Office Depot Inc. (ODP) recently posted break-even first-quarter 2011 results, which fell short of the Zacks Consensus Estimate of 2 cents and plunged 100.0% from the prior-year quarter.
On a reported basis, including one-time items, Office Depot delivered a loss of 5 cents per share, compared with 7 cents in the year-ago quarter.
Office Depot’s total revenue of $2,973.0 million fell short of the Zacks Consensus Estimate of $2,979.0 million and dropped 3.2% from the prior-year quarter, registering sales declines in each business segment.
Cost of goods sold and occupancy fell 2.9%, while general and administrative expenses inched down 1.4%. Meanwhile, store and warehouse operating and selling expenses inched up 0.6%.
Segment Performance
During the quarter, revenue for the North American Retail division slid 2.0% to $1,320.6 million. Same-store sales fell 1% versus the prior-year quarter. Office Depot hinted that customer transaction counts declined compared with the year-ago quarter but the average order value rose slightly during the reported quarter.
The division reported an operating profit of $58.0 million compared with $73.0 million in the prior-year quarter. Lower sales and increased marketing costs weighed upon the operating profit of the company.
Total store count at the North America Retail division stood at 1,141 at the end of the quarter. During the quarter, the company opened 1 store, closed 7 stores and relocated 2 stores.
Revenue for North American Business Solutions also dipped 3.0% to $806.2 million, due to a decline in customer transaction counts. The average order value remained flat compared with the year-ago quarter. Operating profit went down 19.8% to $16.2 million, reflecting lower sales and rising costs.
The International division’s revenue plummeted 5.0% to $846.1 million (in U.S. dollar terms). The division posted an operating profit of $27.3 million, down 34.4% from the prior-year quarter, reflecting a lower gross margin.
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 flows of $123.2 million during the quarter, compared with a positive free cash flow of $11.2 million in the prior-year period.
The company ended the quarter with cash and cash equivalents of $494.2 million, long-term debt of $657.0 million (reflecting debt-to-capitalization ratio of 47.5%), and shareholders’ equity of $725.8 million, excluding non-controlling interest of $0.5 million. Capital expenditures for the quarter came in at $28.6 million.
Our View
Office Depot recently announced that it will be closing its nine existing stores in Canada on June 11. Furthermore, the company claimed that the move was part of its initiative to enhance its growth prospects by cutting down on investments in sections that no longer contribute significantly to its long-term growth.
Office Depot has repositioned itself to remain 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 are expected to contribute to margin improvement.
Office Depot completed the acquisition of Swedish office supply company, Svanstroms Gruppen, in February 2011. The acquisition will facilitate Office Depot to expand its European market presence, placing it among the leading office supply companies in Sweden.
However, we remain cautious about the sluggish recovery in the economy. As a result, consumers and small businesses remain watchful about their spending on 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.
Given the pros and cons, we prefer to maintain a long-term ‘Neutral’ rating on the stock. Office Depot, which competes with Staples Inc. (SPLS) and OfficeMax Inc. (OMX), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
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