UPDATE: Office Depot 2Q Loss Narrows On Cost Cuts
July 27 2010 - 9:53AM
Dow Jones News
Office Depot Inc. (ODP) calmed fears with a much narrower
second-quarter loss than expected, as the No. 2 office-supply chain
operating cost cuts more than made up for weaker-than-expected
revenue.
Revenue fell almost $500 million short of analysts' expectations
in the traditionally softest quarter, but Office Depot said
year-over-year gross margins improved for the fourth consecutive
quarter. Its beaten-down stock, which was 27% lower year to date
through Monday's close, rallied 5.5% to $4.99 in pre-market
trading.
Office-product retailers have been hurt by the soft economy,
especially high unemployment among white-collar workers. Office
Depot in April reported first-quarter earnings that missed
analysts' estimates and said it expected continued weakness in
California, where about 13% of its U.S. stores are located. More
recently, the company walked away from a government contract in Los
Angeles potentially valued at more than $500 million, citing
"onerous" terms.
The office-product retailer reported a loss of $9.5 million, or
7 cents a share, compared with a prior-year loss of $82.1 million,
or 31 cents a share, which included 9 cents of charges. Revenue
decreased 4.4% to $2.7 billion.
Analysts polled by Thomson Reuters most recently forecast a loss
of 17 cents on revenue of $2.74 billion.
Gross margin rose to 28.4% from 27.1%, but its free cash flow,
or
Sales were down 2% at its North American retail division - its
largest unit by revenue - but swung to a small profit amid improved
product margins. Same-store sales fell 1%.
Revenue declined 6% at its North American business solutions
unit on continued declines in transactions and 3% excluding
currency changes at its international business. International
earnings soared to $19 million from $3 million, but business
solutions had a 39% drop.
Office Depot softened its language on why it pulled out of
bidding on the Los Angeles County office-supply contract, which is
then used as the standard for scores of government agencies
nationwide as part of the U.S. Communities Government Purchasing
Alliance, a nonprofit government purchasing cooperative. The
contract could be worth more than $500 million a year, and was $600
million, or 6%, of Office Depot's 2009 sales.
U.S. Communities and L.A. County took issue with Office Depot
saying the terms were onerous, arguing that they were largely
unchanged from previous pacts. Office Depot in its results press
release now called the terms "problematic" and said they could hurt
its profitability, but said it will aggressively work to retain
some of those government customers and can "manage costs as needed
to mitigate the potential financial impact" of business it
loses.
Industry titan Staples Inc. (SPLS) saw its shares rise 2.7%
premarket to $20.85. Meanwhile, No. 3 OfficeMax Inc. (OMX), which
has coupled its solid execution with Office Depot's recent weakness
to nearly overtake Office Depot in terms of market value, was
inactive in premarket trading. OfficeMax reports its quarterly
results next week and Staples will report later in August.
-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171;
maxwell.murphy@dowjones.com
(Tess Stynes and Kevin Kingsbury contributed to this
article)
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