Very risky play- not for the faint of heart, but they got hammered today on poor earnings forecast. Still seems like a severe market overreaction. I am trying for the July calls (not a typo- expires in 10 days) , $7.50 strike at .20. No fill yet, but it could fill, given the declining ask.
Here's the news that explains the killing.
NEW YORK (MarketWatch) -- Shares of Office Depot Inc. lost more than a third of their value Tuesday after the office-supplies retailer said it would miss its second-quarter profit forecast as it continued to be hurt by the "challenging economic environment."
ODP (6.93, -3.48, -33.4%) shares declined 35% to $6.73 after earlier sliding as much as 37%. The sudden drop wiped out nearly four-fifths of its value over the past year. The Delray Beach, Fla., office-supplies retailer said early Tuesday that its second-quarter North American same-store sales declined nearly 10% because of "pressure from weakening business conditions."
Sales trends that worsened late in the quarter shrank the company's profit margin based on earnings before interest and taxes by 2 percentage points more than its previous projection of a decline of 2 to 2.5 percentage points, the company said.
"In other words, the company expects to earn not much more than a penny per share," said Credit Suisse analyst Gary Balter, who lowered his 2008 profit estimate on the retailer to 43 cents a share from 95 cents a share.
Analysts, on average, projected the company would earn 22 cents a share in the second quarter and 99 cents for the year, according to FactSet.
The warning didn't bode well for Office Depot's rivals either, Balter said in a note. Shares in larger rival Staples Inc. (SPLS:Staples Inc SPLS 22.53, -0.61, -2.6%) fell 3.3%. OfficeMax Inc. (OMX:officemax inc OMX 11.73, -2.10, -15.2%) shares dropped 17%.
Office-supplies retailers have been hurt as the slowing economy has dampened their business customers' desires to replenish business machines, computers and furniture, analysts said. Office Depot also has been hurt more than its rivals by a higher level of store exposure in California and Florida, both of which have been battered by the declining housing markets, said Citigroup analyst Kate McShane in a note. The two markets represent about 26% of Office Depot's North American retail sales, compared with an average of about 17% for Staples and Office Depot, she said.
Office Depot said it expects the economy to be "difficult" for the rest of 2008 though it expects profit margins to improve sequentially in the third and fourth quarters.
The company will report final second-quarter results July 30.
Andria Cheng is a MarketWatch reporter based in New York.
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