What recovery? Sales decline and loss expands at ODP

If the economy is improving someone forgot to tell Office Depot’s customers. The company reported a third quarter loss of $70 million loss on sales that declined 5% to $2.7 billion.

The company was quick to qualify the loss figure by noting that third quarter results include approximately $8 million of charges primarily related to restructuring activities and actions to improve future operating performance and approximately $88 million
related to non-cash asset impairment charges, $73 million of which was recognized in the North American Retail Division and $15 million recognized in the International Division.

The company said its third quarter profits would have been $18 million, or 6 cents a share, if the charges were excluded.

Getting a clear picture of Office Depot’s performance tends to be complicated by frequent charges related to the implementation of a seemingly never ending turnaround strategy, resulting in frequent charges and one time events that impact accounting. That was the case again in the third quarter as results were compared to a prior year period that included approximately $6 million of charges the company said were primarily related to restructuring activities and other costs intended to improve efficiency and benefit operations in future periods, as well as a benefit from the reversal of approximately $99 million of combined tax and interest accruals for uncertain tax positions. Excluding these charges and the benefit from the reversal of accruals, the company would have had a net loss, after preferred stock dividends, of about $700,000 or zero cents per
share in the third quarter of 2011.

Despite the topline weakness evident across Office Depot’s three divisions – retail, contract and international – company chairman and CEO Neil Austrian expressed optimism.

"We are pleased that these results reflect successful execution against our strategic plan, even in this challenging economic environment," Austrian said. "We have a great team that is committed to improving the performance of Office Depot now and into the future."

On a positive note, the company said its gross margin rate increased 90 basis points and free cash flow totaled $190 million compared to $139 million the prior year. And, if those pesky charges aren’t included, Office Depot said its earnings, before interest and taxes would have been $54 million in the third quarter compared to $30 million in the prior year period. The company also noted it ended the third quarter with $620 million in
cash and cash equivalents on hand and availability under an amended and restated credit agreement of $700 million, for a total of $1.3 billion in available liquidity.

However, opportunities for improvement are broad-based. The North American retail division saw sales decline 5% to $1.2 billion and same store sales declined 4% as customer traffic and average transaction sizes declined. The roughly 1,100 store division reported an operating loss of $21 million compared to a prior year operating profit of $42 million. Included in the third quarter 2012 operating loss are approximately $74 million of charges, primarily related to a store asset impairment charge.

North American Business Solutions division saw sales increase 1% to $827 million, but operating profits advanced to $55 million from $39 million. Internationally, Office Depots sales on a constant currency basis declined 4% to $692 million and operating profit fell to $1 million compared to $19 million. Again, the profitably picture is muddied by the inclusion of approximately $19 million of charges related to asset impairments and restructuring actions in 2012, and $4 million of restructuring charges in the same period in 2011.