It's More Than the Economy Burning Office Depot

The retailer blames the housing slump for ongoing weakness, but its rivals aren't doing as poorly.
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SAN FRANCISCO -- Office Depot (ODP) - Get Report blamed spreading economic troubles for a so-far difficult fourth quarter.

But there's likely more to it than that.

The company, which issued another gloomy profit forecast Wednesday, has slipped up on its execution, analysts say. And its chief rival,

Staples

(SPLS)

, has been doing a better job of riding out the storm caused by the economic downturn and the housing slump.

"It has been just three weeks after

Office Depot's Q3 conference call, and business has appeared to deteriorate at a faster rate," wrote Banc of America Securities analyst David Strasser in a research note. "This ongoing sales decline is worrisome as there does not appear to be a bottom for their business."

Strasser added, "It is hard to fully blame the macro environment, as SPLS' business, albeit slower, has held up quite well, particularly in higher margin supplies and in the contract division."

Shares of Office Depot recently were tumbling $1.99, or 11.7%, to $15 after the company projected "continued erosion" in fourth-quarter sales and earnings. Office Depot said that recent weakness in key markets -- namely Florida and California -- has spread to other U.S. retail areas.

The company didn't give a specific profit forecast for the quarter. Analysts expect earnings of 34 cents a share for the period, with revenue of $3.85 billion.

In the third quarter, Office Depot's earnings fell 9%, same-store sales, or sales at stores open at least a year, dropped 5% in North America.

The company blamed much of the declines on the Florida and California markets, which have been particularly hard-hit by the housing slump. Those two states made up 28% of North American revenue in the third quarter.

Scott Tilghman, an analyst for Soleil-Hudson Square Research, notes that Office Depot has almost twice as much exposure to Florida and California as Staples.

"There's a certain amount of weathering that has to take place," he says.

At the same time, Staples has positioned itself toward more profitable mid-sized businesses that tend to be less economically sensitive to the market than small businesses, which Office Depot caters to.

Tilghman also says Staples has a better supply chain and has been more adept at integrating its business acquisitions than Office Depot.

Office Depot also further issues with its store layout, which Tilghman says is not conducive to a friendly shopping environment. But the company is trying to change that with aggressive store remodeling.

Tilghman says Office Depot has a ways to go before its performance improves.

"Half of it is the macro economy and geography, but the other half is a function of execution," he says

Wednesday's decline brought Office Depot's stock well past its 52-week low of $16 set earlier this month. The stock is now down 61% since the start of the year.

Staples' shares recently were down 19 cents, or 0.8%, to $23.48. Fellow office retailer

OfficeMax

(OMX)

saw its shares fall 96 cents, or 3.8%, to $24.50.