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Investors Flee Office Depot

A vague announcement of an audit committee probe creates jitters.

Updated from 2:52 p.m. EDT

SAN FRANCISCO -- Shares of

Office Depot

(ODP) - Get Report

plummeted 14% Monday after the retailer said it will delay its third-quarter earnings release because of a review into its vendor program.

The Delray Beach, Fla.-based retailer was supposed to report its earnings on Tuesday. It has not yet set a new date for its release.

The company put out a short, vague statement on Monday describing the review by its audit committee as relating "principally to the timing of the recognition of certain vendor program funds." An Office Depot representative declined to comment further.

Office Depot's vendor program, a common practice in the retail industry, relates to the company receiving rebates from its suppliers for reaching sales milestones or for promoting certain products.

Stephen Chick, an analyst for JPMorgan, downgraded the stock to neutral from overweight on Monday.

He noted that "the lack of clarity regarding the issue for ODP and the potential level of materiality makes us nervous, despite a seemingly inexpensive stock price otherwise."

Chick said he would remain sidelined on the stock "until there is more visibility into the audit committee's review and findings."

Matthew Fassler, an analyst for Goldman Sachs, wrote in his research that he expects the review to be treated as a highly sensitive matter given Office Depot's significant margin expansion in the early part of Chief Executive Steve Odland's tenure. Odland took over as CEO in 2005.

Fassler added, however, that it was "premature to assess the scope of any untoward practices, to attribute them to any individual, or to ascertain how long they have been developing."

Still, the review has potentially serious implications.

"While the scope and specific drivers of the issues are unclear, the presence of any investigation, combined with the involvement of the board, suggests questions about the integrity of the company's financial statements and, as such, render the valuation process challenging," Fassler wrote.

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Gary Balter, an analyst for Credit Suisse, downgraded Office Depot to underperform out of concern that where there's smoke, there's fire.

"This is not a good development for shareholders in this underperforming stock," he wrote in his research. "The majority of misstatements in retailing have occurred through improper, usually early, recognition of vendor funds."

He added that similar issues with other companies have led to restatements. He also pointed to his earlier concerns over the sustainability of retail margins.

"Today's press release

from Office Depot raises our concerns to a whole new level," Balter said.

Shares of Office Depot fell $2.86 to $17.43, having earlier reached an intraday 52-week low of $16.51. The shares traded as high as $42.61 a year ago.

Office Depot has struggled with slowing sales since the back half of its first quarter, blaming its troubles on a soft macroeconomic environment. Furniture and office supplies have performed particularly poorly, which the company has attributed to small businesses cutting back on their spending. As a result, Office Depot has scaled down its plans to open new stores this year.

Analysts surveyed by Thomson Financial expect the company to post third-quarter earnings of 41 cents a share on sales of $3.96 billion. In the year-ago third quarter, Office Depot earned $133.3 million, or 37 cents a share, on sales of $3.86 billion.





Office Max


have also experienced weakness in their business. Shares of Staples were up 1.3% Monday, while Office Max was up 0.6%.