For the second straight session, Office Depot (ODP) shares tanked on heavy volume after a federal judge ruled in favor of the Federal Trade Commission and issued an injunction blocking its merger with Staples (SPLS).
Office Depot shares closed fell another 1.4% on about four times its normal volume, closing the day at $3.58 Thursday. Office Depot went from being up 10% for the week at the end of trading on Tuesday to being down 40% by the end of trading Wednesday.
Meanwhile, Staples closed trading down 2.8% on twice its normal volume Thursday, and is down about 15% for the week.
Jefferies analyst Daniel Binder downgraded both companies to Hold from Buy on Wednesday after the merger fell through. He noted that the firm's prior ratings on the companies were based on the assumption that the merger would be approved.
"On a stand-alone basis, each company's retail and contract segments are vulnerable to secular decline and increased competition, but remaining synergies to be captured at ODP and cost cutting at SPLS should help offset pressures near term," Binder wrote, noting the rocky office retail landscape that was the basis of the companies' proposed merger in the first place.
The entry of Amazon (AMZN) -- a key Growth Seeker holding -- into the office supply retail space with its Amazon Business venture was one of the key sticking points in Office Depot and Staple's argument for the need to merge. Binder agreed.
"We also anticipate that more players, specifically Amazon, will start to make larger inroads into the commercial market," Binder wrote. "Without the benefit of synergies, both Staples and Office Depot have less appealing profit outlook. They will continue to face secular declines, and each company's business is vulnerable to competition from online and non-office-supply retailers."
UBS analyst Michael Lasser also downgraded Office Depot to Sell from Neutral while lowering the price target to $4 to $5.50 per share. The firm noted the downward trajectory of the company's sales while downgrading the stock.
However, Lasser did see a path forward for the company.
"We think there are several strategic imperatives facing ODP. First, it needs to stabilize its core business," Lasser wrote, noting that the company also needed to re-energize its employees and re-engage its customers.
"Finally, it needs to further rationalize it store base, define a new retail prototype, and diversify its contract business. It has lagged behind its industry rival in these efforts," Lasser concluded.