RealMoney Silver - Office Depot Dogged by Economic Woes

Office Depot Dogged by Economic Woes
By Pia Sarkar
Staff Reporter
7/26/2007 2:55 PM EDT

Updated from 12:05 p.m. EDT

Office Depot (ODP) said Thursday that a soft economy and weak housing market has put pressure on its core small-business customers, contributing to its 8% decline in second-quarter profits and likely weighing on earnings in the near future.

Shares of the retailer were sliding $1.94, or 6.7%, to $27.01 in recent trading.

The Delray Beach, Fla.-based company reported a net income of $109.1 million, or 40 cents a share, down from $118.3 million, or 41 cents a share, a year earlier.

Excluding certain charges, the office-supply company earned 43 cents per share in the second quarter, flat with the year-ago results on a comparable basis. The earnings met the average estimate of analysts surveyed by Thomson Financial.

Sales rose 4% to $3.63 from $3.49 billion, missing analysts' target of $3.69 billion.

North American retail sales for the company rose 1%, while international sales increased 14% in U.S. dollars and 7% in local currencies, fueled by strong growth in Europe. But same-store sales, or sales at stores open at least a year, dropped 5% in North America.

Chief Executive Steve Odland said that while he is pleased with the long-term growth prospects for Office Depot, he is less bullish amid the current economic uncertainty.

"Our comps have not improved since the second quarter ended and it will be difficult to show earnings per share growth until the macro situation allows sales growth again," he said.

Sales for furniture and supplies were soft in the second quarter, mainly due to small businesses -- many of which are home-based -- cutting back on their spending. Odland said the company first noticed the purse tightening in the back half of the first quarter, and that it continued through the second quarter. He expects more of the same for the current quarter.

"We found that small businesses tend to act more like consumers than they do like medium to larger businesses," Odland said, describing them as more sensitive to gas prices and interest rate adjustments.

Office Depot opened 15 new retail stores in the second quarter but scaled back its plans for the rest of the year. Instead of 150 stores, it will now open 125 in 2007. Next year, it will open 150 stores, down from the company's original goal of 200.

Odland added that Office Depot is already seeing early indications of a tough retail environment in the third quarter that could result in stiff competition and heavy promotions for the back-to-school season.

The bleak view sent rival OfficeMax (OMX) down $3.24, or 8.8%, to $33.50. Staples (SPLS) declined 90 cents, or 3.7%, to $23.19.