OMX Officemax Incorporated

Office Depot Inc. (ODP) recently posted better-than-expected fourth-quarter 2011 bottom-line results. The company reported earnings of 3 cents a share, surpassing the Zacks Consensus Estimate of break-even. Looking out to the year over year performance, earnings marked a sharp improvement from a loss of 10 cents delivered in the year-ago quarter.

On a reported basis, including one-time items, Office Depot’s quarterly earnings came in at 4 cents a share compared with a loss of 39 cents registered in the prior-year quarter.

Office Depot’s total revenue of $2,969.7 million fell short of the Zacks Consensus Estimate of $2,997 million, and remained approximately flat from the prior-year quarter’s revenue.

Cost of goods sold and occupancy costs declined 2.1% year over year to $2,070.5 million during the quarter resulting in an increase of 6.2% in the gross profit to $900.2 million. Adjusted gross margin expanded 170 basis points to 30.3% in the reported quarter.  

Adjusted operating profit came in at $35.8 million compared with $13.4 million in the prior-year quarter, whereas adjusted operating margin increased 70 basis points to 1.2%.

Segment Performance

During the quarter, revenue for the North American Retail division remained flat at $1,236.8 million. Same-store sales fell 5%. Office Depot witnessed comps decline in computers and related products and in furniture category which were partially offset by comps growth in supplies, cleaning and break room products and Copy and Print Depot. Customer transaction counts dropped 4% and the average order value fell marginally.

The division reported an operating profit of $32.4 million compared with $16.2 million in the prior-year quarter. The increase in profit was attributed to improved gross margin on account increase in sales mix of supplies, enhanced promotional management and reduced property expenses.

Total store count at the North America Retail division stood at 1,131 at the end of the quarter. During the quarter, the company opened 1 store and closed 2.

Revenue for North American Business Solutions increased 4% to $831.5 million, reflecting positive impact of the 53^rd week’s sales.  Average order value was up slightly during the quarter, while customer transaction counts were down by the same amount.

Direct channel sales increased 5%, whereas contract channel sales increased 4%. 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 $44.7 million from $37.1 in the year-ago quarter, reflecting effective cost management and increased gross margin.

The International division’s revenue decreased 3% in n both U.S. dollars and constant currencies to $901.4 million. The overall sales in contract channel rose witnessing growth in the U.K. and Germany, partly offset by softness seen in sales in other parts of Europe. Direct channel experienced a sales decline.

The division posted an operating profit of $33 million up from $20.6 million in the year-ago quarter due to reduced operating expenses and increased gross margin.

At the end of the quarter, total store count at the International division stood at 131. During the quarter, the company closed 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 free cash flow of $138.5 million during the quarter compared with a use of $27.8 million in the prior-year period.

The company ended the quarter with cash and cash equivalents of $570.7 million, long-term debt of $648.3 million and shareholders’ equity of $739.1 million, excluding non-controlling interest of $0.2 million.

For fiscal 2011, capital expenditures were $130 million. The company expects capital expenditure of $160 million in 2012.

Going by the pulse of the economy we prefer to have a long-term Neutral rating on the stock. Moreover, Office Depot, which competes with Staples Inc. (SPLS) and OfficeMax Inc. (OMX), holds aZacks #3 Rank that translates into a short-term Hold rating.

 
OFFICE DEPOT (ODP): Free Stock Analysis Report
 
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