Office Depot's Q2 Sales, Profits Sink
By Alan Wolf -- TWICE, 7/28/2009
Boca Raton, Fla. - Office Depot reported an $82 million loss and a 22 percent decline in sales to $2.8 billion for its second quarter, ended June 27.
The loss included about $35 million in pretax charges related to lease accruals, severance expenses and asset impairments. The charges, taken as part of a "strategic business review," are expected to help cash flow and earnings before interest and taxes (EBIT) for the full year, the office-supply chain said.
Sales at the company's U.S. and Canadian stores fell 21 percent to $1.1 billion during the quarter, and same-store sales dropped 18 percent. The chain attributed the declines to the soft economy, which has caused consumers and small businesses to reign in spending on big-ticket items like office furniture and computers.
Revenue was also impacted by a reduction of 114 stores year over year, and a pullback in promotions for certain low-margin categories, the company said.
Inventory per store was approximately $714,000 at the end of the period, down about 21 percent from the prior year, due to improved inventory management and fewer big-ticket inventory items.
The North American retail division had an operating loss of $13 million, compared with a year-ago operating loss of $4 million, as the sales declines outpaced the benefits accrued from reduced operating expenses, lower charges for shrink and inventory valuation, the comparative benefit from closing the underperforming stores, and improved product margins.
During the quarter the company closed five stores, opened three and relocated one, bringing the total store count for North America to 1,158 as of June 27.
In a statement, chief financial officer Mike Newman said, "Second-quarter business results met our expectations given the challenging economic conditions and the period's normal seasonality. However, the successful execution of our liquidity initiatives generated positive cash flow before financing activities in the second quarter, significantly exceeding our expectations."
But Credit Suisse retail analyst Gary Balter found the statement troubling. "We're somewhat concerned that the company felt it was necessary to say that they were in-line with the results for the quarter and that they were pleased with that as each division showed weakness relative to [the first quarter]," he said in a research note. "We recognize that the calendar shift hurt the quarter slightly, but even combining the first two quarters, results were quite weak."
According to Balter, the results occurred in a "somewhat stable pricing environment," and were likely buoyed by additional vendor support. "Without these two factors," he observed, "one wonders just how weak results would have been."
During the quarter private equity firm BC Partners purchased about $350 million in Office Depot shares. The chain said it will use the proceeds of the stock sale for "general corporate purposes."
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