Office Depot Inc

Office Depot Swings To 1Q Loss As Sales Drop

Office Depot Inc.'s (ODP) swung to surprise first-quarter loss as the office-supplies retailer reported weaker sales and a higher tax rate.

The company has struggled in recent years, as the recession exacerbated the glut of stores in an office-supply market where Staples Inc. (SPLS) dominates and third-largest player OfficeMax Inc. (OMX) has corrected past problems--heating up a race with Office Depot for second place.

Office Depot recently disclosed that a material weakness in its internal controls failed to prevent or discover improper tax accounting that led to a restatement of its 2010 results. The beleaguered company also is looking for a permanent chief executive and has recently settled charges of improper pricing under certain state and local government contracts, pricing issues that appear to be the root of a new investigation by the Justice Department that Office Depot announced in February.

Office Depot reported a loss of $5.4 million, or 5 cents a share, from year-earlier profit of $29.5 million, or 7 cents a share. Excluding restructuring and integration-related expenses earnings were breakeven on a per-share basis. Analysts polled by Thomson Reuters most recently forecast earnings of 2 cents.

Revenue decreased 3.2% to $2.97 billion, in line with company forecasts. Excluding acquisitions and divestitures, sales declined 2%.

Gross margin edged down to 29.5% from 29.7%.

Sales at the company's North American Retail Division, its largest business segment, were down 2% as same-store sales declined 1%.

Shares closed Monday at $4.14 and were inactive premarket. The stock is down 54% in the past year.

Earnings Preview: Office Depot

Office Depot posted better-than-expected fourth-quarter 2010 results. The quarterly earnings of 9 cents per share portrayed a substantial improvement from a loss of 6 cents in the prior-year quarter, outpacing the Zacks Consensus Estimate of a loss of 3 cents.

On a reported basis, including one-time items, Office Depot delivered a loss of 21 cents per share, as against a loss of 28 cents posted in the year-ago quarter.

Despite a low-single digit decline in the top line, the office supplies retailer was able to earn a profit on the heels of cost containment. Cost of goods sold and occupancy fell 4.2%, store and warehouse operating and selling expenses tumbled 5.5%, whereas general and administrative expenses slipped 9% during the quarter.

Office Depot’s total revenue of $2,961.9 million fell short of the Zacks Consensus Estimate of $2,975 million, and also dropped 3.4% from the prior-year quarter due to soft demand for office supplies in a sluggish economy. The improvement in the bottom line overshadowed the fall in the top line.

First-Quarter 2011 Zacks Consensus

Of the 15 analysts following the stock, 7 analysts revised the estimate downwards in the last 30 days, which led to a decrease in the Zacks Consensus Estimate in the first quarter of 2011. The Estimate moved down to 3 cents from 6 cents in the last 30 days. In the last 7 days, none of the analysts have revised their estimates keeping the Zacks Consensus Estimate unchanged.

Mixed Earnings Surprise History

Office Depot is repositioning itself in this difficult consumer environment by containing costs, closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities and focusing on providing innovative products and services.

Furthermore, the company in order to enhance its global footprint has made strategic acquisitions over the past few years, and is still looking for accretive opportunities. Office Depot is reviewing capital-efficient opportunities to expand its reach in Eastern Europe, Asia and South America. The company believes that India and China will provide significant growth opportunities.

We also appreciate Office Depot’s rational approach to slow the pace of stores openings in North America, given the weak consumer environment. The company opened 6 stores in fiscal year 2009, significantly down from 59 stores opened in 2008 and 71 stores opened in 2007. However, with signs of recovery in the economy, the company opened 17 stores in fiscal 2010.