From the tone of this morning's earnings guidance by Office Depot (NYSE:ODP), you'd think the retailer was feeding its office supplies corn or selling fuel-operated computers.
All we're hearing about these days is how bad the economy is, mainly based on rising fuel and food prices. Of course, this is bound to trickle down to the rest of the economy, with Office Depot citing the "challenging economic environment" as the reason for a 10% drop in same-store sales in the second quarter and a margin drop of more than 400 basis points. This gloomy news has set the stock into a drastic free fall, with a plunge in price of more than 30% this morning and an overall plummet of almost 78% from its 52-week high.
This story isn't anything new for Office Depot. The company has been taking it on the chin for a few quarters now and has consistently claimed that small business declines and a depressing housing market are the company's main problems. Direct competitors OfficeMax (NYSE:OMX) and Staples (NASDAQ:SPLS) haven't had an easy time of things either, and have focused on cost control to keep afloat. Meanwhile, the tough marketplace is actually favorable for more diverse competitors like Wal-Mart (NYSE:WMT), as consumers continue to bargain shop.
Office Depot stated previously that it will cut capital expenditures amid slow same-store sales, which is pretty much a no-brainer, considering the steep declines in revenue that the company is facing. Whether Office Depot is really doing a better job of cost control is questionable, although it couldn't do too much worse than it did in the fourth quarter of last year, when the cost of goods sold of 6% outpaced revenue growth of 3%. In comparison, first-quarter revenues dropped by 3.2%, while cost of goods sold fell just 1.1% and general and administrative expenses actually increased by almost 23%. Sorry, but that doesn't look like effective cost control from here.
It's tough to pinpoint exactly when, if ever, the bricks-and-mortar office supply business will revive itself. For now, the messy economy isn't helping, and Office Depot looks to be trapped in an economic paper jam. To survive, let alone compete, Office Depot is going to have to make a significant effort to cut back its costs, even if that means computers and leather desk chairs must cut back to two meals a day.
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