Office Depot Inc reported a smaller-than-expected quarterly loss on lower distribution costs and other expense controls, sending shares of the No. 2 U.S. office supplies retailer up 8 percent.

The company, which competes with Staples Inc and smaller rival OfficeMax , curtailed operating expenses by about 8 percent in the latest second quarter, while its sales fell 4.3 percent to about $2.70 billion.

Sales missed analyst expectations of $2.74 billion due to weakness in both its domestic and international divisions.

Office Depot has been grappling with weakness in California, one of its larger markets. In April, it warned that the budget deficit and government-mandated three-day-per-month furloughs for state employees would further weigh on its business in California.

Earlier this month, it also walked away from bidding for a key Los Angeles County office supplies contract, citing onerous terms that would cause it to lose money on the deal.

Office Depot's loss narrowed to $18.7 million, or 7 cents a share in its second quarter, from $82.6 million, or 31 cents a share, a year earlier.

Analysts on average were expecting a loss of 17 cents a share, according to Thomson Reuters I/B/E/S.

CUSTOMERS STILL CAUTIOUS

Sales at U.S. and Canadian stores open at least a year fell 1 percent.

Many investors look at office-supply sellers as a good gauge of economic health since demand for their products is closely tied to white-collar employment rates.

The sector has grappled with lackluster sales as consumers and small businesses turned frugal in the U.S. economic downturn.

Despite some improvement in sales trends recently, many executives have talked about consumers being selective while spending on expensive goods like furniture and computers.

Office Depot pointed to a fall in customer transaction counts from the year-ago period at its North American retail division, while the average order value increased. Sales at its domestic division that caters to business customers also fell.

Analysts have also noted that Office Depot was ceding share to its better-positioned rivals after all three chains suffered during the downturn.

(Reporting by Dhanya Skariachan; Editing by Maureen Bavdek, Dave Zimmerman)

California Investment Citigroup