Lower costs help office supply chains offset weak sales

NEW YORK Tue Nov 6, 2012 9:12am EST

NEW YORK (Reuters) - Tight cost controls helped U.S. office supply retailers Office Depot Inc ODP.N and OfficeMax Inc OMX.N offset weaker-than-expected sales in the third quarter.

Many investors look at office-supply retailers as a barometer of economic health because demand for their products is closely tied to white-collar employment rates.

Sales have suffered as corporate customers and other shoppers cut back on discretionary spending in the weak global economy, forcing the retailers to keep a tight lid on costs.

Same-store sales at Office Depot's 1,090 North American stores fell 4 percent for the third quarter. OfficeMax's same-store sales dropped 2.1 percent in the quarter, including a 2.6 percent decrease in the United States.

Both companies blamed weak demand for technology products, especially personal computers, for the lackluster same-store sales numbers. U.S. shoppers are increasingly choosing mobile computing devices such as tablets and e-readers over traditional computers.

"The weaker PC industry will get some help from Windows 8 in the near term, but we remain concerned about its structural recovery, leading us to further question the bet Staples is increasingly making on the category," Janney Capital Markets analyst David Strasser said. Industry leader Staples Inc (SPLS.O) is due to report results next week.

Office supply retailers, which face increased competition from mass merchants, online chains and drugstores, have reined in costs in recent years to protect margins.

OfficeMax's gross margin of 22.8 percent was slightly better than what Strasser expected, reflecting lower factory, office, and warehouse expenses, "well-managed" selling, general and administrative costs and lower payroll expenses.

Office Depot was helped by lower occupancy costs and supply chain costs.

Office Depot, the second largest U.S. office supply chain, said the third-quarter net loss was $70 million, or 25 cents a share, compared with net earnings of $92 million, or 28 cents a share, a year earlier.

Excluding items, it earned 6 cents a share, while analysts, on average, were looking for a profit of 1 cent a share, according to Thomson Reuters I/B/E/S.

Sales at the retailer fell 5 percent to $2.69 billion, while analysts expected $2.73 billion.

OfficeMax's net income rose to $433.0 million, or $4.92 a share, from $21.5 million, or 25 cents a share, in the third quarter of 2011. Excluding items, it earned 27 cents a share, above the analysts' average estimate of 25 cents a share.

Sales at the No. 3 U.S. office supply chain fell 1.7 percent to $1.74 billion, while analysts expected $1.78 billion.

BB&T Capital Markets analyst Anthony Chukumba said in a research note he was "encouraged" by OfficeMax's better-than-expected earnings, "particularly given the fact the global macroeconomic environment remains severely challenged."

For the full year, OfficeMax expects sales to be lower than the prior year and operating margin to be slightly higher.

(Reporting By Dhanya Skariachan; Editing by Jeffrey Benkoe)

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