Office Depot 3Q Profit Falls 9 Pct

The company had delayed its quarterly results to revise past financial statements after a whistleblower complaint prompted an independent review of vendor-program accounting. It found weakness in its internal controls and led to the firing of four merchandising employees and 2006 and 2007 results being restated.

"To be clear, this is solely related to the timing as to when those funds were recognized," Steve Odland, the company's chairman and CEO, said during a conference call. He added that the problems have been corrected.

Delray Beach-based Office Depot has retained Peter J. Solomon Co. to review its capital structure options and advise the company on a course of action.

Net income fell to $117.5 million, or 43 cents per share, in the three months ended Sept. 29 from $129.1 million, or 45 cents per share, in the year-ago quarter. The latest period includes a $33 million tax benefit.

Sales climbed 2 percent to $3.94 billion from $3.86 billion in the prior-year period.

Analysts surveyed by Thomson Financial predicted profit of 40 cents per share on slightly higher revenue of $3.95 billion.

Odland expressed disappointment with the results and said it would focus on "cutting capital spending and improving cash flow."

"It is clear that we need to execute better both in the short term and in the long term," he said.

The company said North American retail same-store sales fell 5 percent for the quarter, hurt mostly by the slumping housing market. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones.

North American business services segment sales fell 3 percent.

International sales grew 13 percent from the year-ago quarter, the company said the international division still hasn't met expectations.

Charlie Brown, the division's president, noted that weak performance in the U.K. could continue into next year as that country's economy remains in a slump.

Brown said Office Depot would focus on simplifying operations in Europe and lowering operating costs while working to improve customer sales service and freezing the hiring of new sales staff.

The company will cut back on new store openings in North America for 2007 from 150 to about 70 as it changes strategy in response to the weak economy.

The company will instead focus more on growth and retention of its small business customers and expanding its private brand, said North American retail division president Chuck Rubin.

He said "we don't know how the retail environment will develop for the holidays," but said he is "confident we have the right team in place."

Rubin said much of the company's North American slump is directly due to the weak housing market, mainly in California and Florida, where Office Depot typically sees brisk sales.

The company announced Oct. 29 it would delay its earnings report, due out the next day, because of the vendor program review.

The review found that during the period beginning in the third quarter of 2006 through the second quarter of 2007, funds due or received from vendors were recognized in the current quarter but should have been deferred into later periods. Results have since been restated.

Fiscal 2006 third-quarter earnings have been reduced by 2 cents per share, and fiscal 2006 fourth-quarter earnings by 3 cents. For its 2007 fiscal year, the company reduced first-quarter earnings per share by a penny and second-quarter earnings by 2 cents.

"The market is likely to view the retention of an advisor favorably," Goldman Sachs retail analyst Matthew Fassler wrote in a report. He said the hiring of Solomon would likely "blunt the blow" of poor earnings and weak stock.

The company's shares fell $1.31, or 7 percent, to $17.49 Tuesday.

Office Depot has annual sales of more than $15 billion and sells to customers in 42 countries. It is the nation's second-largest office supplies retailer behind Framingham, Mass.-based Staples Inc.