2nd UPDATE: Office Depot Predicts 2012 Growth As Initiatives Thrive

Office Depot Inc. (ODP), fresh off its first year in the black since 2007, expects profitability to continue improving this year as its margin-bolstering initiatives build on better-than-expected sales.

Shares in the office-supplies retailer surged 16%, to $3.51 in recent trading. In the last year, the stock has fallen 35%, alongside drops for rivals Staples Inc. (SPLS) and OfficeMax Inc. (OMX). The companies have faced weak demand as well as cutthroat competition among themselves and from outsiders like e-commerce leader Amazon.com Inc. (AMZN).

Chairman and Chief Executive Neil R. Austrian said initiatives that helped improve profitability last year still have "a lot of leg left." Those include exiting low-end laptop computers, improving in-store customer experience, remodeling to reduce average store size and relying less on promotions. This year, Office Depot expects adjusted earnings before interest and taxes to climb to $140 million to $150 million, compared with last year's $122 million.

Executives on a conference call with analysts said they're "not looking at huge sales recovery" this year, estimating revenue growth in a low-single-digit percentage. But that outlook beats analysts' expectation for roughly flat sales this year from a survey by Thomson Reuters.

"We're positioning ourselves for the point when the economy does change, and when you do see sales increase, you're going to see a significant change to the EBIT line," Austrian said. Executives added they haven't seen any sales lift yet from improving employment data.

Though fourth-quarter same-store sales dropped 5% in the company's large North American retail division, division President Kevin A. Peters noted that the sales would have been positive excluding sales of computers and their related products. As those are product categories Office Depot is continuing to refine this year, the growth excluding them gives investors a preview of how a changed sales mix may invigorate profit going forward.

Looking ahead, Peters said first-quarter same-store sales rate would be in the range of the fourth quarter, given the lead time associated with the company's new technology assortment strategy. Despite the lower sales, he predicted first-quarter operating profit will be flat to slightly positive from a year earlier in the division.

Overall, in its fourth quarter bolstered by an extra selling week, Office Depot swung to the black on margin growth. Company-wide gross margin widened to 30.3% from 28.6%. In North American retail, margin's strength hinged on a higher sales mix of supplies, keener promotional management and lower property costs. Companywide margin also benefited from lower advertising costs in North American business solutions and lower operating costs in international operations.

Overall constant-currency sales decreased about 4% excluding the extra selling week and other one-time effects. That's a deeper drop than in any other quarter of last year and compares to the company's October prediction for a slight decrease.

Office Depot reported a profit of $20.4 million, compared with a year-earlier loss of $99.4 million. Including preferred dividends, per-share profit was 4 cents, compared with a year-earlier loss of 39 cents. Stripping out charges linked to restructuring and write-downs as well as a tax benefit, the company reported a per-share profit of 3 cents.

Revenue was up 0.3% at $2.97 billion.

Analysts surveyed by Thomson Reuters expected break-even earnings per share and $3 billion in revenue.

-By Joan E. Solsman, Dow Jones Newswires; 212-416-2291; joan.solsman@dowjones.com

--Mia Lamar contributed to this report.

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