July 27, 2010 / 11:59 AM / 7 years ago

UPDATE 4-Office Depot sees flat profit in back-to-school qtr

* Sees a promotional, competitive back-to-school season

* Expects Q3 oper profit to be flat versus last year

* Q2 loss/shr 7 cents vs. Street’s loss estimate 17 cents

* Sales fall 4.3 pct to $2.7 billion; misses Street

* Shares down more than 5 pct after rising 8 pct (Rewrites, adds analyst reaction, comments from conference call)

By Dhanya Skariachan

NEW YORK, July 27 (Reuters) - Office Depot Inc’s ODP.N sales missed investor expectations due to weak U.S. and international markets and the company said operating profit for the current quarter would be flat as it spends more to win back-to-school shoppers.

Shares of the No. 2 U.S. office supplies retailer, which competes with Staples Inc SPLS.O and smaller rival OfficeMax OMX.N, fell more than 5 percent.

The company blamed budget cuts and austerity actions by governments across Europe for the disappointing international results. On the domestic front, Boca Raton, Florida-based Office Depot pointed to continuing weakness in larger markets like California.

Office Depot’s loss narrowed to $18.7 million, or 7 cents a share in its second quarter, from $82.6 million, or 31 cents a share, a year earlier.

Analysts on average were expecting a loss of 17 cents a share, according to Thomson Reuters I/B/E/S.

Office Depot curtailed operating expenses by about 8 percent in the the quarter, but sales fell 4.3 percent to about $2.70 billion, missing analyst expectations of $2.74 billion.

In April, it had warned that the budget deficit and government-mandated three-day-per-month furloughs for state employees would further weigh on its business in California.

Earlier this month, it also walked away from bidding for a key Los Angeles County office supplies contract, citing “onerous” terms that would cause it to lose money on the deal.

“Although the bottom-line results were better than anticipated ... we remain concerned that infrastructure investment needs coupled with unfavorable geographic exposure and ongoing contract disputes may hinder top-line turnaround efforts,” said Hudson Square Research’s Scott Tilghman.

He maintained his “hold” rating on the stock.

PROMOTIONAL BACK-TO-SCHOOL SEASON

Office supply sellers are viewed as one gauge of economic health since demand for their products is closely tied to white-collar employment rates. The sector has grappled with lackluster sales to consumers and small businesses in the U.S. economic downturn.

Office Depot said sales at U.S. and Canadian stores open at least a year fell 1 percent in the latest quarter. It expects the upcoming back-to-school season to be highly promotional due to fiercer competition among retailers.

Sales in the international division fell 6 percent to $778 million.

Office Depot plans to increase its marketing, including a return to broadcast advertising, to take on retail players from discount chains to drugstores fighting for a share of back-to-school sales.

Office Depot pointed to a fall in customer transaction counts from the year-ago period at its North American retail division, while the average order value increased. Sales at its domestic division that caters to business customers also fell.

Office Depot shares fell more than 5 percent to $4.49 after trading as high as $5.01 earlier in the session. (Reporting by Dhanya Skariachan; Editing by Michele Gershberg, Maureen Bavdek, Dave Zimmerman)

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