Office Depot Beats on Bottom-Line - Analyst Blog
November 06 2012 - 6:49AM
Zacks
Amid sluggish economic environment, Office Depot
Inc. (ODP) posted third-quarter 2012 earnings of 6 cents a
share compared with a breakeven in the year-ago quarter, and way
ahead of the Zacks Consensus Estimate of 1 cent. Effective cost
management facilitated this office supply retailer to deliver
better-than-expected bottom-line results.
Including one-time items, Office Depot slumped to a loss of 25
cents a share compared with an earnings of 28 cents registered in
the prior-year quarter.
Office Depot’s total revenue of $2,692.9 million decreased 5%
from the prior-year quarter and also fell short of the Zacks
Consensus Estimate of $2,724 million. In constant currency, revenue
slipped 3%.
Despite a 6% decline in cost of goods sold and occupancy costs
during the quarter, gross profit dropped 2% to $834.7 million.
However, gross margin expanded 90 basis points to 31% in the
quarter.
Office Depot reported adjusted operating profit of $40.5 million
up from $24.9 million in the year-ago quarter, whereas operating
margin increased 60 basis points to 1.5%.
Segment Performance
During the quarter, North American Retail
division revenue decreased 5% to $1,173.7 million, whereas
comparable-store sales dropped 4%.
Office Depot witnessed sharp sales decline across computers and
other related products but registered sales increase across tablets
and e-readers. Sales of Copy and Print rose while fell for office
furniture. Sales in the supplies category remained even, whereas
sales of ink and toner rose marginally. Management stated that
customer transaction counts dropped 4%, while the average order
value was marginally negative.
The division reported an operating loss of $21.3 million
compared with an operating profit of $41.9 million in the
prior-year quarter.
Total store count at the North America Retail division stood at
1,114 at the end of the quarter. During the quarter, the company
opened 1, closed 4 and relocated 5 stores.
Revenue for North American Business Solutions
inched up 1% to $827.4 million. Direct channel sales decreased,
whereas contract channel sales rose. The division witnessed
improved sales in Copy and Print, furniture and cleaning and breaks
room supplies. Sales remained soft to federal and state government
due to budget constraint but were higher to customers related to
education sector.
The division posted operating profit of $54.8 million up from
$39.1 million in the year-ago quarter.
The International division’s revenue dipped 12%
in U.S. dollars to $691.9 million, whereas it fell 4% in constant
currency. The overall sales in European contract channel dropped in
the low single-digits as the growth witnessed in Germany and even
sales in the U.K. were mitigated by soft sales in other parts of
Europe. Asia contract channel sales rose in the high
single-digits.
European direct channel experienced a sales decline but the rate
of fall decelerated sequentially. The retail channel sales slipped
in low single-digits in Europe, whereas in Asia, South Korean
retail witnessed sales increase in high single-digits.
The division posted an operating profit of $1 million,
drastically down from $19.5 million in the year-ago quarter. At the
end of the quarter, total store count at the International division
stood at 134. During the quarter, the company opened 1 and closed 1
store.
Other Financial Details
Office Depot, the operator of office supply stores under brand
names such as Office Depot, Foray, Ativa, Break Escapes, Worklife
and Christopher Lowell, generated free cash flow of $189.7 million
and incurred capital expenditures of $26.2 million.
The company ended the quarter with cash and cash equivalents of
$619.5 million, long-term debt of $486 million and shareholders’
equity of $676.9 million, excluding non-controlling interest of
$95,000.
Closing Comment
No one can predict the future but efforts to combat the tough
economy are obvious. Business budget remains tight, consumers
remain more cautious than ever before and companies are trying hard
to navigate through the challenging environment. Consumers and
small businesses remain frugal about big ticket spending on items
such as business machines and other durable products.
We believe that the demand for office products is closely tied
to the health of the economy. Going by the pulse of the economy we
prefer to have a long-term Neutral recommendation on the stock.
However, Office Depot, which competes with OfficeMax
Inc. (OMX) and Staples Inc. (SPLS), holds
a Zacks #5 Rank that translates into a short-term Strong Sell
rating.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
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