What Office Depot’s Q1 results say about the economy

BOCA RATON, Fla. — Sales continued to decline at two of Office Depot’s three divisions during the first quarter with weakness most pronounced in the retail business.

Total company sales declined 3% to $2.9 billion and were negatively affected by the ongoing struggles of the 1,123 unit North American retail division. Profits increased to $41 million or 14 cents a share compared with a prior year loss of $15 million or five cents a share.

“Our first quarter 2012 results showed continued year-over-year earnings improvement despite lower sales,” said Neil Austrian, Office Depot chairman and CEO. “The North American business solutions division delivered a strong performance again this quarter.”

In fact, the business solutions group was the bright spot among the company’s three divisions as retail operations continue to reflect weakness in the overall business spending climate. Sales declined 8% to $1.2 billion and same-store sales declined 6%. Operating profits that declined to $44 million from $58 million was driven largely by an $18 million asset impairment charge caused by a greater than expected decline at some lower performing stores partially offset by 140 basis points of gross margin improvement as the company reduced payroll and advertising costs.

As for the comps decline, the company highlighted that comps would have been flat if not for the negative effect of computers and related products. The company said sales of tablets and e-readers increased during the quarter and customers who switched from laptop computers to tablets contributed to lower sales but improved product margins. Furniture sales were lower in 2012 compared with the first quarter of 2011 reflecting promotional activity last year that was not repeated. Sales in the Copy and Print Depot increased while paper, ink and toner sales decreased versus prior year. Average order value was slightly negative and customer transaction counts declined approximately 5% compared to the same period last year.

Weakness at retail was somewhat offset by a stronger performance of the company’s North American business solutions division where sales increased 3% to $828 million and operating income increased to $43 million from $16 million. The company said sales to both large and global accounts increased, however, sales to public sector customers declined, reflecting their continued budgetary pressures. Sales to small and medium contract customers were flat versus prior year while sales of supplies, including paper and ink and toner, were lower, partially offset by sales increases in Copy and Print, printers, seating and the cleaning and break room categories.

Office Depot’s international division saw sales increase 1% on a constant currency basis to $825 million while operating profits declined to $15 million from $27 million due to $18 million in charges related to the closure of facilities and severance costs related to European restructuring activities.
Office Depot ended the quarter with $489 million in cash and cash equivalents and $704 million available under its credit agreement for a total of $1.2 billion in available liquidity.