Office Depot and OfficeMax merger can’t happen soon enough

Weak second-quarter financial results from Office Depot offered the latest evidence of the strategic rationale underpinning the company’s pending merger with longtime rival OfficeMax.

Office Depot said sales in the second quarter ended June 29 declined 4% to roughly $2.4 billion and it posted a net loss of $64 million, or 23 cents a share, equal to a loss reported in the second quarter the prior year.

"Our second quarter results came in largely as expected, as we remain focused on executing against our multi-year strategic plan," said Neil Austrian, Office Depot’s chairman and CEO. “Sales continue to be impacted by a sluggish technology category, particularly laptops, as well as ongoing budgetary pressure on our federal accounts. Despite these headwinds, however, we were pleased with our cost reduction actions and progress on our key initiatives.”

The quarterly results are largely irrelevant as Office Depot and OfficeMax move forward with a merger announced in February. The all-stock deal is designed to bolster the combined company’s prospects relative to Staples and other office products and business services providers.

According to Austrian, “we remain actively engaged in integration planning related to the proposed merger with OfficeMax, which we continue to expect to close by the end of the year. Shareholders of both companies overwhelmingly supported the merger at concurrent special meetings that were held in early July, and we look forward to closing the transaction and creating an even stronger office solutions provider in an increasingly competitive environment."

A stronger company may well result from the merger, but the new company still needs to see improvement in underlying demand if it is to prosper. That demand was not evident in the second quarter, especially in the North American Retail division where sales declined 5% to $939 million and same store sales declined 4%. The division recorded an operating loss of $28 million, compared to $50 the prior year.

The sales decline was largely driven by decreased sales of technology and peripherals, particularly mid-priced laptops, which have historically been a large part of the division's laptop assortment. Sales in the Copy and Print Depot and break room supplies category increased, while supplies and furniture sales were down year-over-year. Average order value was down approximately 3% in the second quarter, and customer transaction counts declined about 1% compared to the same period last year. 

Faring somewhat better was Office Depot’s North American Business Solutions division which reported a sales decline of 2% to $781 million and operating profits of $31 million, compared to a profit of $20 million the prior year.

The company’s international division saw sales decline 3% to $698 million and an operating loss of $11 million.