OMX Officemax Incorporated

Office Depot Inc. (ODP), the supplier of a range of office products and services across the globe, recently posted lower-than-expected third-quarter 2011 results.

Street analysts had a week to ponder on the company’s scores. In the paragraphs that follow, we cover the recent earnings announcement, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

On October 25, Office Depot reported a break-even that missed the Zacks Consensus Estimate by a couple of cents, but grew marginally from a loss of 2 cents a share delivered in the year-ago quarter.

Total revenue of $2,836.7 million fell short of the Zacks Consensus Estimate of $2,894 million, and also dropped 2.2% from the prior-year revenue of $2,899.7 million.

During the quarter, revenue for the North American Retail division slid 4% to $1,232.7 million due to a same-store sales decline of 2%. Revenue for North American Business Solutions also dipped 2% to $820.9 million due to a decline in customer transaction counts. The International division’s revenue inched up 1% to $783.2 million (in U.S. dollar terms) but dipped 7% in constant currency.

(Read our full coverage on this earnings report: OfficeMax Beats, Remains Cautious)

Agreement of Estimate Revisions

In the last 7 days, 4 out of 12 analysts covering the stock lowered their estimates, whereas only 1 analyst raised the same for the fourth quarter of 2011. For the first quarter of 2012, only 1 analyst cut the estimate while none raised the same.

In the last 30 days, 10 analysts lowered their estimates, whereas only 1 analyst raised the same for the fourth quarter of 2011. For the first quarter of 2012, only 1 analyst moved the estimate downward while none raised the same.    

For fiscal 2011, 3 analysts pushed their estimates downward with 2 analysts revising them upward in the last 7 days. For fiscal 2012, 5 analysts trimmed their estimates.

For fiscal 2011, 10 analysts lowered their estimates with only 2 analysts revising them upward in the last 30 days. For fiscal 2012, 9 analysts reduced their estimates.

Magnitude of Estimate Revisions

The analysts remained skeptical following Office Depot’s third quarter results, as was evident from the magnitude of estimate revisions, which portrayed a downward trend.

The Zacks Consensus Estimates dropped by 2 cents to a break-even for the fourth quarter of 2011, and remained unchanged at 4 cents for the first quarter of 2012, in the last 7 days.          

In the last 30 days, the Zacks Consensus Estimates dropped by 4 cents to a break-even for the fourth quarter of 2011, and by a penny to 4 cents for the first quarter of 2012.

For fiscal 2011, the Zacks Consensus Estimate fell by a penny to a loss of 6 cents, and for fiscal 2012, it dropped 2 cents to 11 cents in the last 7 days.

In the last 30 days, for fiscal 2011, the Zacks Consensus Estimate fell by 5 cents to a loss of 6 cents, and for fiscal 2012, it dropped 3 cents to 11 cents.

What Drives Estimate Revisions

Office Depot’s third-quarter 2011 results failed to impress the analysts following the stock, and majority of them tweaked their estimates. Clearly, a negative sentiment is palpable among analysts, who remain pessimistic on the company’s performance. Following the earnings release, the Zacks Consensus Estimate has been falling with analysts remaining bearish on the stock.

With the economy showing no signs of revival, the analysts continue to hold a cautious view on the company. The demand for office products is closely tied to the health of the economy. Further, management’s projection of a 2% decline in comparable-store sales at its North American Retail division in the fourth quarter compelled the analysts to take a step back. While total company sales were projected to be marginally up in the upcoming quarter, it was not enough to cheer the analysts.

Let’s Conclude

The future remains uncertain but efforts to battle the tough economy are obvious. Business budget remains tight, consumers remain more watchful than ever before and companies are trying hard to navigate through the challenging environment.

Office Depot is repositioning itself to keep afloat in a difficult consumer environment. The company is containing costs, closing underpesrforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, and focusing on providing innovative products and services, which should all contribute to margin improvements.

Consumers and small businesses remain frugal about big-ticket spending on items such as business machines and other durable products. Counting the pulse of the economy, we prefer to maintain our long-term Neutral rating on the stock. Moreover, Office Depot, which competes with Staples Inc. (SPLS) and OfficeMax Inc. (OMX), holds a Zacks #3 Rank that translates into a short-term Hold’ rating and correlates with our long-term view.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

 
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