Following a dismal first-quarter 2012 top-line performance, we
recently downgraded our long-term recommendation on
Office Depot Inc.
) to Underperform with a price target of $2.00. Earlier, Office
Depot had been enjoying a Neutral rating.
Office Depot's total revenue of $2,872.8 million fell short of
the Zacks Consensus Estimate of $2,884 million, and decreased
approximately 3% on a year-over-year basis. Management had earlier
predicted sales to decline between 3% and 4%. However, the
quarterly earnings came in at 5 cents a share, in line with the
Zacks Consensus Estimate, and marked a sharp increase from a break
even in the year-ago quarter.
We believe that the change in the demand for office supplies
products and services remains one of the indicators that describe
the health of the economy. The economy is still not out of the
woods, and amidst such a scenario Office Depot has to walk the
tight rope to juggle with unprecedented situation that may hurt its
The underperformance can be traced back to North American Retail
and International divisions, where sales were down 8% and 2%,
respectively. However, North American Business Solutions division
acted as a savior to some extent, with sales rising 3%.
We remain cautious about the macroeconomic environment and
sluggish job market. The recovery in the economy is murky. As a
result, consumers and small businesses still remain watchful about
their spending for big-ticket items such as business machines and
other durable products. We observe that the demand for office
products is closely tied to the health of the economy.
Management now expects total sales for the second quarter of
2012 to decline 3% from the year-ago quarter, and further hinted
that adjusted operating income is expected to decline $20 million
to $30 million. Further, Office Depot forecasted that North
American Retail division's comparable-store sales would decline in
the second quarter, and hinted that International division's sales
would fall 4% to 5% in constant currency.
Moreover, due to high exposure to international markets, Office
Depot remains prone to currency fluctuations. The weakening of
foreign currencies against the U.S. dollar may require the company
to either raise prices or contract profit margins in locations
outside the U.S. An increase in price may have an adverse impact on
the demand for the products.
No one can predict the future but genuine efforts are
implemented to combat the tough economy. Business budget remains
tight, consumers remain cautious than ever before and companies are
trying hard to navigate through the challenging maze. Office Depot,
which competes with
), holds a Zacks #3 Rank that translates into a short-term "Hold"
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