UPDATE 2-Office Depot expects sales to stay weak in tough market

Tue Aug 5, 2014 12:26pm EDT

(Adds analyst, CEO comment, details; updates shares)

By Devika Krishna Kumar

Aug 5 (Reuters) - Office Depot Inc warned of weak sales this year as stiff competition from online and mass retailers erodes sales in its North American retail business.

Shares of the office supply retailer, which also reported lower-than-expected quarterly adjusted revenue, were down 3.5 percent at $4.93 in noon trading on the New York Stock Exchange.

Office Depot and Staples Inc have seen their U.S. sales decline as online retailers such as Amazon.com and mass retailers like Wal-Mart Stores Inc attract shoppers with lower-priced offerings.

Office Depot bought smaller rival OfficeMax in November to cut costs and expand its presence in a saturated North American market.

"We question the long-term viability of Office Depot's turnaround, particularly given that management, by its own admission, continues to search for the company's unique selling proposition," BB&T Capital Markets analysts wrote in a note.

Office Depot's North America retail same-store sales fell 3 percent in the second quarter ended June 28. The business accounts for about 40 percent of its total sales.

The decline was driven by a fall in sales of ink and toner, laptops and peripherals, Chief Executive Roland Smith said on a conference call.

"The weakness in sales in laptops is a little bit surprising because that actually has done well for other retailers like Best Buy and hhgregg," ISI Group analyst Oliver Wintermantel said.

Office Depot said on Tuesday it identified two customer segments where it was "significantly underpenetrated" compared with rivals. The segments represent about $60 billion in annual sales, the company said.

"We will begin testing and refining our USP this year and into next year. We expect to build our rollout plan in late 2015, with full implementation throughout 2016," Smith said.

Office Depot raised its full-year adjusted operating income forecast to at least $200 million from at least $160 million, saying cost savings from the planned closure of U.S. stores were expected to be higher than previously anticipated.

The company said in May that it would close 400 U.S. stores by the end of 2016, including 165 stores this year.

Office Depot raised its estimate on annual run-rate synergies from the store closures to at least $100 million by the end of 2016 from at least $75 million.

Net loss attributable to shareholders widened to $190 million, or 36 cents per share, in the second quarter from $64 million, or 23 cents per share, a year earlier.

Sales rose 59 percent to $3.84 billion. The year-earlier quarter did not include OfficeMax sales.

Excluding items, Office Depot posted a loss of 2 cents per share and revenue of $3.78 billion for the second quarter.

Analysts had expected a loss of 2 cents per share on revenue of $3.81 billion, according to Thomson Reuters I/B/E/S. (Editing by Kirti Pandey)