It looks like it's really happening now: The ripple effects from the troubled housing market are showing significant impact on the larger economy. The repercussions have reached from the safety of home all the way to the office -- well, Office Depot (NYSE:ODP), anyway. The company watched its stock fall slightly more than 6% after its earnings release. In fact, the entire office-supply industry suffered, with Staples (NASDAQ:SPLS) and OfficeMax (NYSE:OMX) watching their stocks drop as well, even though they have yet to announce quarterly results.
The second quarter was the first in two years in which Office Depot failed to report double-digit earnings-per-share growth. Instead, it reported a 2.4% drop, and net profit fell 7.8% to $109.1 million in the second quarter.
The company need look no further than its North American market to find the cause. North American sales edged up 1% in the quarter, but comps dropped 5% lower. With the housing market continuing to plummet, there was no need for homeowners to purchase new office furniture, which negatively affected comps by 160 basis points. International shoppers did their best to counter the dismal North American performance, pushing sales 14% higher.
With the economic slowdown expected to continue (it looks like it's just getting started), Office Depot is cutting back on its aggressive growth plans. For 2007, it now expects to open 125 new stores as opposed to the 150 it had originally planned. As proof that management expects the economy to remain soft, it has also lowered its growth projections for 2008, reducing from 200 to 150 the number of new locations it anticipates opening.
Office Depot will continue to expand its international operations, which offer the most potential for growth. This will increase sales, but the costs associated with that expansion will also limit profitability in the near term. Over time, however, it should see significant gains as a result of its efforts.
While I still like the office supply business and think Office Depot has potential to grow substantially, I'm not sure yesterday's sell-off creates a buying opportunity -- at least, not yet. I expect investors interested in Office Depot will have plenty of time to perform their own research and pick their spots as they wait for the overall economy to recover.
To read about happier times at the office, check out:
- Staples Secures Shares
- OfficeMax Shreds the Quarter: Fool by Numbers
- Office Depot Stocks Up: Fool by Numbers
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Fool contributor Mike Cianciolo welcomes feedback and doesn't own any of the companies in this article.
