ODP - Office Depot, Inc.

[Henrique Costa]

Profile: Office Depot, Inc. is a global supplier of office products and services. The Company is organized into three business segments: North American Retail division, North American Business Solutions division and International division. Its sales are processed through multiple channels, consisting of office supply stores, a contract sales force, an outbound telephone account management sales force, Internet sites, direct marketing catalogs and call centers, supported by its network of crossdocks, warehouses and delivery operations. In April 2008, Office Depot, Inc. and Reliance Retail Limited, a subsidiary of Reliance Industries Limited, announced that they have entered into a joint venture to provide office products and services to business customers in India. Office Depot, Inc. and Reliance also announced the acquisition of eOfficePlanet, one of the dealers of office products and services to corporate customers in India.
Market Cap: 1.39B
Website: http://www.officedepot.com


Trading Idea:
- Interesting large-cap
- Cyclical sector
- Technicals are solid with big triangle and testing the restistance

JPM Research with 7$ PT:

Top line progressing as expected; expenses disappoint. ODP reported operating
EPS of ($0.22), below our forecast and consensus of ($0.10) and ($0.12),
respectively. Total sales decreased 21.7% vs. 20.4%E, and gross margins came in
better than expected at 27.1% vs. 26.3%E. However, operating expenses were
worse than expected, increasing 230 bps to 29.3% vs. 27.4%E.

The Good: NAR comps came in just slightly below our forecast at (18%) vs.
(17%)E and would have been 80 bps better if it were not for the Easter shift. NAR
operating profit also hit our forecast at ($13)MM in the weakest qtr of the year.
BSD sales were in line with our estimate at (18%), and International revenues beat
our top-line projection at (28%) vs. (25%)E. The gross margin rate was down 20
bps, well ahead of our forecast for a 100-bp decline. Finally, the company built
cash of $57MM excluding the benefit of the preferred stock issued during the
quarter. The proverbial donut appears squarely in the rearview mirror.
The Bad: International profits came in at $3MM, well below our $27MM
forecast, partly due to the company anniversarying the benefit of a one-time gain.
BSD profits were below our forecast at $23MM vs. $30MM estimated. Most
shockingly, operating expenses were $827MM, materially above our estimate of
$786MM (i.e., down 15% YOY vs. -19%E).

One step in the right direction in spite of the EPS miss. Overall, the EPS miss
was disappointing and expense levels require us to lower our earnings forecast.
However, we are encouraged by the two-year trend in NAR comps, which only
ticked down 100 bps (60 bps ex the Easter shift) after a 150-bp sequential drop in
1Q and a 300-bp decrease in 4Q. Similarly, BSD's two-year trends sequentially
declined only 100 bps after two consecutive 200-bp decreases in the prior quarters.
International is (as expected) clearly lagging the U.S., and this division drove a
good portion of the earnings miss, but the stock's performance in 2H09 is more
dependent on a sequential recovery in the U.S. economy.

While ODP's results and stock price are likely to be highly volatile and the margin
structure and charges hard to reconcile, with bankruptcy risk behind us and the
economic situation showing some stability (and easy sales comparisons ahead), we
believe that the trend in sales is the most important metric to watch. Thus, we
believe that 2Q was a step in the right direction.

If ODP breaks its triangular pattern on the upside, the projection would be a little above $8, which makes sense with the fundamental projections also.

Trading Plan:
Buy 10% at the open, and hold until stop or limit is posted.

[Henrique Costa]

Change in Trading Plan:
Sell today @ the open