Office Depot Struggling in Recessionary Back to School, but Not Alone

Last Updated Jul 29, 2009 7:06 PM EDT

Office supply retailers are having a rough time in the recession, and even though they are trying to generate some excitement for the back to school season, numbers posted by Office Depot and its rivals show how tough the competitive landscape is.

Not only are they competing with each other but with the likes of Sam's Club, which is pushing its business services, and Costco, which is offering more business-related facilities. On top of that, retailers from supermarkets to drug chains to dollar stores to web players are competing against the office supply operators and adding services such as inkjet refills that draw business. And many of those competitors, if less comprehensive in their business proposition, offer the one sure traffic builder in the current recession, inexpensive food.

Yesterday, Office Depot announced a 22 percent sales decrease to $2.8 billion in the second quarter ended June 27. After adjusting for one-time charges, the company posted a 22 cents per share loss in the quarter versus earnings of four cents per share in the 2008 period.

Morgan Stanley analyst Oliver Wintermantel, in a research note, pointed out that Office Depot margins fell by 262 basis points, or 2.62 percentage points, "worse than the decline of 185 basis points we were looking for. Gross margin was in line with expectations, while SG&A expenses were worse than our estimates. Retail and especially international divisions were weak."

While results may not be terrific over at Staples, with net income off 33 percent in the first quarter ended May 2, they at least included a sales increase of 19 percent to $5.8 billion versus the year earlier. Comparable store sales declined by eight percent.

In contrast, OfficeMax, which releases second quarter earnings tomorrow, posted a sales decrease of 17 percent in the quarter ended March 28 to $1.9 billion compared to the year earlier period. Earnings declined to 17 cents per diluted share from 81 cents per diluted share, and comps were down 13 percent.

Office chains are promoting to drive what business there is. Staples is dealing on electronics, particularly laptops, for back to school. While it isn't hitting the kind of laptop prices that Best Buy and Wal-Mart, are, it is providing a Dell Inspiron 15.6-inch Notebook Computer at a $699 everyday price and, during promotional periods, at $549 pre-loaded with Microsoft Office Home and Student software. The kicker is that any new computer purchaser during back to school gets coupons worth more than $500 for wireless networking, printers, accessories and related products.

For its part, OfficeMax has partnered with Payless ShoeSource to cross promote register receipt coupons that give folks purchasing footware at one store discounts on business and school products at the other. And vice versa.

Office Depot also is hoofing it, striking a deal with Foot Locker whereby shoe store purchasers receive a coupon good for $10 off of a qualifying purchase of $30 or more at Office Depot retail locations. Conversely, shoppers making a back to school purchase from Office Depot get a 20 percent off coupon for use at Foot Locker, Lady Foot Locker or Kids Foot Locker retail locations and web sites.

Office Depot is working local promotions as well. NASCAR star Tony Stewart appeared in Indianapolis as part of a program that provides children with school backpacks. In suburban Miami, the Energizer Bunny spent time in a Kendall Office Depot stores as the chain partnered with the Miami-Dade Fire Rescue Department to give away hurricane preparedness supplies and information. Maybe what the retailer is trying to say with the Kendall event is that it wants to keep going and going and going, even if it isn't exactly on fire.