Office Depot's Q3 Profits Down 9%

DELRAY BEACH, FLA. — Office Depot reported "disappointing" sales and earnings for its third fiscal quarter.

Company-wide sales increased 2 percent to $3.9 billion and net earnings fell 9.3 percent to $129 million for the three months, ended Sept. 29, due to weak sales and margin compression amid a "highly promotional" environment, the office supply chain said.

Within the company's North American retail division, which includes 1,111 stores in the United States and Canada, sales were flat at $1.8 billion and comp-store sales fell 5 percent. Division president Chuck Rubin attributed the weak results to lower store traffic due to soft macroeconomic conditions related to the housing market. During an investor conference call, Rubin said that 26 percent of the division's total sales are derived from Florida and California, the two-hardest hit real estate markets, which together accounted for 40 percent of the quarter's comp decline.

Operating profit for the division fell nearly 30 percent to $80 million, reflecting a "very competitive" back-to-school season marked by aggressive promotional activity by Office Depot in response to its office supply, warehouse club, drug store and discount chain competitors.

The company countered by cutting expenses, including lowering performance-based salary incentives, trimming advertising expenditures, and reducing the number of new stores planned for 2008 to 75. Other planned actions include:

• increasing store productivity;
• upgrading stores to its M2 retail format;
• expanding its private label assortment;
• emphasizing its revamped Worklife Rewards loyalty program; and
• continuing to focus on the small business segment.

The quarterly results were delayed by three weeks due to an audit of vendor fund accounting practices following a whistleblower complaint. The funds should have been deferred into later periods and the company has since restated its results from the third quarter of 2006 through the second quarter of 2007.