Updated from 8:59 a.m. EDT

Shares of

Office Depot

(ODP) - Get Report

plummeted 29% after the company announced Friday that it will fail to meet second-quarter expectations because of weak May sales, foreign currency woes and cost improvements that are taking longer than anticipated to take effect.

The largest office supply company in North America, based in Delray Beach, Fla., expects to miss by 4 to 6 cents the 24-cent consensus estimate of analysts polled by

First Call/Thomson Financial

.

Shares of Office Depot dropped 3 1/16 to 7 7/16 in Friday afternoon trading after reaching a new 52-week low of 6 7/8. (Office Depot closed down 2 7/8, or 27%, at 7 5/8.) The news also impacted competitors such as No. 2

Staples

(SPLS)

, down 6%, or 15/16, to 16 after reaching a new 52-week low of 15 5/8; and No. 3

Office Max

(OMX)

, down 3%, or 3/16, to 5 1/4. (Staples finished down 1 3/16, or 7%, at 15 3/4, while Office Max closed down 3/16, or 3%, at 5 1/4.)

Downgrades also ensued from analysts at both

J.P. Morgan Securities

(to market performer from long-term buy) and

Robinson-Humphrey

(to neutral from buy) on Friday's news. Danielle Fox, the J.P. Morgan analyst, also downgraded Staples because of "deteriorating earnings visibility industry-wide," she wrote in a report.

As investors, especially momentum ones, grow increasingly

skittish about rising interest rates, they are fleeing

retail stocks at any sign of weakness. Of concern are slower consumer spending and the rising cost of doing business that will make it increasingly difficult for companies to beat earnings estimates.

However, Office Depot's problems are company specific as well.

"Performance in the second quarter has failed to meet our expectations," said David Fuente, chairman and chief executive, in a statement. "The greatest sales shortfall occurred in the technology area in our retail stores during the month of May."

Comparable store sales, a measure of companies open more than a year, came in well below expectations in the retail division for May. Though same-store sales should improve in June, "we now have concerns about total comparable store sales for the quarter," Fuente continued.

Office Depot has a greater exposure to the technology area -- which encompasses items like calculators, computers and copiers vs. furniture and office supplies such as envelopes and pencils -- than both Staples and Office Max.

Mark Mandel, the Robinson-Humphrey analyst, said that desktop computers and related products generally account for 20% to 24% of sales, while the comparable figure for Staples ranges from the high teens to the 20s. Office Max is in the process of exiting the technology business because of a relationship with

Gateway

(GTW)

. Mandel's firm has done no underwriting for Office Depot.

Not surprisingly, international factors are also part of the mix, with the weakness of the euro and sterling vs. the dollar accounting for a portion of the shortfall. The majority of the company's revenue comes from its U.S. business, but international sales in the first quarter did account for 12% of revenue, or $385.8 million in U.S. dollars, up 18% from the year before.

Office Depot owns 26 stores in France and six in Japan, with 89 additional stores operating under the Office Depot name via joint venture and licensing agreements in six other foreign countries. The company also operates mail order and delivery operations in 14 countries outside the U.S. and Canada.

Office Depot has a larger exposure to Europe than either Office Max, which has no presence there, and Staples, which derives about 5% of its sales from Europe. "We have a fairly small presence there," said Shannon Lapierre, a Staples spokeswoman. "We are not changing our guidance because there is no material impact from exchange rates."

Also, anticipated cost savings from Office Depot's warehouse consolidation program have yet to fully take effect, thus negatively impacting margins.