Marginal Sequential Improvement From ODP

This quarter was not close to the disaster that Office Depot (ODP - commentary - Cramer's Take) reported back in February. The company has managed to work off some of its inventory issues and, in the process, improved its margins on a sequential basis. On a year-over-year basis, however, Office Depot is still managing to erode sales and earnings. Once you back out foreign exchange fluctuations, even the international unit results declined year over year.

Office Depot is still a second-class citizen in a very competitive business, which is experiencing the impact of a slower economy. Any bounce in the stock today is more likely due to short-covering than aggressive buying.

Overall Data

The company reported first-quarter 2008 adjusted EPS of 29 cents (25 cents on a GAAP basis). Total company sales rose 3%, to $4.0 billion.

Operating expenses increased 140 basis points as a percentage of sales, to 26.6%. Adjusted earnings before interest and taxes was 3.1% of sales vs. 6.0% in the year-ago quarter. Margins improved sequentially by 290 basis points due to improvement in North America. That improvement was more than expected by management in the fourth-quarter earnings call.

North American Retail

Sales declined 7%, to $1.7 billion. Same-store comps in the U.S. and Canada declined 9% for the quarter. Florida and California continue to drag down results; the two states represent approximately 26% of total store sales and 35% of comp-store sales declines. Comps were impacted by competitive intrusion (60 basis points), new store cannibalization (30 basis points) and the Easter shift. Operating profits as a percentage of sales declined 340 basis points. Office Depot experienced a 340-basis-point sequential margin improvement. The company will open 25 to 30 new stores in the quarter.

North American Business Solutions

Sales declined 5%, to $1.1 billion. Sales to small- and medium-sized businesses were down 12%, large national account sales rose 3%, and public sector sales rose 4%. Florida and California account for 30% of the division's sales, with those two states declining 10% in the quarter. Operating margins declined 80 basis points, to 5.4%, but improved 530 basis points sequentially.

International Division

Total sales increased 6% in the quarter, while sales in local currency declined 4%. Operating margins declined 230 basis points, to 5.3%, year over year. The U.K. remains a challenging environment. The company is centralizing its back-office transaction into one facility in Eastern Europe, with the rest of Europe scheduled to migrate by the end of the year.

For Rothbort's preview heading into the Office Depot conference call, please click here.

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.