Is Office Depot Going in a New Direction?

With its purchase of a 13.3 percent stake in Office Depot (NYSE:ODP) announced this week, activist investment fund Starboard Value LP made clear in a letter to management the company’s need to downsize.

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In a letter made public Monday, Starboard CEO Jeffrey Smith wrote to Office Depot’s chief executive Neil Austrian that although the company’s shares are “deeply undervalued,” cutting expenses could improve its performance. Starboard, which is now the largest shareholder in Office Depot, showed concern that the company’s performance lagged behind others in the industry, including Staples (NASDAQ:SPLS) and OfficeMax (NYSE:OMX).

Declining sales have affected the industry across the board as web-based officer suppliers, including Amazon (NASDAQ:AMZN), steal market share, and business customers cut back on spending. Office Depot has shut stores in recent years, revenue has fallen, and expenses have increased. In August, the Florida-based office supplier posted lower-than-expected sales and a net loss for the second quarter.

Austrian, who became CEO in May 2011, has already made attempts to turn Office Depot around by downsizing and remodeling U.S. stores.

But according to Starboard, downsizing its 1,200 U.S. and Canada-based retail locations to smaller store formats could improve Office Depot’s profitability by between $166 million and $379 million. The firm, which has made it its business to target small-cap companies it considers undervalued, also suggested Office Depot could increase sales by pushing higher-margin products and services, including printing and technology services.

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