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Office Depot Downgraded to Underperform

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On May 13, we downgraded our recommendation to Underperform on Office Depot, Inc. (ODP - Free Report) , the supplier of a wide range of office products and services, based on the company’s dismal first-quarter 2013 results and disappointing outlook.

Why the Downgrade?

Estimates for Office Depot have been portraying a downward trend ever since it posted first-quarter results on Apr 30. The company delivered breakeven bottom-line results for the quarter that fell short of the Zacks Consensus Estimate of 5 cents and went down significantly from the year-ago earnings of 11 cents. Soft top-line performance muted the company’s cost containment efforts.

Total revenue of $2,718.3 million decreased 5.4% from the prior-year quarter and was below the Zacks Consensus Estimate of $2,783 million.

Management now forecasts a sales decline of 3% to 4%, during the second quarter of 2013, attributable to mid-single digit fall in sales across the North American Retail and International segments, partially offset by improved sales performance at North American Business Solutions.

Following the release, the Zacks Consensus Estimate for 2013 and 2014 has gone down 66.7% and 45.5% to 2 cents and 6 cents, respectively. Recently, this Zacks Rank #3 (Hold) company decided to merge with OfficeMax Inc. to better compete with the industry leaders. The decision augurs well for both the companies, which have been struggling with soft sales.

Cause for Concern

Business budget remains tight, consumers remain more cautious than ever and companies are trying hard to navigate through the challenging economic environment. Consumers and small businesses remain frugal about big-ticket spending on items such as business machines and other durable products. We believe that the demand for office products is closely tied to the health of the economy.

Stocks that Warrants a Look

While we prefer to avoid Office Depot until we see signs of improvement in the company's performance, other stocks worth considering in the non-food retail wholesale industry are Big 5 Sporting Goods Corp. (BGFV - Free Report) and Cabela's Inc. , both the stocks hold a Zacks Rank #1 (Strong Buy).

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