Office Depot: Earnings Preview

| About: Office Depot (ODP)

Office Depot Inc. (ODP), one of the leading suppliers of office products and services, is scheduled to report its third-quarter 2010 financial results before the bell on Wednesday, October 27, 2010. The current Zacks Consensus Estimate for the quarter is a loss of 2 cents a share. For the quarter under review, revenues are $2,962 million, according to the Zacks Consensus Estimate.

Second-Quarter 2010, a Synopsis
Office Depot posted improved second-quarter 2010 results on July 27, 2010. The quarterly loss of 7 cents a share portrayed a substantial improvement from a loss of 22 cents witnessed in the prior-year quarter, and also fared far better than the Zacks Consensus Estimate of a loss of 17 cents.

Despite a mid-single digit decline in the top-line, the office supplies retailer was able to narrow its bottom-line loss enabled by cost containment. Office Depot’s total revenue of $2,699.5 million missed the Zacks Consensus Estimate of $2,740 million, and dropped 4.4% from the prior-year quarter due to sluggish demand.

Third-Quarter 2010 Zacks Consensus
Analysts under the Zacks consideration expect Office Depot to post a loss of 2 cents a share for the third-quarter of 2010. The current Zacks Consensus Estimate reflects an improvement over a loss of 8 cents posted in the prior-year quarter. The current Zacks Consensus Estimates for the quarter range from a low of negative 5 cents to a high of positive 5 cents.

Zacks Agreement & Magnitude
The current Zacks Consensus Estimate has remained stagnant over the last 30 days, with none of the 17 analysts covering the stock having revised their estimates. In the last 7 days too, no analysts have revisited their estimates keeping the consensus unchanged.

Mixed Earnings Surprise History
With respect to earnings surprises, Office Depot has met as well as topped the Zacks Consensus Estimate over the last four quarters in the range of 0.0% to 71.4%. The average remained at 45.7%. This suggests that Office Depot has outperformed the Zacks Consensus Estimate by an average of 45.7% in the last four quarters.

Office Depot in Neutral Lane
Office Depot is repositioning itself to keep afloat in a difficult consumer environment. The company is containing costs, closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities 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. Office Depot is reviewing capital-efficient opportunities to expand its reach in Eastern Europe, Asia and South America. The company believes that India and China will provide significant growth opportunities.

The company has been also actively managing its cash flows, and expects to generate free cash flows between $50 million and $70 million in fiscal 2010. In addition, the company’s strong liquidity, driven by solid cash balance, positions it to drive future growth.

However, the company’s decision of not participating in the bid to renew the Los Angeles County office supplies contract, which is set to expire on January 1, 2011, may hamper its financial condition and keep the stock under pressure.

Moreover, we remain cautious about the macroeconomic environment and sluggish job market. The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain watchful about their spending on big-ticket items such as business machines and other durable products. We observe that the demand for office products is closely tied to the health of the economy.

Given the pros and cons, we remain Neutral on Office Depot, the operator of office supply stores under brand names such as Office Depot, Foray, Ativa, Break Escapes and Worklife with a target price of $4.25.

Office Depot, which competes with Staples Inc. (SPLS) and OfficeMax Inc. (OMX), holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ recommendation.