February 26, 2008 / 1:16 PM / 10 years ago

UPDATE 4-Office Depot profit falls sharply, shares tumble

By Justin Grant

NEW YORK, Feb 26 (Reuters) - Office Depot Inc ODP.N posted a bigger-than-expected drop in quarterly profit on Tuesday, hurt by higher expenses and lower sales in North America, and its shares tumbled more than 8 percent.

The No. 2 U.S. office supplies retailer also said Chief Financial Officer Patricia McKay will leave the company March 1. Charles Brown, president of its international segment, will become acting CFO.

Office Depot said fourth-quarter profit fell to $18.8 million, or 7 cents a share, from $126.6 million, or 45 cents a share, a year ago. Sales edged up 1 percent to $3.9 billion.

Excluding special items, the company earned 10 cents a share. On that basis, analysts’ average forecast was 17 cents a share on sales of $3.8 billion, according to Reuters Estimates.

“A big miss here, no matter how you cut it, that looks even worse after (OfficeMax’s) admirable results last week,” Bear Stearns analyst Christopher Horvers wrote in a research note.

Chief Executive Steve Odland said on a conference call that it will be difficult for Office Deport to rejuvenate growth unless market conditions improve.

“Best estimates by economists as well as our customers suggest that these conditions may continue until at least the second half of 2008,” Odland said.

Last week Office Depot rival OfficeMax Inc OMX.N reported a 2.6 percent decline in fourth-quarter sales.

Sales at office supply chains have weakened in recent quarters as slowing job growth, the distressed U.S. housing sector and credit market jitters have led small businesses to cut spending.

Office Depot said the housing crisis continues to hamper its results, as weakness in key areas like Florida and California spreads into other markets.

“This appears to be a company in free fall and we are unclear if there is a safety net in terms of an acquirer,” Credit Suisse analyst Gary Balter wrote in a research note.

“We see the stock as stuck in the mud until there are signs of business stabilization,” wrote Balter, who has a “neutral” rating on Office Depot’s shares.

Odland said earnings during the first half of 2008 will be down compared to last year, and the company will look to curb spending and shore up margins.

Office Depot said it expects 2008 capital expenditures of $375 million, down from $461 million in 2007. It also expects low-single-digit sales growth for the year.

Fourth-quarter sales for Office Depot’s North American business fell 3 percent to $1.7 billion. Sales at North American stores open at least a year — or same-store sales, a measure of retail strength — fell 7 percent.

Operating profit in its North American retail segment fell to $23 million from $109 million a year earlier.

McKay’s resignation as CFO, meanwhile, points to added disruptions in the business and will likely increase the potential for shareholder activism, Sanford Bernstein analyst Colin McGranahan wrote in a research note.

“The weakness across segments points to little traction as yet in ODP’s in-process plans to turn trends, wrote McGranahan, who has an “outperform” rating on the stock.

Shares of Office Depot were trading Tuesday morning at 9.5 times 2008 earnings, a discount to rivals Staples Inc SPLS.O and OfficeMax, which were trading at respective multiples of 16.2 times and 10.1 times earnings.

The shares were down $1.15 to $13.12 in morning trading on the New York Stock Exchange. (Reporting by Justin Grant, editing by Dave Zimmerman and John Wallace)

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