From: Reuters
Published April 29, 2008 10:55 AM

Office Depot profit down but beats Street view

By Justin Grant

NEW YORK (Reuters) - Office Depot Inc <ODP.N> posted a sharply lower quarterly profit on Tuesday as sales to small business owners fell but the results beat Wall Street's expectations and its shares rose as much as 13 percent.

The nation's No. 2 office supplies retailer has been hit hard by the weakening U.S. economy, as small businesses -- its core customers -- have cut back on spending due to declining home values and the credit crunch.

The company said first-quarter profit fell to $69 million, or 25 cents a share, from $154 million, or 55 cents, a year earlier. Quarterly sales fell 3 percent to $4 billion, meeting the average forecast, according to Reuters Estimates.

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Excluding certain one-time items, Office Depot said it earned 29 cents a share. On that basis, analysts' average forecast was 23 cents a share, according to Reuters Estimates.

At its North American Business Solutions division, sales to small to medium-sized customers fell 12 percent in the first quarter. Overall, the segment's sales dropped 5 percent to $1.1 billion.

Sales at its North American division fell 7 percent to $1.7 billion while international sales rose 6 percent.

The company said the weak housing market was responsible for steep sales declines in Florida and California, which weighed heavily on its results.

Sanford Bernstein analyst Colin McGranahan wrote in a research note that the company's results should be challenged through the rest of the year but that its stock has been resilient at the current level.

"We continue to believe that Office Depot has a favorable risk/reward profile with significant upside potential and limited downside," wrote McGranahan, who has an "outperform" rating on the stock.

Office Depot shares have fallen more than 65 percent in the last year. The stock was up $1.35, or 11.3 percent, to $13.31 in late morning trading on the New York Stock Exchange after climbing to $13.82.

Office Depot earlier this month thwarted a proxy challenge from shareholder group Woodbridge Group, which sought to oust Chief Executive Steve Odland and former CEO David Fuente from its board of directors.

Despite the stock's rally, Office Depot is still facing a number of issues that may temper investor's enthusiasm, Credit Suisse analyst Gary Balter wrote in a research note.

"The company's proxy battle and other legal matters may have raised (general and administrative) costs," wrote Balter, who has a "neutral" rating on the stock. "Inventories seem elevated. ... Vendors appear to be tightening terms further."

Office Depot said it expects sales to continue to be challenged in the second quarter, which is historically its weakest period. The retailer is also bracing for lower operating margins.

(Reporting by Justin Grant, editing by Mark Porter and John Wallace)

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