U.S. Markets closed

Office Depot beats estimates but keeps sales warning

An Office Depot store front is shown in Encinitas, California February 28, 2012. Office Depot will report earnings this week. REUTERS/ Mike Blake

By Yashaswini Swamynathan

(Reuters) - Office Depot Inc's (ODP.O) quarterly profit beat market estimates as it squeezed out higher-than-expected savings from its OfficeMax acquisition, masking an overall deterioration in sales that the office supply retailer expects will continue.

Office Depot shares rose as much as 23 percent to a more than three-year high of $6.25 on the Nasdaq.

The company has been struggling to revive sales as it battles higher competition from online retailers such as Amazon.com Inc (AMZN.O) and a shift in consumer reliance on smartphones and tablets from traditional office supplies.

"We expect total company sales in Q4 to decline more than the year-to-date trend, primarily due to planned retail store closures," Chief Executive Roland Smith said on a post earnings call with analysts.

The company said it expects the cost benefits of the OfficeMax acquisition to more than offset weak sales for the rest of the year.

Office Depot bought rival OfficeMax for $976 million in November and has since streamlined operations by cutting jobs, shutting stores, and boosting clout with suppliers.

The company raised its forecast for the annual run-rate cost benefits of the OfficeMax deal to "more than $750 million" by the end of 2016 from "more than $700 million".

The retailer forecast an adjusted operating income of $255-$265 million for 2014 — up from its earlier forecast of "above $200 million" — and about $475 million in 2015.

KeyBanc Capital Markets analysts were expecting $359 million for next year.


SLOW SALES LINGER

Same-store sales in North America fell 3 percent in the third quarter ended Sept. 27, primarily due to fewer customer purchases, while pro-forma sales in the division fell 7 percent to $1.72 billion.

"Longer-term we remain hard-pressed to envision even the best laid out integration plans driving substantial improvement at ODP... against a backdrop of a structurally deteriorating story," Oppenheimer and Co analysts said in a note.

The new management has been able to reduce costs and improve execution, but sales are expected to decline faster in early 2015 following store closures, KeyBanc Capital Markets' analyst Thomas Bradley said

Third-quarter revenue rose to $4.07 billion from reported sales of $2.62 billion a year earlier.

Net income attributable to shareholders slumped 78 percent to $29 million. The year-ago quarter was boosted by a gain from the sale of the company's Mexican joint venture.

Excluding items, Office Depot earned 10 cents per share.

Analysts on average expected a profit of 9 cents per share on revenue of $4.05 billion, according to Thomson Reuters I/B/E/S.

More than 35 million Office Depot shares exchanged hands as of 1 p.m. ET, more than five times their 10-day moving average volume. Up to Monday's close, the stock had fallen 4.2 percent this year.


(Reporting By Yashaswini Swamynathan in Bangalore; Editing by Joyjeet Das; Editing by Feroze Jamal and Savio D'Souza)