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Office Depot Reports In line

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Office Depot Inc. (ODP) recently posted first-quarter 2012 earnings of 5 cents a share, in line with the Zacks Consensus Estimate. Looking at the year-over-year performance, earnings marked a sharp improvement from a break even in the year-ago quarter.

On a reported basis, including one-time items, Office Depot’s quarterly earnings came in at 14 cents a share compared with a loss of 5 cents registered in the prior-year quarter.

Office Depot’s total revenue of $2,872.8 million fell short of the Zacks Consensus Estimate of $2,884 million, and decreased approximately 3% from the prior-year quarter’s revenue.

Cost of goods sold and occupancy costs declined 5% year over year to $1,989.6 million during the quarter, whereas adjusted gross profit increased marginally to $883.2 million. Adjusted gross margin expanded 120 basis points to 30.7% in the reported quarter.  

Adjusted operating profit came in at $38 million compared with $26.8 million in the prior-year quarter, whereas adjusted operating margin increased 40 basis points to 1.3%.

Segment Performance

During the quarter, North American Retail division revenue decreased 8% to $1,219.6 million. Besides, significant decline in the sales of computers and related products dragged down same-store sales by 6%.

Office Depot witnessed comps decline in furniture, paper, and ink and toner sales category, which were partially offset by comps growth in tablets and e-readers and Copy and Print Depot. Management stated that customer transaction counts dropped 5%, while the average order value was marginally negative.

The division reported an operating profit of $44.4 million compared with $58 million in the prior-year quarter. The decrease in profit was attributed to lower sales and an asset impairment charge of approximately $18 million.

Total store count at the North America Retail division stood at 1,123 at the end of the quarter. During the quarter, the company opened 1 store and closed 9.

Revenue for North American Business Solutions increased 3% to $827.7 million. Direct channel sales inched up 2%, whereas contract channel sales increased 3%. The division witnessed a decline in sales of supplies, including paper and ink and toner. These were partly offset by rise in sales across cleaning and break room categories, seating, printers, Copy and Print.

Operating profit increased to $42.5 million from $16.2 in the year-ago quarter, reflecting effective pricing and better mix of product sales.

The International division’s revenue inched down 2% in U.S. dollars to $825.5 million. However, it increased 1% in constant currency. The overall sales in contract channel rose reflecting growth in the U.K. and Germany, partly offset by softness in sales in other parts of Europe. Direct channel experienced a sales decline. The retail channel sales registered a growth across Europe and Asia.

The division posted an operating profit of $15.2 million, significantly down from $27.3 million in the year-ago quarter. At the end of the quarter, total store count at the International division stood at 132. During the quarter, the company opened 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 negative free cash flow of $128 million during the quarter. The company incurred capital expenditures of $34.6 million.

The company ended the quarter with cash and cash equivalents of $488.8 million, long-term debt of $642.5 million and shareholders’ equity of $815.8 million, excluding non-controlling interest of $0.2 million.

Currently, we 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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