According to a recent report by Colliers International, office vacancies in the U.S. rose nearly 1% to 15.45% in the second quarter, up from 14.48% in Q1. This was equivalent to an increase of 25.2 million square feet (msf) in available office space. And with unemployment continuing to trend upward, one industry sector that is being hit especially hard is the office supply and service sector.
Major office supply rivals Staples (NASDAQ:SPLS) and Office Depot (NYSE:ODP) both released second-quarter earnings last week - let's take a quick look at which of these two are faring better in this environment.
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Office Depot
ODP reported a sizable 22% decrease in total sales to $2.8 billion, and a net loss of $82 million for the second quarter of 2009. This compares to sales of $3.6 billion and a net loss of $2.6 billion in the same period last year. The reported adjusted earnings per share of negative 22 cents was significantly worse than the negative 12 cents analysts polled by Reuters were expecting.
One area of concern for investors should be Office Depot's tepid cost-cutting measures. Although the company reported a decrease of $143 million in operating expenses for the second quarter, as a percentage of revenue, its operating expenses actually increased from 27.4% to 30.5%. Office Depot's heavy cost structure needs to be trimmed down drastically to match the current environment.
A bright spot for Office Depot was the continued recognition of its above average product quality and service. Based on the National Trading Survey of 150 companies, Office Depot was again awarded the Partners of Choice award for the fourth consecutive year. However, the trade-off for product quality and service is clearly being shown in ODP's above average operating expenses. And it doesn't seem to be translating into additional sales or helping its bottom line.
Inventory turnover at Office Depot was 1.72 for the second quarter and 1.88 for the first quarter. In contrast, for the trailing two quarters, Staple's inventory turnover was 1.69 and 1.81 for Q2 and Q1 respectively. Office Depot's turnover was better for Q1/Q2 while Staples had better turnover in Q3/Q4 of 2008. So it does look like Office Depot has taken steps to tighten its inventory management.
Staples
Staples reported a more moderate decline in sales, reporting a total sales decrease of 9% to $5.5 billion and a net profit (excluding restructuring charges) of 16 cents a share. Both were consistent with the consensus estimates from analysts polled by Reuters.
Staples also has a much leaner cost structure than Office Depot. For the second quarter, Staple's operating expenses, as a percent of revenue, was 21%, down from 21.8% for the same period last year. That's a significant difference from Office Depot's nearly 31% operating expense.
In addition, Staple's North American Retail comparable store sales was down only 5% in Q2. This compares to negative 18% for Office Depot's North American retail division, and negative 11.6% for Office Max (NYSE:OMX). As total sales in the entire office supply industry continue to decrease, Staples is clearly taking market share away from both Office Depot and Office Max.
Bottom Line
When it comes down to it, office supplies are homogenous and Office Depot should look for ways to trim its cost structure, even if it diminishes service and product quality. Going forward, Staples looks better prepared to endure weak office supply demand. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)
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