It has been a difficult period for Office Depot
Earnings came in at the upper end of recently reduced guidance, but net income fell 2% on disappointing revenues that inched up only 3% to $3.33 billion. Management cited several factors for the lackluster results, including weak European sales, slow back-to-school shopping, and the adverse impact of hurricanes.
Despite the name, Office Depot is fortunately not entirely reliant on mundane products such as staplers, envelopes, and file folders. Most of the company's 1% improvement in North American same-store sales can be credited to technology (which scored a double-digit gain), particularly notebook computers. Notebooks have been in demand elsewhere and were listed among the most popular items at both Best Buy
North American retail revenues grew 3% to $1.5 billion, which along with a 30 basis-point improvement in store and warehouse expenses helped drive operating profits 7% higher to $107.9 million. The Business Services segment turned in a mixed performance, with strength in the namesake catalog offsetting weakness in the Viking Catalog. Domestic e-commerce sales jumped 12%, securing Office Depot's status as one of the nation's largest online retailers. Last year, the company logged $2.6 billion in online sales.
International revenues were also soft and would have actually been negative without the benefit of currency translation. Though segment operating profits are 29% higher year-to-date in constant dollars, they tumbled 10% in the latest quarter. The Guilbert business, acquired last June to supply small-business customers, continues to weigh heavily on results and sank comparable contract sales by double digits.
Office Depot seems to have little momentum in any of its sales channels, except for e-commerce. The Viking and Guilbert acquisitions haven't proven to be much of a catalyst, and domestic retail operations aren't making much headway against stiff competition from industry leader Staples
There is a light at the end of the tunnel, however. After adding only a handful of stores over the past few years, a more ambitious remodeling and expansion plan (50 new units this year) is under way, particularly in the Northeast, where Office Depot is preparing to battle toe-to-toe with Staples. Furthermore, early October indications look promising, as comps are tracking as high as the mid-single digits, the highest point in the past four years.
With signs of growth on the horizon, and new indications of a firm commitment to cut costs, Office Depot may be undervalued at only 14 times trailing earnings. With a $500 million share repurchase plan recently authorized, apparently management has come to the same conclusion.
Fool contributor Nathan Slaughter has seen the movie Office Space about 16 times, but he owns none of the companies mentioned.