Office Depot falls on gloomy forecast

NEW YORK (Reuters) - Office Depot Inc(ODP.N) shares fell as much as l0.25 percent on Friday, a day after the office supplies retailer said third and fourth quarter earnings would likely fall below year-ago levels as small business customers cut back on spending in response to the housing slowdown.

"Our small-business customers have changed their buying habits as a result of this environment, and traffic remains slower than normal in our retail stores," Chief Financial Officer Patricia McKay said at a Goldman Sachs retailer conference in New York on Thursday.

Earnings per share for the third quarter will likely fall by double-digits, she said. "If small business spending in the U.S. remains soft in the fourth quarter, it too could be affected similarly as in the third quarter," McKay said.

A year ago, Office Depot reported third-quarter earnings of 47 cents per share.

The warning prompted analysts including Goldman Sachs, William Blair & Co and Credit Suisse to cut their earnings estimates. Goldman Sachs also reduced its 12-month price target on the stock to $29 from $32.

In late morning trading, Office Depot shares were down 8.2 percent at $20.14.

The shares, as well as those of other retailers, also came under pressure after the government reported the first monthly drop in payrolls in four years, stoking fears of a recession.

"The macro backdrop is no doubt presenting some headwinds, though given ongoing industrial production and GDP growth, we are surprised by the magnitude of spillover to the office products retail segment," Goldman Sachs analyst Matthew Fassler wrote in a research note. "Office Depot seems to be bearing more than its fair share of the fallout."

At the conference, McKay said the retailer had trimmed its plans for new store openings and now expects to open 100 stores in 2007, down from an earlier 150. For 2008, it now expects to open 125 to 150 stores, down from 200.

The company said the competitive environment during the back-to-school shopping season would likely hurt third-quarter operating profit margins in its retail division.

"We have seen a tremendous amount of promotion from Wal-Mart, Target, mass (merchants), drugs, supermarkets and everybody chasing back to school," Chairman Steve Odland said.

"So, we had to risk losing market share or trying to become more promotional in this quarter."