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Office Depot’s Q1 Sales, Earnings Sink

4/28/2009 10:21:00 AM Eastern

Boca Raton, Fla. — Soft demand by consumers and small businesses, and a $120 million pretax charge for an ongoing company overhaul, sent Office Depot’s sales and earnings sharply lower for the fiscal first quarter, ended March 28.

Net sales fell 19 percent to $3.2 billion, and the office-supply chain recorded a net loss of $55 million, compared with earnings of $69 million for the year-ago period. Excluding the impact of the charges, earnings fell 65 percent to $27 million.

The charges stem from the company’s continuing “strategic business review” and relate primarily to lease accruals, severance expenses and inventory write downs as it closed facilities during the quarter. It said the actions helped lower quarterly operating expenses by $192 million, excluding charges.

The company anticipates taking another $110 million in charges during the balance of the year, but says the restructuring will help boost total 2009 earnings before interest and taxes (EBIT) by about $130 million and cash flow by $85 million.

In addition, a series of initiatives including sale leasebacks of owned properties in the U.S. and Europe, dividends received from a joint venture, tax refunds, and the benefit from reduced capital spending helped the company realize about $160 million in cash during the quarter.

Office Depot also has access to $630 million through its asset-based loan facility, giving it $806 million in total available liquidity, it said.

Within its North American retail division, which operates 1,138 stores in the U.S. and Canada, sales sank 16 percent to $1.4 billion and same-store sales fell 17 percent during the quarter.

The chain attributed most of the decline to “macroeconomic factors as consumers and small business customers reduced their spending, especially on large-ticket items like furniture and computers.” The decision to be less aggressive with advertising promotions in certain categories also contributed to the sales decline, it said. 

Operating profit for the division was essentially flat at $81 million, buoyed by higher product margins, lower charges for shrink and inventory valuation, unprofitable store closures and expense reduction, the company said, although those factors were offset by the flow-through impact from the quarter’s sales volume decline.

Office Depot closed 107 stores during the period and relocated one. Inventory was reduced about 27 percent to approximately $635,000 per store at the end of the quarter, due primarily to improved inventory management and reduced exposure to big-ticket inventory items, the company said.

In a research note, Credit Suisse’s Gary Balter described analyzing Office Depot’s quarterly results as “an experiment in forensic accounting” due to the voluminous charges, but lauded the company’s efforts to stay afloat.

“When one tries to cut through all the noise,” he wrote, “what we see is a retailer struggling to survive, one that has sold off many of the assets that it can monetize, one that continues to lose share in one of the best segments, its North American business solutions, and one that has continued problems internationally.”

Nevertheless, “It is not over by any means for Office Depot,” Balter continued, “and they have a management team that seems to recognize how dire their situation is … Office Depot does deserve credit for fighting for survival, as weaker management teams would have likely rolled over by now. [Chairman/CEO Steve Odland’s] actions to sell off assets, including possibly some core ones, and to push vendors, even if not loved by those vendors, shows a man who will not go down without a fight … If they can hang on to better times, and if better times come around sooner rather than later, there can be life as the No. 2 player.”

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