Office Depot's Profit Grows

Office Depot ( ODP) said first-quarter profit rose, helped by a jump in technology and e-commerce sales.

Including a charge of a penny a share for a litigation settlement, the company earned $115.6 million, or 37 cents a share, compared with $79.2 million, or 25 cents a share, a year earlier.

Analysts were expecting 36 cents a share.

The Delray Beach, Fla.-based office products retailer said revenue rose 18% to $3.6 billion in the quarter, while same-stores sales were up 2%. The company also said e-commerce sales increased 27% to $762 million. International sales spiked 94% higher in U.S. dollars, while sales at the company's business services group, or BSG, were flat and North American retail sales rose 5%.

"Strong sales in technology products led the performance that resulted in our first positive retail comp quarter in the last four years," the company said in a statement.

Nevertheless, shares of the company were recently falling 92 cents, or 4.8%, to $18.28.

Goldman Sachs analyst Matthew Fassler noticed a couple of potential negatives. "Mix shift in both retail and BSG are taking their toll on store and warehouse level margins, which showed modest expansion, below our expectation," he said.

Fassler also thinks the company's future earnings before interest and taxes, or EBIT, margin is unlikely to expand, which could hamper upside to earnings. Gross margin in the company's retail business will likely decrease, while expenses should remain even, he said. (Goldman Sachs does investment banking for Office Depot.)

UBS analyst Brian Nagel agreed about the negatives at BSG, noting the soft trends in that segment. He also said increased same-store sales in the company's North American retail division resulted in part from "stronger sales of lower-margin technology products and increased advertising, factors that might prove unsustainable." (UBS has an investment banking relationship with Office Depot.)

Meanwhile, Ulysses Yannas, an analyst at Buckman Buckman & Reid, was somewhat confused by the drop in shares. He thinks investors could be pre-emptively focused on the widely held belief that an increase in interest rates is a negative for the retail industry.

Office Depot sees earnings up 15% to 20% in full-year 2004 earnings over the $1.04 a share reported in 2002. Analysts are calling for $1.21 a share.

The company also expects second-quarter earnings to rise 15% to 20% over the prior year. The Wall Street consensus is for 23 cents a share.

Office Depot said it expects to open 80 to 100 new stores in 2004, thanks in part to its March acquisition of Kids R Us stores from Toys R Us ( TOY).

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