Office Depot: Earnings Preview

| About: Office Depot (ODP)

Office Depot Inc. (NYSE:ODP), the operator of office supply stores under brand names such as Office Depot, Foray, Ativa, Break Escapes, Worklife and Christopher Lowell is slated to report its second-quarter 2010 financial results on Tuesday, July 27, 2010. The current Zacks Consensus Estimate for the quarter is a loss of 17 cents per share.
First-Quarter 2010, a Synopsis
Office Depot reported weaker-than-expected first-quarter 2010 results. Earnings per share were 7 cents, down by a penny from the Zacks Consensus Estimate.
During the quarter, total revenue declined 5% year-over-year to $3,072 million. The fall in revenue was due to lower contributions from the North American business lines, but partially offset by the International Division.
North American Retail division’s revenue dipped 6% to $1,347.5 million and North American Business Solutions' revenue also slipped 9% to $830.6 million. These were partially offset by revenue growth of 2% to $893.8 million at the International division.
Second-Quarter 2010 Consensus
Analysts surveyed by Zacks, expect Office Depot to post a second-quarter 2010 loss of 17 cents a share. Of the 17 analysts covering the stock, only 3 analysts have revised their estimates downwards in the last 7 days, which led the current Zacks Consensus Estimate to slip to a loss of 17 cents from a loss of 16 cents a share anticipated earlier.
The current Zacks Consensus Estimate for the quarter represents a sharp improvement from a loss of 22 cents delivered in the prior-year quarter. The estimates in the current Zacks Consensus for the quarter range from negative 22 cents to negative 13 cents.

The current Zacks Consensus Estimate for fiscal 2010, which is a loss of 9 cents a share, reflects a dip of 2 cents in the last 7 days. Three analysts lowered their estimates on account of the decision made by the company of not participating in the bid to renew the office supplies contract of Los Angeles County, which is set to expire on January 1, 2011. Office Depot has been the supplier for the past 14 years.
The company cited the terms of new general office supplies agreement as the reason for not bidding for the new contract, which may adversely impact its profitability. Office Depot informed that the business with Los Angeles County is currently expected to generate revenues of approximately $515 million, representing 4.2% of total sales for 2009 and 15% of its Business Solutions segment sales. Operating profits are running in the low-single digit as a percentage of annual sales.
Analysts believe that the loss of contract may hamper the company’s financial wherewithal. However, Office Depot notified that it would manage its infrastructure costs to alleviate the negative impact of the lost business. Moreover, the weakening in the Euro vis-à-vis dollar may adversely affect the company’s top and bottom lines.
Earnings Surprise History
With respect to earnings surprises, Office Depot has performed across a wide range of earnings expectations over the last four quarters from a negative 83.3% to a positive 71.4%. The average remained positive at 2.7%. This suggests that Office Depot has beaten the Zacks Consensus Estimate by an average of 2.7% in the last four quarters.
Office Depot in Neutral Lane
Office Depot is repositioning itself to keep afloat in a difficult consumer environment. It is containing costs, closing underperforming stores, managing inventory, and focusing on providing innovative products and services, which should all contribute to margin improvement.
Furthermore, the company has always been looking for accretive opportunities to enhance its global footprint, and has been actively managing its cash flows. However, with sluggish domestic sales as well as competition, we do not see any near-term catalyst to revive sagging comparable-store sales. The weak business environment will keep the stock under pressure in the near term.
We have a Neutral rating on Office Depot. However, we hold a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation on account of the company’s decision of not participating in the bid to renew the Los Angeles County office supplies contract.