Amid a sluggish economic environment, Office Depot
Inc. ( ODP
) posted breakeven earnings for the fourth quarter of 2012 that
fell short of both the Zacks Consensus Estimate as well as the
prior-year quarter earnings by 3 cents. Soft top-line performance
muted the company's cost containment efforts.
Including one-time items, Office Depot slumped to a loss of 6
cents a share compared with earnings of 4 cents registered in the
Office Depot's total revenue of $2,622.8 million decreased 11.7%
from the prior-year quarter and also came below the Zacks Consensus
Estimate of $2,767 million. In constant currency, revenue slipped
Despite an 11.2% decline in cost of goods and occupancy costs
during the quarter, adjusted gross profit dropped 12.9% to $783.8
million. Gross margin contracted 40 basis points to 29.9% in the
Office Depot reported adjusted operating income of $26 million
down from $35.8 million in the year-ago quarter, whereas operating
margin shriveled 20 basis points to 1%.
Concurrent with the earnings release, this Zacks Rank #5 (Sell)
stock announced a merger deal with OfficeMax
Incorporated ( OMX ), which has long
been speculated. OfficeMax also came out with its fourth quarter
results, delivering adjusted earnings of 16 cents a share that came
a penny ahead of the Zacks Consensus Estimate but fell 5.9% year
over year. Total sales tumbled 7.4% to $1,700.5 million.
During the quarter, North American Retail
division revenue decreased 13% to $1,070.7 million, whereas
comparable-store sales dropped 6%.
Office Depot witnessed sales decline across notebook computers
and software but registered sales increase across tablets,
e-readers and desktop computers. Sales of Copy and Print, and
cleaning and breakroom supplies rose but fell for office furniture
and supplies. Management stated that customer transaction counts
dropped 5%, while the average order value remained even.
The division reported an operating income of $10.6 million,
substantially down from an operating income of $32.4 million in the
Total store count at the North America Retail division stood at
1,112 at the end of the quarter. During the quarter, the company
opened 2, closed 4 and relocated 15 stores.
Revenue for North American Business Solutions
decreased 8% to $763.4 million. Both direct and contract channels
sales declined during the quarter. However, online sales increased
on the back of higher traffic and increase in average order value
but the direct channel witnessed fall in purchases from consumers
who use catalogs while shopping and give orders via call
The division posted operating income of $55.2 million up from
$44.7 million in the year-ago quarter.
The International division's revenue dipped 13%
to $788.7 million, whereas it fell 11% in constant currency. The
overall sales in European contract channel dropped in the
mid-single digits as the growth witnessed in Germany and even sales
in the UK were mitigated by soft sales in other parts of Europe.
Asia contract channel sales remained flat compared with the
prior-year quarter. European direct channel experienced a sales
decline but the rate of fall decelerated sequentially. The retail
channel sales slipped in Europe due to softness witnessed across
Sweden and Hungary, partly offset by marginal sales increment in
France, whereas in Asia, South Korean retail witnessed a marginal
increase in sales.
The division posted an operating income of $23.4 million, down
from $33 million in the year-ago quarter. At the end of the
quarter, total store count at the International division stood at
123. During the quarter, the company closed 11 stores.
Other Financial Details
Office Depot generated cash flow of $95.2 million from operating
activities and incurred capital expenditures of $31.5 million,
resulting in free cash flow of $63.7 million.
The company ended the quarter with cash and cash equivalents of
$670.8 million, long-term debt of $485.3 million and shareholders'
equity of $661.4 million, excluding non-controlling interest of
About the Merger
Though the future remains unpredictable, efforts to combat the
tough economy are obvious. Business budget remains tight, consumers
are cautious than ever before and companies are trying hard to
navigate through the challenging environment. Amid such a scenario,
Office Depot and OfficeMax decided to unite to better compete with
the industry bellwether, Staples Inc . ( SPLS ) and online
rivals such as Amazon.com Inc. ( AMZN ).
The all-stock merger agreement, which involves 2.69 Office Depot
shares for each share of OfficeMax, would result in cost synergies
of $400 to $600 million yearly by the third year from the time of
closing of the transaction. The transaction is expected to be
concluded by the end of 2013. Management of both the companies are
yet to decide on the name of newly formed company, the location of
corporate headquarters and the CEO.
The consolidation augurs well for both the companies, who have
been grappling with soft sales. The combined sales for the recently
concluded year ended on Dec 29, 2012 stood at approximately $18
billion, whereas cash and cash equivalents together comes at $1.2
billion.AMAZON.COM INC (AMZN): Free Stock Analysis
ReportOFFICE DEPOT (ODP): Free Stock Analysis ReportOFFICEMAX INC (OMX): Free Stock Analysis ReportSTAPLES INC (SPLS): Free Stock Analysis ReportTo read this article on Zacks.com click here.