Office Depot Inc. (NASDAQ:ODP), the supplier of a range of office products and services across the globe, is scheduled to report its third-quarter 2011 financial results on Tuesday, October 25, 2011. The current Zacks Consensus Estimate for the quarter is 2 cents a share. The Zacks Consensus estimates revenue at $2,896 million for the quarter under discussion.
Second-Quarter 2011, a Synopsis
On July 26, 2011, Office Depot delivered better-than-expected second-quarter 2011 results. The quarterly loss of 6 cents a share not only improved from the prior-year quarter’s loss of 9 cents but was also lower than the Zacks Consensus Estimate of a loss of 12 cents.
Office Depot’s total revenue of $2710.1 million fell short of the Zacks Consensus Estimate of $2,728.0 million, but increased marginally from the prior-year quarter’s revenue of $2699.5 million.
The operator of office supply stores under brand names such as Office Depot, Foray, Ativa, Break Escapes, Worklife and Christopher Lowell, generated negative free cash flows of $85.2 million during the quarter compared with a negative free cash flow of $59.8 million in the prior-year period.
Third-Quarter 2011 Consensus
The analysts surveyed by Zacks, expect Office Depot to post third-quarter 2011 earnings of 2 cents a share. The current Zacks Consensus Estimate compares with 3 cents a share earned in the year-ago quarter. The estimates in the current Zacks Consensus for the quarter range from a loss of 3 cents to a profit of 5 cents a share.
Zacks Agreement & Magnitude
Of the 13 analysts following the stock, none of the analysts revised their estimates either upward or downward in the last 30 or 7 days, thus Zacks Consensus Estimate remains constant at 2 cents.
Mixed Earnings Surprise History
With respect to earnings surprises, Office Depot has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 100% to positive 400%. The average remained at positive 187.5%. This suggests that Office Depot has beaten the Zacks Consensus Estimate by an average of 187.5% in the trailing four quarters.
Since its last earnings release on July 26, 2011, Office Depot’s market price has plunged 44.7% to $2.15 on October 20, 2011. During trading hours on October 20, the stock price reached the day low of $2.04 and the day high of $2.15. The stock price is within the range of the 52-week low-high range of $1.75 attained on October 4, 2011 and $6.25 achieved on January 5, 2011. Over the period from July 26, 2011 to October 20, 2011, the stock dropped to a low of $1.75 on October 4, 2011 and rose to a high of $4.10 on August 1, 2011.
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 improvements.
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.
Office Depot, in order to drive sales, has undertaken initiatives, which includes, improvement in customer in-store shopping experience, investment in Copy & Print Depot and Tech Depot services, remodeling and introduction of smaller format stores, and margin improvements through rationalization of stock keeping units and product pricing. Management anticipates that these initiatives could result in $75 million to $100 million by way of annual benefits by the end of 2013 at North American Retail division.
However, we remain cautious about the current economic unrest as the economy continues to be sluggish, and consumers and small businesses remain frugal about big-ticket spending on items such as business machines and other durable products. We believe that the demand for office products is closely tied to the health of the economy.
Moreover, due to high exposure to international markets, Office Depot remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or trim profit margins in locations outside the U.S. An increase in price may have an adverse impact on the demand for its products.
Given the pros and cons, we prefer to maintain our long-tem Neutral rating at this juncture. However, Office Depot, which competes with Staples Inc. (NASDAQ:SPLS) and OfficeMax Inc. (NYSE:OMX), holds a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.