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Leading office supplies company Office Depot Inc. (ODP - Analyst Report) posted adjusted loss per share of 10 cents in the second quarter of 2013, which came in line with the Zacks Consensus Estimate. However, the loss narrowed year over year as the company reported an adjusted loss of 14 cents per in the year-ago quarter.

Including one-time items, Office Depot slumped to a loss of 23 cents a share compared, which remained flat with the prior-year quarter.

Office Depot’s total revenue of $2,418.6 million decreased 4% (both in constant currency and U.S. dollars) from the prior-year quarter and also came below the Zacks Consensus Estimate of $2,428 million.

Gross profit dropped 4.5% to $546.3 million as declines in sales muted the company’s cost containment efforts. Gross margin declined 20 basis points to 22.6% in the quarter. Office Depot reported adjusted operating loss of $14.3 million, which improved from the loss of $26.1 million in the prior-year quarter.

Segment Performance

During the quarter, North American Retail division revenue decreased 5% to $939.5 million, whereas comparable-store sales dropped 4%.  

Office Depot witnessed sales decline across technology and peripherals, while shift in consumer demand into tablets negatively impacted the sale of laptops. Sales of Copy and Print and breakroom supplies rose, though it fell for office furniture and supplies. Management stated that customer transaction count dipped 1%, while the average order value declined 3%.

The division reported adjusted operating loss of approximately $20 million during the quarter, which improved $6 million year over year, mainly on account of the company’s cost reduction initiatives.

Total store count at the North America Retail division stood at 1,109 at the end of the quarter. During the quarter, the company opened 3 new stores, while it closed 5.  

Revenue for North American Business Solutions decreased 2% to $781 million. Both direct and contract channels sales declined during the quarter. The division posted an operating income of $30.7 million up from $19.5 million in the year-ago quarter. Operating margin expanded 140 basis points to 3.9%, reflecting gross margin expansion coupled with lower advertising and payroll expenses.

The International division’s revenue dipped 3% (both in constant currency and U.S. dollars) to $698.2 million. The overall sales in the European contract channel dropped in the mid-single digits as the growth witnessed in Austria and Switzerland was offset by soft sales in other countries.

Asia contract channel sales remained flat during the quarter. Direct channel experienced a sales decline but the rate of fall decelerated sequentially. The retail channel sales increased, reflecting growth across Korea and France, partially offset by a decrease in Sweden.

The division reported an operating loss of $11.3 million during the quarter. However, excluding one-time items, operating loss expanded by $3 million. At the end of the quarter, total store count at the International division stood at 123. During the quarter, the company closed 1 store.

Merger Update

Yesterday, in a joint statement, Office Depot and OfficeMax Inc. stated that more than 150 executives are working with Boston Consulting Group on the integration plan. Alongside, the company reaffirmed that the combination would result in annual savings of $400 million to $600 million by the third year of the deal. The transaction is expected to be concluded by the end of 2013.

Speaking specifically, the company stated that it expects to generate $130–$200 million savings from purchasing efficiencies, while supply-chain initiatives are projected to result in $70–$100 million cost savings.  Selling, general and administrative efficiencies are expected to result in $130–$200 million in savings, while it expects to generate cost synergies of $70–$100 million from advertising and marketing efficiencies.

Earlier, in February Office Depot and OfficeMax decided to merge their businesses in order to better compete with the industry bellwether, Staples Inc. (SPLS - Analyst Report) and online rivals such as Inc. (AMZN - Analyst Report). The decision augurs well for both the companies, which have been grappling with soft sales.

Other Financial Details

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $472 million, long-term debt of $475 million and shareholders’ equity of $568.5 million. The company incurred capital expenditures of $33.7 million, while it generated negative free cash flow of $34 million.

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