Office Depot sees qtrly sales decline; shares sag - Forbes.com

United States -

(Adds analyst, Staples CFO comment; previously datelined NEW YORK)

ATLANTA (Reuters) - Office supplies retailer Office Depot Inc (nyse: ODP - news - people ) said Tuesday its North American same-store sales fell nearly 10 percent in the second quarter and warned operating margins would fall more than expected, sending its shares down more than 30 percent to a new low.

In a preliminary forecast, the retailer also said total company sales declined in the quarter and it was "disappointed" with the results.

The office supply sector has been hit hard by the weakening U.S. economy as consumers and businesses have cut back on spending in the face of falling home values and the credit crunch. Rivals Staples (nasdaq: SPLS - news - people ) Inc and OfficeMax Inc (nyse: OMX - news - people ) have also posted weaker same-store sales for North America.

"There's no question about the fact that consumers had a little boost with the rebate checks that they got, but overall they are very fearful as a result of gas prices, interest rates, their real estate coming down in value," Staples Chief Financial Officer John Mahoney told the CNBC network Tuesday.

"It's a time when consumers are really pulling in their horns," Mahoney added.

In April, Office Depot reported a 55 percent drop in first-quarter profit and said it expected sales would continue to be challenged in the second quarter.

Credit Suisse analyst Gary Balter cut his price target on Office Depot shares to $13 to $8 Tuesday and slashed his 2008 earnings per share estimate from 95 cents to 43 cents per share.

"Our Q1 earnings note title at the time, 'Self Delusional?', reflected our concern that the company seems not only to be headed on a downward spiral but also refuses to admit it," Balter wrote in a note. "That, as we have seen at too many retailers over the years, is a dangerous combination, and today's press release is an outcome of that."

Office Depot also warned that its second-quarter earnings before income tax (EBIT) margin -- or operating margin -- is expected to decline 2 percentage points more than the 2 percent to 2.5 percentage point decline it previously expected on a year-over-year basis, as sales trends worsened late in the quarter.

"While the company anticipates the economic environment to be difficult over the balance of the year, it expects its profit margins to improve sequentially in the third and fourth quarters," Office Depot said in a statement.

MANAGEMENT CHANGES?

Sanford Bernstein analyst Colin McGranahan raised the possibility that the weaker second quarter results could spur management changes. Office Depot earlier this year survived a proxy challenge from a shareholder group which sought to oust Chief Executive Steve Odland and former CEO David Fuente from the board.

"Given this weak performance and lack of traction in turnaround strategies, we believe that the probability of additional changes in management this year has increased," McGranahan said in a research note.

Shares of Office Depot, which have fallen about 66 percent over the last 12 months, were down $3.34, or 32 percent, to $7.07 in late morning trading on the New York Stock Exchange, dipping to levels not seen since late 2000.

OfficeMax also reached a new year low, falling $2.66, or 19.3 percent, to $11.17. Staples was down 74 cents, or 3.1 percent, to $22.40 on Nasdaq. (Reporting by Karen Jacobs in Atlanta, Shivani Singh in Bangalore and Nicole Maestri in New York; Editing by Derek Caney and Tim Dobbyn)

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