Office Depot Shares Surged: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Same-store sales at Office Depot (NYS: ODP) dropped 2% year over year in the most recent quarter. Hurray! Buy-buy-buy! The stock's up 13% on the news!

So what: Wait. No, that's bad news, isn't it? Well, sort of. But OD reassured investors that if it sold less stuff in the quarter, at least it sold less low-margin stuff. By shifting PC sales toward the higher end, for example, OD was able to help boost gross margins one whole percentage point. Combined with strong back-to-school sales, the company says overall gross margins rose 150 basis points through August.

Now what: Improvements like these have Office Depot promising investors a small but noticeable improvement in operating profit for the current fiscal year. Still, the improvement doesn't look likely to translate into net profits just yet. Analysts are still forecasting a $0.02-per-share net loss at OD for this year. Right now, hopes center on the chance OD can earn $0.13 in 2012.

Call me a pessimist, though, but that still has me seeing Office Depot as a 20 forward P/E stock that's only expected to grow at 10% per year over the next five years. A "strong sell," in other words.

Disagree? Think there's still a future for Office Depot?Add it to your Watchlistand find out.

At the time this article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. The Motley Fool has adisclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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