Office Depot Earnings Preview

| About: Office Depot (ODP)

Office Depot Inc. (NYSE:ODP), the supplier of office products, is scheduled to report its first-quarter 2011 financial results on April 26. The current Zacks Consensus Estimate for the quarter is 3 cents a share. For the quarter under review, revenue is $2,982 million, according to the Zacks Consensus Estimate.

Fourth-Quarter 2010: A Synopsis

Office Depot posted better-than-expected fourth-quarter 2010 results. The quarterly earnings of 9 cents per share portrayed a substantial improvement from a loss of 6 cents in the prior-year quarter, outpacing the Zacks Consensus Estimate of a loss of 3 cents.

On a reported basis, including one-time items, Office Depot delivered a loss of 21 cents per share, as against a loss of 28 cents posted in the year-ago quarter.

Despite a low-single digit decline in the top line, the office supplies retailer was able to earn a profit on the heels of cost containment. Cost of goods sold and occupancy fell 4.2%, store and warehouse operating and selling expenses tumbled 5.5%, whereas general and administrative expenses slipped 9% during the quarter.

Office Depot’s total revenue of $2,961.9 million fell short of the Zacks Consensus Estimate of $2,975 million, and also dropped 3.4% from the prior-year quarter due to soft demand for office supplies in a sluggish economy. The improvement in the bottom line overshadowed the fall in the top line.

First-Quarter 2011 Zacks Consensus

Analysts considered by Zacks expect Office Depot to post first-quarter 2011 earnings of 3 cents a share. The current Zacks Consensus Estimate is 57.1% below the prior-year quarter earnings.

Zacks Agreement & Magnitude

Of the 15 analysts following the stock, seven analysts revised the estimate downwards in the last 30 days, which led to a decrease in the Zacks Consensus Estimate in the first quarter of 2011. The Estimate moved down to 3 cents from 6 cents in the last 30 days. In the last seven days, none of the analysts have revised their estimates keeping the Zacks Consensus Estimate 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 400.0%. The average remained at 400%. Given the past performance, we expect the company to meet or outperform the Zacks Consensus Estimate.

Office Depot in Neutral Lane

Office Depot is repositioning itself in this difficult consumer environment by 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.

Furthermore, the company in order to enhance its global footprint has made strategic acquisitions over the past few years, and is still looking for accretive opportunities. 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.

We also appreciate Office Depot’s rational approach to slow the pace of stores openings in North America, given the weak consumer environment. The company opened 6 stores in fiscal year 2009, significantly down from 59 stores opened in 2008 and 71 stores opened in 2007. However, with signs of recovery in the economy, the company opened 17 stores in fiscal 2010.

However, 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 for big-ticket items such as business machines and other durables. We observe that the demand for office products is closely tied to the health of the economy.

Given the pros and cons, we prefer to have a long-term ‘Neutral’ rating on the stock. Office Depot, which competes with Staples Inc. (NASDAQ:SPLS) and OfficeMax Inc. (NYSE:OMX) holds a Zacks #3 Rank that translates into a short-term Hold recommendation and correlates with our long-term view.