing share." Writes Greenberg: "The words to watch are ‘we do not think’. While the company may ‘not think’ it’s losing share, the ‘not think’ suggests it doesn’t really know."
Greenberg also points to Odland’s fondness of ‘pay-on-scan’ inventory while at AutoZone – a system where the manufacturer retains ownership of the product until it is scanned at the checkout.
The benefits to the retailer are clear, and Odland had been aiming for 100 per cent pay-on-scan. Pay-on-scan works best, however, in high turnover sectors such as grocery, not low turnover industries such as auto parts. And this was being borne out in Odland’s last quarter at AutoZone, which revealed that pay-on-scan fell to 7.5 per cent of inventory, compared to 9 per cent in the previous quarter
Greenberg says that whatever way you look at this, it cannot be good, but points out that Odland still put a positive spin on it, saying the dip was "a deliberate, positive development" as faddish stock that didn’t sell well went back to the manufacturers.
Tonic
Maybe Odland’s ‘glass is half full rather than half empty’ approach should be applauded and could be just the tonic Depot needs right now.
His arrival, swiftly followed by Sam Duncan’s appointment at OfficeMax, means that Staples no longer has the only permanent CEO among the big three. While it declined to comment on Odland’s appointment, you can be sure it will be keeping a careful watch to see if the new incumbent can come anywhere close to matching Sargent’s famed powers of execution.
Meanwhile, up at OfficeMax, board members have probably got both eyes firmly fixed on their own problems at the moment to pay too much attention on what is happening down in Florida. While it has just installed Duncan, CFO and retail chief vacancies remain, while shareholder actions are also providing "unnecessary distractions" of their own.
