Office retail results indicate weak business climate

Office Depot and OfficeMax reported a drop in third-quarter sales but eked out profits, thanks to expense control and a focus on sales in profitable categories.

At OfficeMax, same-store sales declined 11.5% and total retail segment sales decreased 11% to $923 million. Operating profits fell slightly to $28.4 million from $29.1 million. However, a reduction in expenses enabled the company to increase its operating margin rate to 3% of sales from 2.8% the prior year. The company ended the quarter with 1,010 stores in its retail division, consisting of 932 units in the United States and 78 stores in Mexico.

“While continued lower sales levels strained our profitability this quarter, we managed to mitigate the impact by reducing costs and improving our operations,” said Sam Duncan, OfficeMax chairman and CEO. “Our relentless focus on implementing disciplined growth initiatives, differentiating our business and increasing our productivity continue to significantly benefit our performance.”

Despite that assertion, the OfficeMax missed analysts’ earning per share expectations by a wide margin, reporting a seven cents a share profit that was half of what analysts were expecting.

Profit were also hard to come by at Office Depot as top line sales growth was weak. Office Depot said sales at its North American retail division declined 18% to $1.3 billion due to 117 fewer stores and a 14% same-store sales decline. Despite the reduced sales volume, the division grew operating profits to $35 million compared to $12 million the prior year due in part to a conscious effort to reduce what it called, “unacceptable margin promotions in select categories.” Reduced expenses, lower asset impairment charges and improved inventory management also contributed to improved profitability.

“We are pleased with both our operating results and cash flow performance in the third quarter,” said Mike Newman, Office Depot’s CFO. “We exceeded our expectations in the quarter as a result of strong execution across the entire enterprise.”

Office Depot reported a loss of eight cents a share, excluding special items, which exceeded analysts’ estimates for a loss of 10 cents a share.

Office Depot ended the quarter with 1,158 stores in the U.S. and Canada.