Office Depot Keeps a Sharp Pencil on Cost Savings

It is not just consumers who have slowed down their spending this year. Businesses have been watching the coffers carefully as well and conserving cash and cutting expenses in the weak economy. This trend has showed up in the results of office-supply retails stores, with sales and profits slipping in recent quarters.

Office Depot(ODP Quote - Cramer on ODP - Stock Picks) has been hit hard, just like it s competitors. Lower-than-expected sales in North America were the major reason cited for the company's $2 million loss in the second quarter. The company has dramatically slowed its plans for new store openings.

Office Depot management recently told investors and analysts that it would only open stores where it has contractual arrangements already in place. The company said it will also enact layoffs at the corporate level and other cost-cutting measures in order to weather the current storm.

The company has done a decent job of managing its balance sheet during the slowdown. Office Depot ended last quarter positive on an operating cash flow basis. The slowdown in store openings, as well as a reduced number of company funded store remodeling, will allow that cash flow to grow over the next few years. Office Depot ended the second quarter with over $157 million in cash and equivalents on the balance sheet.

Excluding the impact of currency fluctuations, total inventories grew just 1%. More importantly, inventory in the hardest-hit North American stores were down year over year. Clearance activities to reduce inventory risk and new inventory control measures helped total store inventories on the division drop by 6%. The company is also making changes to its revolving credit line, switching to an asset-backed arrangement that has more favorable terms and covenants to maintain liquidity levels until the economy recovers.

Growing Abroad

The international division has been something of a bright spot for Office Depot. The division had sales growth of 13% last quarter and was the only division of the company to generate a profit. Although the European economy faces many of the same challenges as the U.S., two-thirds of Office Depot locations on the continent showed same-store sales growth in the quarter.

The company is also making an effort to gain and hold market share internationally. It has expanded the Tech Depot concept into the U.K., France and Germany after early success in the Belgium market.

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