Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=163739
Story Retrieval Date: 5/18/2013 1:14:40 PM CST
The office supply retailer, based in Boca Raton, earned $29.5 million, or 7 cents per diluted share, in the first quarter ended March 27, up from a loss of $54.7 million, or a loss of 20 cents per diluted share, in the year-earlier period.
Total sales were $3.07 billion, down 5 percent from $3.23 billion a year ago. Sales in the U.S. amounted to $1.35 billion, a decrease of 6 percent from $1.44 billion. Sales in the 1,133 U.S. and Canadian stores that have been open for more than a year decreased 1 percent.
“Consumers continue to keep a tight rein on discretionary spending for office supplies,” said Steven Schmidt, president of the North American business solutions division for Office Depot, in a conference call Tuesday.
Schmidt attributed Office Depot’s financial struggles to a continuing slump in average order size and customer transaction counts. The California market, which has been negatively affected by high unemployment and government-mandated furloughs for state employees, remains a “major concern” with sales declines in the double-digits, Schmidt said.
International sales were a bit more upbeat, up 2 percent to $893.8 million from $874.4 million. The global market turned in a “stronger than anticipated performance for the second consecutive quarter,” according to a statement by Mike Newman, chief financial officer. The better performance was driven largely by better price management and reduced distribution, he said.
The company, which has 10 locations in the Chicago area, closed 120 stores in 2009 as part of restructuring,, Office Depot closed seven stores and opened four in the first quarter 2010, bringing the total North American store count to 1,149 at quarter end.
Morningstar analyst R.J. Hottovy said he doesn’t think expansion is a good idea for Office Depot right now. “It’s a questionable strategy . . . the office supply superstore market in the U.S. is oversaturated,” Hottovy said.
To offset decreasing sales, Office Depot has implemented plans to reduce spending and also has passed along price increases to customers, which may not be sustainable, some analysts warn.
“Office supplies are a commodity business, so generally the low-cost provider is going to win market share,” Hottovy said.
Major office supply competitor Staples, which has more than eight times the market cap of Office Depot, has been able to keep its prices low, something that Office Depot has struggled with.
“The proof is that they’re lagging [behind] Staples in terms of comparable-store sales, and that just shows that consumers prefer Staples as their office supply provider,” according to Hottovy.
Although Hottovy said he thinks Office Depot has done enough cost cutting to turn a profit for the next few quarters, the company’s failure to meet expectations for the first quarter shows that it is a secondary player in the office supply market. Though it’s seen some improvement in numbers, he anticipates Office Depot will face an “uphill battle” to get back to peak operating margin.
The stock closed at $7.06 Tuesday, down $1.89.