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Office Depot Misses Q3 Earnings Estimates

Zacks Equity Research

Office Depot Inc. (ODP), the office supplier retailer, posted adjusted earnings per share of 2 cents in the third quarter of 2013, which missed the Zacks Consensus Estimate of 5 cents. Moreover, results were substantially down 66.7% from 6 cents reported in the year-ago quarter.

Including one-time items, Office Depot’s earnings improved to 41 cents per share as against a loss of 25 cents in the prior-year quarter.

Office Depot’s total revenue of $2,619.4 million decreased about 3.0% from the prior-year quarter but surpassed the Zacks Consensus Estimate of $2,611.0 million.

Gross profit fell 4.5% to $632.7 million as decline in sales more than offset the company’s cost containment efforts. Gross margin declined 45 basis points to 24.2% in the quarter. The fall in margin was mainly due to weak performance of the North American Retail and International Divisions, partially offset by the North American Business Solutions Division.

Segment Performance

In the quarter, North American Retail division’s revenues fell 3.9% to $1,127.8 million while comparable-store sales dropped 2%. Operating income was $10.2 million as against loss of $52 million in the prior-year quarter.

Office Depot witnessed sales decline across technology and peripherals, offset by higher sales of tablets and mobility products. Sales of Copy and Print Depot and school supplies rose, while furniture experienced a fall in sales. Management stated that customer transaction count fell 2% and the average order value dipped 1%.

The division reported adjusted operating income of approximately $15.0 million in the quarter, down from $22.0 million earned in the prior-year quarter, mainly owing to fall in sales and contraction in gross margin, partly offset by expense reduction initiatives.

Total store count at the North America Retail division was 1,104 at the quarter-end. Moreover, during the quarter, the company opened 2 stores, shuttered 7 stores and relocated 4 outlets.  

Revenues for North American Business Solutions fell nearly 2% to $811.2 million. Contract channels sales declined in the quarter and Direct channel sales remained flat. The division posted an operating income of $38.8 million, up 27.6% from $30.4 million in the year-ago quarter. Excluding one-time charges, operating income increased by $6 million. The rise was driven by gross margin expansion and fall in advertising, general and administrative expenses as well as payroll.

The International division’s revenues dipped 4% on a constant currency basis and 2% based on U.S. dollars, to $680.5 million. The overall sales in the European contract channel fell in mid single digits. Direct channel experienced a sales decline but the rate of fall decelerated sequentially. The retail channel sales decreased, owing to the stores closed in Sweden, partly offset by sales growth in France.

The division reported an operating income of $2.6 million in the quarter as against loss of $14.6 million in the prior-year period. Excluding one-time items, operating income was $6.0 million, up from $4 million in the prior-year quarter. At the end of the quarter, total store count at the International division was 121. During the quarter, the company closed 2 stores.

Merger Update

OfficeMax Incorporated (OMX) and Office Depot recently announced the completion of the merger, which sanctions combination of both the companies under the name Office Depot, Inc. that will trade at the New York Stock Exchange under the symbol “ODP”. At present, Neil Austrian, Chairman and CEO of Office Depot and Ravi Saligram, President and CEO of OfficeMax, will together supervise the newly formed entity.

The all-stock merger agreement, which involves 2.69 Office Depot shares for each share of OfficeMax, would result in cost synergies in the upper half of $400 million to $600 million by the end of the third year following the deal’s conclusion.

It was in February that OfficeMax and Office Depot decided to merge their businesses to compete with the industry bellwether, Staples Inc. (SPLS) and online rivals such as Amazon.com Inc. (AMZN) in a better manner. The move was a strategic one for both the companies, which have been grappling with soft sales.

The new company, which has total revenue of about $17 billion for the 12 months ended Sep 28, 2013 has about 66,000 employees worldwide. It offers services in 59 countries and operates over 2,200 retail outlets.

Other Financial Details

This Zacks Rank #4 (Sell) company ended the quarter with cash and cash equivalents of $724.7 million, long-term debt (net of current maturities) of $471.3 million and shareholders’ equity of $777.2 million. The company incurred capital expenditures of $32 million, and generated negative free cash flow of $57.6 million during the quarter.

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