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Office Depot In Shredder


10% drop in sales may drive takeover bid.

Office Depot (ODP) was expected to release second-quarter earnings on July 30th, but they just couldn't wait to share their doomsday news. The retailer -- whose familiar slogan, "What you need to know," suddenly sounds very grim indeed -- said yesterday that same-store sales have fallen almost 10% in North American stores open for a year or more.

The 10% drop is even more alarming in light of the fact that 2007's second quarter saw a 5% decline - which suggests that the company's bread-and-butter business is being mauled by the economic downturn and cutbacks among both small businesses and consumers.

But Office Depot can't blame all their woes on the economy: The firm has been steadily losing market share to competitors Staples (SPLS) and OfficeMax (OMX). In April, Woodbridge (LEV) sent an open letter to Office Depot shareholders in which they cited a number of management blunders, including a high rate of executive turnover, vendor payment and accounting issues, as well as customer defections.

Woodbridge ultimately decided not to pursue a prolonged proxy fight, though they did urge shareholders to withhold votes from the current board in order to send "the strongest message possible" that their performance "is unacceptable."

It's true, however, that the entire space is suffering: Yahoo Finance quoted Staples' CFO John Mahoney as saying that "the second half of 2008 is likely to bring little in the way of economic improvement." Office Depot's reassurances that "profit margins [should] improve sequentially in the third and fourth quarters" therefore ring more than a little hollow.

Moreover, the sell side can't be happy with these second-quarter results: The company posted a profit of approximately a penny per share - a far cry from analysts' consensus estimate of $0.21 per share. In the coming days, I expect them to scale back their 2008 estimates, and that too could exacerbate the utter pounding the stock has already taken.

To be clear: I think Office Depot's shareholders would be receptive to any outside party with a heartbeat and a credible plan for turnaround. With more than 1,000 stores in the U.S. and Canada and affiliates in 43 countries, Office Depot has a highly attractive footprint; I wouldn't be at all surprised if a hedge fund or private equity firm were to make a takeover bid, and soon.

Office Depot closed at $7.12, down $3.29, or 31.6%.
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