Who's Minding the Store at Office Depot?

By Colleen Paulson | More Articles
July 30, 2008 | Comments (1)

Office Depot's (NYSE: ODP ) lackluster second-quarter results weren't a huge surprise, considering the earnings guidance the company had provided. Revenue for the quarter was down by less than 1%, and an overall cost increase of 3.6% drove a loss of $0.01 per share for the quarter versus last year's profit of $0.38 per share.

Office Depot shared plans to cut capital spending and new store openings several months ago and disclosed today that it plans to decrease its workforce, too. This is pretty much a no-brainer: Although sales declines certainly have hurt the company's long-term growth prospects, the lack of cost controls is a huge part of the losses.

Cost of goods sold increased by 3.4% for the quarter, which isn't ridiculous considering the drastic inflation that is affecting everyone. Yes, when fuel prices get to $4.00 per gallon, it's going to be more expensive to run your business. But what doesn't make a lot of sense is Office Depot's 17% increase in general and administrative expenses when its revenue isn't increasing.

Granted, the office supply industry isn't a rapid growth sector at this point, so Office Depot isn't alone in its misery. OfficeMax (NYSE: OMX ) also reported second-quarter losses today on one-time charges. Staples (Nasdaq: SPLS ) has fared OK, differentiating itself by, among other things, positioning itself as a leading sustainable business. Wal-Mart (NYSE: WMT ) might align itself with Dell (Nasdaq: DELL ) for computer services in Wal-Mart stores. It's obvious that companies must offer something special to drive revenue growth in this competitive marketplace.

Office Depot wasn't in a great position to begin with, what with a net profit margin of 2.9% for last year's second quarter. Office Depot has been talking about change for several months now, but results have been slow to come for the company whose slogan is "Taking Care of Business." It's time for Office Depot to cut costs to stay competitive and take care of its own business.

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Staples is a Motley Fool Stock Advisor selection, and Wal-Mart and Dell are Inside Value picks. Looking for more advice in a topsy-turvy market? Give the Fool's newsletters a try via a 30-day free trial.

Fool contributor Colleen Paulson does not own any of the stocks mentioned in this article and is a stickler for watching costs. The Fool's disclosure policy always takes care of the Fools.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On July 31, 2008, at 12:08 PM, jermi wrote:

How are their expenses rising? I'll relate a short story from a friend of mine who has worked for OD for 10+ years. A couple weeks ago a VP walks into the store, is quite happy with what he sees, then proceeds to blow his top to discover that they had several "white" bins on the floor about the store. The VP demanded that the manager remove them from the floor and replace them with "red" bins, same type, at a cost of $350 each.

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