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Office Depot Sees Soft 2Q On Retail, International

05/01/2012 | 12:37pm US/Eastern

--Company sees weaker second-quarter earnings but full-year view largely intact

--First-quarter bottom line swings to black on pension-settlement benefit

--Margin cushions profit from continuing sales decline in North American retail

(Adds outlook, other executive comments from conference call to first, fourth through eighth and 13th paragraphs; updates share movement in third.)

   By Joan E. Solsman and Kristin Jones 
   Of  
 

Office Depot Inc. (>> Office Depot, Inc.), which posted continuing higher margins but lower sales in its first-quarter results, said it expects to see it profits fall in the second quarter because of softness in its North American retail business and international operations.

Shares were recently down 3.3% at $2.94 in recent trading on the modest outlook. While the stock has surged 37% this year through Monday's close, it remains 32% below its year-earlier level.

Tuesday, Chief Financial Officer Michael D. Newman said adjusted earnings before interest and taxes to be down $20 million to $30 million from the $11 million last reported in the second quarter last year.

"We're a little bit softer in retail than last year, we're a little bit softer in international," he said about the outlook, adding that he expected initiatives such as movement to improve the in-store customer experience wouldn't kick in until the third quarter.

A large element of the earnings-decline view was nonrecurring benefits to the year-earlier period, Newman said. If not for them, the guidance would up $10 million operationally from the prior year's number, he said.

In the second quarter, the company predicted sales would fall 3%, while analysts surveyed by Thomson Reuters were expecting a 2% drop.

However, the company remained generally on track with its prior full-year view for adjusted earnings. It expects 2012 adjusted EBIT to to be $120 million to $130 million, including an impairment charge in first quarter of $18 million. Its February outlook, which didn't include the write-down, was for $140 million to $150 million.

In the latest period, Office Depot's North American retail same-store sales fell 6% following a 5% drop in the fourth quarter. Comparable sales in the division--the company's biggest by revenue--continued to battle the effects of a strategic shifts in assortment. Lower sales of computers and related products were a heavy drag it continues to move out of the category in favor of other tech items like tablets and e-readers, sales of which increased. The company said consumers were switching to tablets from laptops, which hurt sales but improved product margins.

The technology assortment alterations are part of Office Depot's wider aim to improve profitability, also reflected in the latest quarter's lower furniture sales because of a decision not to repeat last year's promotions.

But despite the focus on profitability, North American retail's operating profit plunged 23% even though the company predicted it to be flat to slightly positive in February. The tumble was driven by not only the lower revenue but also a write-down stemming from unexpectedly weak sales at about 50 lower-performing stores. Without the impairment, segment operating profit would have risen as gross margin improved payroll and advertising expense decreased.

Kevin A. Peters, president of North American retail, said on a conference call discussing results that the technology and peripheral assortment, action on pricing and promotion and finally better conversion thanks to customer-experience enhancements would be the eventual drivers of same-store sales improvement as well as incremental margin growth.

In the North American business-solutions division, sales were up 2.7% while division operating profit more than doubled to $42 million, nearly bringing it level with the profit gleaned from North American retail despite being a much lower revenue business. The company in February had anticipated significantly higher profit in business solutions.

International sales decreased 2.4% but increased about 1% in constant currencies. Operating profit fell 44% because of ongoing charges from its overseas restructuring, including closing stores in Europe.

Weakness overseas has burdened rivals as well. In February, Staples Inc. (SPLS), the No. 1 office-supplies retailer by sales, said it would lay off hundreds in Europe as well as Australia as the regions continued to weigh down international sales.

Office Depot posted a profit of $49.5 million, or 14 cents a share, compared with a year-earlier loss of $5.4 million, or 5 cents. Stripping out the large benefit from a acquisition-related pension settlement and other items, the latest quarter's profit was 5 cents a share after preferred dividends, matching the consensus estimate of analysts surveyed by Thomson Reuters.

Gross margin widened to 30.7% from 29.5%.

Revenue decreased 3.4% to $2.87 billion. In February, the company predicted sales would be down about 3% to 4%, moderately below the average analyst estimate at the time.

Office Depot swung into the black last year for the first time since 2007 and has said it expects growth to continue this year. Cutthroat competition from rivals like Staples and e-commerce giant Amazon.com Inc. (AMZN), as well as weak demand for office supplies, have spurred Office Depot to revamp, included remodeling to reduce average store size, eliminating lower-margin products like entry-level laptops and relying less on promotions.

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

Stocks mentioned in the article : Office Depot, Inc.
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