Office Depot: The Drumbeats of Doom are Pounding

Last Updated May 2, 2010 3:20 PM EDT

In the battle for survival between the three national office-supplies chains, Office Depot (ODP) lags the furthest behind. That's looking downright ominous for the company; if you look across the retail landscape, there aren't many areas with more than two dominant national players.

In office supplies, Staples (SPLS) is the undisputed champion. And now it looks like OfficeMax (OMX) is tightening its grip on second place. Both Office Depot and OfficeMax recently released their quarterly earnings, and the outlooks for each company are widely different, even though they both essentially sell the same products -- and, heck, are frequently hard to tell apart.

Taking a quick glance at their first-quarter results doesn't reveal a major disparity. Depot's net income was $29.5 million; Max brought in $24.8 million. Depot's same-store sales fell one percent, while Max saw a 0.3 percent uptick.

The difference lies in their future projections. Office Depot expects a second-quarter loss. One of the problems lies in its exposure to California, a state still deep in the recession. But the challenges are national as well, according to Chairman and CEO Steve Odland: "Our small business customers are uncertain of the future cost of adding employees and are hesitant to do so," he said during Office Depot's earnings call. This is a contrast to the retailer's prior quarter, when it looked as though things were turning around.

OfficeMax paints a different picture. Management didn't offer specific guidance but said that it expects sales and earnings to rise in the second quarter as the economy continues to improve. "They've just showed very strong execution," analyst Brad Thomas of KeyBanc told MarketWatch. "They are getting smarter and more targeted with the promotions they are setting."

Office Depot didn't have a terrible quarter, and it's still too early to count the chain out. But if other retail sectors are a measuring stick, like the electronics arena where Circuit City got booted by Best Buy (BBY), then Office Depot can't afford to stay in third place for long.



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