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Earnings Preview: Office Depot

Zacks Equity Research

Office Depot Inc. (ODP), one of the leading suppliers of office products and services across the globe, will release its first-quarter 2012 financial results on Tuesday, May 1, 2012.

The current Zacks Consensus Estimate for the quarter is 5 cents a share compared with a break-even in the prior-year quarter. The estimates in the current Zacks Consensus range between a low of 3 cents and a high of 8 cents a share. The Zacks Consensus revenue estimate is pegged at $2,884 million for the quarter under discussion.

Recap of Fourth-Quarter 2011

Despite sluggish economic recovery and underlying pressure in Europe, Office Depot posted better-than-expected fourth-quarter 2011 bottom-line results. The company reported earnings of 3 cents a share, surpassing the Zacks Consensus Estimate of a break-even. Looking out to the year-over-year performance, earnings marked a sharp improvement from a loss of 10 cents delivered in the year-ago quarter.

Office Depot’s total revenue of $2,969.7 million portrayed a marginal increase of 0.3% from the prior-year quarter but fell short of the Zacks Consensus Estimate of $2,997 million.

Zacks Agreement & Magnitude

No movement was noticed in the Zacks Consensus Estimate for the first quarter of 2012, either in the last 7 or 30 days, since 14 analysts covering the stock kept their estimates intact in the absence of any major news having a direct or an indirect impact on the estimates. 

Mixed Earnings Surprise History

With respect to earnings surprises, Office Depot has topped as well as missed the Zacks Consensus Estimate over the last four quarters in the range of negative 100% to positive 50%. The average remained at negative 50%. This suggests that Office Depot has underperformed the Zacks Consensus Estimate by an average of 50% in the previous four quarters.

Closing Commentary

Office Depot is repositioning itself to keep afloat in a difficult consumer environment. The company is 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, which should all contribute to margin improvements.

The company in order to drive sales has undertaken initiatives, which include improvement in customer in-store shopping experience, investment in Copy & Print Depot and Tech Depot services, remodeling of stores and introduction of smaller format stores, and margin improvements through rationalization of stock keeping units and product pricing.

In view of this, the company rolled out 8 locations of size 5,000 square feet. Moreover, continuing with its margin improvement initiatives, the company remains committed to price optimization and effective promotions.

We remain cautious about the macroeconomic environment and sluggish job market. The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain watchful about their spending for big-ticket items such as business machines and other durable products. We observe that the demand for office products is closely tied to the health of the economy.

Management now expects total company sales for the first quarter of 2012 to decline between 3% and 4% from the prior-year quarter. Moreover, Office Depot expects first quarter comparable-store sales at the North American Retail division to be somewhat in line with the fourth quarter of 2011. The company had witnessed a 5% decline in comps during the fourth quarter.

No one can predict the future but genuine efforts are implemented to combat the tough economy. Business budget remains tight, consumers remain cautious than ever before and companies are trying hard to navigate through the challenging maze. Going by the pulse of the economy and given the pros and cons, we prefer to maintain our long-term “Neutral” recommendation on the stock. Moreover, Office Depot, which competes with OfficeMax Inc. (OMX) and Staples Inc. (SPLS), holds a Zacks #3 Rank that translates into a short-term “Hold” rating.

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