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Office Depot Inc. (NYSE:ODP) reported weaker-than-expected first quarter results. Earnings per share were 7 cents, down by a penny from the Zacks Consensus Estimate. ODP shares fell approximately 18% during afternoon trading following the results and the company’s pale second quarter outlook.

During the quarter, total revenue declined 5% year over year to $3.1 billion. The fall in revenue was due to lower contributions from the North American business lines, partially offset by the International Division.

Overall gross profit slightly improved in the reported quarter due to a 6.7% decrease in the cost of goods sold.

Segmental Performance


During the quarter, North American Retail division’s revenue dipped 6% to $1.3 billion largely due to closure of 120 stores in the last year. Operating profit also fell more than 10% to $73 million on the back of weak sales and increased advertising expenditures. Total store count in North America stood at 1,149 as of March 27, 2010.

North American Business Solutions' revenue also slipped 9% to $831 million due to a decline in the number of consumer transactions. Operating profit was down more than 39% year over year to $20 million.

However, the International division’s revenue rose 2% to $894 million (in U.S. dollar terms). Operating profit for the quarter more than doubled to $42 million. Better pricing management and lower distribution and operating costs helped to boost results.

Office Depot, the operator of office supply stores under brand names such as Office Depot, Foray, Ativa, Break Escapes, Worklife and Christopher Lowell, generated free cash flow of $11 million during the first quarter.

Given an improving overall scenario, ODP is among the most prominent names to a late-cycle recovery in business spending. While the domestic operating margin is mostly stabilizing, international operating margin is gaining traction with the recent quarter margin of 4.7%, compared with 2.1% in the year-ago quarter.

Outlook


Office Depot has been taken various measures to supply more oxygen to the company’s underlying valuation including gross margin improvement through various cost cutting initiatives.

However, with still-struggling domestic sales as well as tough competition, we do not see any near-term catalyst to revive sagging comparable-store sales. Consequently, we prefer to stay on the sidelines and maintain our Neutral recommendation for Office Depot shares.

Source: Office Depot Misses, Shares Tumble