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Office Depot Announces Third Quarter Results

DELRAY BEACH, Fla.--(BUSINESS WIRE)--Oct. 29, 2008--Office Depot, Inc. (NYSE:ODP), a leading global provider of office products and services, today announced results for the fiscal period ending September 27, 2008.

Third Quarter Results (1)

Total Company sales for the third quarter decreased 7% to $3.7 billion. Total Company operating expenses, adjusted for Charges, represented 27.7% of sales, versus 25.2% reported in the third quarter of 2007. EBIT, adjusted for Charges, was $15 million in the third quarter of 2008 or 0.4% as a percentage of sales, compared to $128 million or 3.3% in the prior-year period.

The Company reported a net loss of $7 million in the third quarter of 2008, compared to earnings of $117 million in the same period of 2007. The loss per share on a diluted basis was $0.02 for the quarter, versus earnings per share of $0.43 in the third quarter of 2007. Adjusted for Charges, the Company reported a loss per share on a diluted basis of $0.01 for the third quarter, versus earnings of $0.43 in the same period one year ago. These results include a charge of approximately $21 million, or $0.05 per share, for North American Retail store impairment and closure costs, and a U.K. tax law change that had an $8 million, or $0.03 per share, negative impact on the Company's third quarter results. In the third quarter, the Company's cash flow from operations was $261 million and free cash flow was $190 million.

Third Quarter Division Results

North American Retail Division

Third quarter sales in the North American Retail Division were $1.6 billion, down 11% compared to the same period last year. Comparable store sales in the 1,203 stores in the U.S. and Canada that have been open for more than one year decreased 14% for the third quarter. The Company continues to be negatively impacted by weakening business conditions in North America. Although it appears that the sales rate decline in California has been consistent over the past few quarters, Florida, and the other markets in which the Company operates, experienced a steeper sales rate decline.

The North American Retail Division had an operating profit of $12 million for the third quarter, a decline from the operating profit of $80 million in the same period of the prior year. Operating profit margin was 0.8%, versus 4.5% in the third quarter of 2007. Operating margin during the third quarter of 2008 was negatively impacted by a de-leveraging of fixed costs, asset impairment charges and store closure costs of $21 million, inventory shrink, higher supply chain costs and lower bonus accrual reversals versus a year ago. Partially offsetting this margin decline was an improvement in product margins.

During the third quarter, Office Depot opened six new stores, closed three, and relocated two stores, bringing the total store count to 1,275. The Company also remodeled two stores in the quarter.

Inventory per store was $777 thousand at the end of the third quarter of 2008, down approximately 15% from the prior year. This decrease is a result of the Company's ability to align inventory investment with sales levels in the current economic environment.

North American Business Solutions Division

Third quarter sales in the North American Business Solutions Division were $1.1 billion, down 10% compared to the same period last year, driven by further deterioration in our small- to medium-sized customer base and a significant reversal in the sales growth trend among our large, national account customers and the public sector.

The North American Business Solutions Division operating profit was $39 million for the third quarter of 2008 compared to $69 million for the same period of the prior year. Operating profit margin was 3.7%, versus 5.9% in the third quarter 2007. The decrease in operating margin during the third quarter 2008 primarily relates to lower product margins, an increase in advertising spend, de-leveraging of fixed costs against lower sales levels and lower bonus accrual reversals versus a year ago. Partially offsetting this margin decline was an increase in vendor program support during the quarter.

International Division

The International Division reported a sales increase of 3% in the third quarter of 2008 to $1.0 billion, compared with the same period last year, while sales in local currency decreased by 2%. Sales in the Direct channel were down as a result of a growing number of value seeking customers and an increase in competitiveness within the channel. Sales in the Contract channel increased 3% in local currency; however, sales weakened during the quarter as many larger accounts were under pressure to reduce spending.

Division operating profit was $36 million in the third quarter of 2008 compared to $47 million in the same period of the prior year. Operating profit margin was 3.5%, versus 4.7% in the third quarter of 2007. The margin decrease is a result of lower bonus accrual reversals versus a year ago, lower sales volume de-leveraging fixed expenses and unfavorable foreign exchange rates. Partially offsetting this margin decline was an improvement in the profitability of the U.K. business.

Other Matters

As noted in the announcement on September 26, 2008, Office Depot entered into its new $1.25 billion asset-based credit facility. The facility is secured by the Company's inventory, accounts receivable, cash and depository accounts, and replaced the previous $1.0 billion revolving credit agreement and various overseas credit lines. More information is available in the Forms 8-K filed with the Securities and Exchange Commission on September 26, 2008 and October 9, 2008.

The Company has not moved forward with selling its investment in its Mexican joint venture in conjunction with the unsolicited, nonbinding proposal from its joint venture partner. Office Depot continues to engage in discussions with its partner regarding strategic alternatives for the business that will add to cash flow and increase shareholder value. Decisions regarding alternatives for this business would need to consider, among other things, the share repurchase restrictions in the Company's asset-based loan facility (which currently prohibits share repurchases). In addition, the proceeds received from a potential sale would be reduced by about 40 percent due to taxes. There can be no assurance that any agreement on financial or other terms satisfactory to the Company will result or that any transaction will be approved or completed. The joint venture is expected to contribute between $35 and $40 million in net income this year to Office Depot.

Additional information on the Company's results for the period can be found in the third quarter Form 10-Q filed with the Securities and Exchange Commission.

Non-GAAP Reconciliation

A reconciliation of GAAP results to non-GAAP results excluding certain items is presented in this release and also may be accessed on the corporate website, www.officedepot.com, under the category Company Info.

Conference Call Information

Office Depot will hold a conference call for investors and analysts at 9 a.m. (Eastern Daylight Time) today. The conference call will be available to all investors via Web cast at http://investor.officedepot.com. Interested parties may contact Investor Relations at 561-438-7893 for further information.

About Office Depot

Every day, Office Depot is Taking Care of Business for millions of customers around the globe. For the local corner store as well as Fortune 500 companies, Office Depot provides products and services to its customers through 1,705 worldwide retail stores, a dedicated sales force, top-rated catalogs and a $4.9 billion e-commerce operation. Office Depot has annual sales of approximately $15.1 billion, and employs about 49,000 associates around the world. The Company provides more office products and services to more customers in more countries than any other company, and currently sells to customers directly or through affiliates in 48 countries.

Office Depot's common stock is listed on the New York Stock Exchange under the symbol ODP and is included in the S&P 500 Index. Additional press information can be found at: http://mediarelations.officedepot.com.

Cautionary Statement Regarding Forward-Looking Statements: The Private Securities Litigation Reform Act of 1995, as amended (the "Act") provides protection from liability in private lawsuits for "forward-looking" statements made by public companies under certain circumstances, provided that the public company discloses with specificity the risk factors that may impact its future results. We want to take advantage of the "safe harbor" provisions of the Act. Certain statements made in this press release are 'forward-looking' statements under the Act. Except for historical financial and business performance information, statements made in this press release should be considered 'forward-looking' as referred to in the Act. Much of the information that looks towards future performance of our company is based on various factors and important assumptions about future events that may or may not actually come true. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements made in this press release. Certain risks and uncertainties are detailed from time to time in our filings with the United States Securities and Exchange Commission ("SEC"). You are strongly urged to review all such filings for a more detailed discussion of such risks and uncertainties. The Company's SEC filings are readily obtainable at no charge at www.sec.gov and at www.freeEDGAR.com, as well as on a number of other commercial web sites.

                          OFFICE DEPOT, INC.
                CONDENSED CONSOLIDATED BALANCE SHEETS
          (In thousands, except share and per share amounts)
                             (Unaudited)

                                  As of        As of         As of
                              September 27, December 29, September 29,
                                  2008          2007         2007
                              ------------- ------------ -------------
Assets

Current assets:
  Cash and cash equivalents     $  394,574  $   222,954   $   187,037
  Receivables, net               1,450,220    1,511,681     1,532,784
  Inventories                    1,460,499    1,717,662     1,608,697
  Deferred income taxes            144,209      120,162        85,207
  Prepaid expenses and other
   current assets                  166,917      143,255       139,865
                              ------------- ------------ -------------

    Total current assets         3,616,419    3,715,714     3,553,590

Property and equipment, net      1,623,858    1,588,958     1,529,046
Goodwill                         1,338,183    1,282,457     1,266,816
Other intangible assets            103,453      107,987       109,299
Other assets                       537,500      561,424       487,420
                              ------------- ------------ -------------
      Total assets              $7,219,413  $ 7,256,540   $ 6,946,171
                              ============= ============ =============

Liabilities and stockholders'
 equity

Current liabilities:
  Trade accounts payable        $1,351,016  $ 1,591,154   $ 1,622,841
  Accrued expenses and other
   current liabilities           1,196,732    1,170,775     1,123,594
  Income taxes payable              11,447        3,491        36,330
  Short-term borrowings and
   current maturities
of long-term debt                  420,979      207,996        49,933
                              ------------- ------------ -------------

    Total current liabilities    2,980,174    2,973,416     2,832,698

Deferred income taxes and
 other long-term liabilities       585,573      576,254       539,915
Long-term debt, net of current
 maturities                        519,348      607,462       581,140
Minority interest                    7,302       15,564        14,999

Commitments and contingencies

Stockholders' equity:
  Common stock - authorized
   800,000,000 shares of $.01
   par value; issued and
   outstanding shares -
   280,862,835 in 2008,
   428,777,625 in December
   2007 and 428,671,158 in
   September 2007                    2,809        4,288         4,287
  Additional paid-in capital     1,187,383    1,784,184     1,771,370
  Accumulated other
   comprehensive income            449,854      495,916       420,258
  Retained earnings              1,545,281    3,783,805     3,765,031
  Treasury stock, at cost -
   5,976,950 shares in
2008, 155,819,358 shares in
 December 2007
and 155,783,289 shares in
 September 2007                    (58,311)  (2,984,349)   (2,983,527)
                              ------------- ------------ -------------
    Total stockholders' equity   3,127,016    3,083,844     2,977,419
                              ------------- ------------ -------------
      Total liabilities and
       stockholders' equity     $7,219,413  $ 7,256,540   $ 6,946,171
                              ============= ============ =============
                          OFFICE DEPOT, INC.
            CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
               (In thousands, except per share amounts)
                             (Unaudited)

                     13 Weeks Ended              39 Weeks Ended
               --------------------------- ---------------------------
               September 27, September 29, September 27, September 29,
                   2008          2007          2008          2007
               ------------- ------------- ------------- -------------

Sales          $  3,657,857  $  3,935,411  $ 11,224,947  $ 11,660,610
Cost of goods
 sold and
 occupancy
 costs            2,633,416     2,820,276     8,048,310     8,180,248
               ------------- ------------- ------------- -------------

  Gross profit    1,024,441     1,115,135     3,176,637     3,480,362

Store and
 warehouse
 operating and
 selling
 expenses           844,189       843,958     2,522,689     2,529,144
General and
 administrative
 expenses           176,362       150,797       550,136       462,115
Amortization of
 deferred gain
 on building
 sale                (1,873)       (1,873)       (5,619)       (5,619)
               ------------- ------------- ------------- -------------

  Operating
   profit             5,763       122,253       109,431       494,722

Other income
 (expense):
  Interest
   income             1,908         4,111         8,417         6,212
  Interest
   expense          (16,405)      (19,316)      (45,631)      (49,987)
  Miscellaneous
   income, net        3,574         5,238        18,517        24,933
               ------------- ------------- ------------- -------------

  Earnings
   (loss)
   before
   income taxes      (5,160)      112,286        90,734       475,880

Income taxes          1,538        (5,202)       30,661        99,039
               ------------- ------------- ------------- -------------

  Net earnings
   (loss)      $     (6,698) $    117,488  $     60,073  $    376,841
               ============= ============= ============= =============


Earnings (loss)
 per common
 share:
  Basic        $      (0.02) $       0.43  $       0.22  $       1.38
  Diluted             (0.02)         0.43          0.22          1.36

Weighted
 average number
 of common
 shares
 outstanding:
  Basic             272,939       272,014       272,726       273,131
  Diluted           272,939       274,370       273,073       276,817
                          OFFICE DEPOT, INC.
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)
                             (Unaudited)

                                                 39 Weeks Ended
                                           ---------------------------

                                           September 27, September 29,
                                               2008          2007
                                           ------------- -------------

Cash flow from operating activities:
  Net earnings                             $     60,073  $    376,841
  Adjustments to reconcile net earnings to
   net cash provided by operating
   activities:

      Depreciation and amortization             192,345       206,454
      Charges for losses on inventories and
       receivables                              100,353        76,425
      Changes in working capital and other       45,510      (204,945)
                                           ------------- -------------
        Net cash provided by operating
         activities                             398,281       454,775
                                           ------------- -------------

Cash flows from investing activities:
  Capital expenditures                         (277,818)     (334,010)
  Acquisitions, net of cash acquired, and
   related payments                            (101,786)      (47,848)
  Release of restricted cash                     18,100            --
  Purchase of assets held for sale and sold     (39,772)           --
  Proceeds from assets sold and other            85,286       107,680
                                           ------------- -------------
        Net cash used in investing
         activities                            (315,990)     (274,178)
                                           ------------- -------------

Cash flows from financing activities:
  Proceeds from exercise of stock options
   and sale of stock under employee stock
   purchase plans
                                                    658        27,913
  Tax benefits from employee share-based
   payments                                         292        15,776
  Acquisition of treasury stock under
   approved repurchase plans                         --      (199,592)
  Treasury stock additions from employee
   related plans                                 (1,015)      (10,372)
  Proceeds from issuance of debt under
   asset based credit facility                  365,000            --
  Net payments on long- and short-term
   borrowings                                  (268,923)       (5,470)
                                           ------------- -------------
        Net cash provided by (used in)
         financing activities                    96,012      (171,745)
                                           ------------- -------------

Effect of exchange rate changes on cash and
 cash equivalents                                (6,683)        4,633
                                           ------------- -------------

  Net increase in cash and cash equivalents     171,620        13,485
    Cash and cash equivalents at beginning
     of period                                  222,954       173,552
                                           ------------- -------------
    Cash and cash equivalents at end of
     period                                $    394,574  $    187,037
                                           ============= =============
                          OFFICE DEPOT, INC.
             Comparative Trailing Four Quarters Data and
                   GAAP to Non-GAAP Reconciliations
                             (Unaudited)

Total Company                                  Trailing 4 Quarters
----------------------------------------------------------------------
(Dollars in millions)                      September 27, September 29,
-------------------------------------------
                                               2008          2007
                                           ------------- -------------
Sales                                      $   15,091.9  $   15,503.6

EBIT(1)                                    $      120.6  $      689.3
% of sales                                          0.8%          4.4%
EBIT - as adjusted(1)                      $      165.9  $      745.8
% of sales                                          1.1%          4.8%

Net earnings                               $       78.9  $      503.4
Net earnings - as adjusted(1)              $      112.8  $      540.5

Diluted Earnings Per Share                 $       0.29  $       1.81
Diluted Earnings Per Share - as adjusted(1)$       0.41  $       1.95

EBITDA - as adjusted(1)                    $      421.6  $      997.1
% of sales                                          2.8%          6.4%

Return on Invested Capital (ROIC) - as
 adjusted( 1)                                       6.9%         13.9%

Average shares                                    273.1         277.7

(1 )EBIT and EBITDA are non-GAAP financial measures; EBIT - as
 adjusted and EBITDA - as adjusted exclude the Charges. (bps = basis
 points)

The Company is committed to measuring and reporting results in
 conformity with accounting principles generally accepted in the
 United States of America ("GAAP"). However, management also
 recognizes that some financial measures other than those prepared in
 accordance with GAAP ("non-GAAP") can provide meaningful and useful
 information about performance and allow for an informed assessment of
 possible future performance. Certain non-GAAP performance measures
 (e.g. EBIT and ROIC) are used to determine variable pay awards
 throughout our Company.

Non-GAAP measures in these tables exclude certain charges ("Charges")
 that are important and required under GAAP but that may not clearly
 convey the on-going results of operating the business during the
 period. These measures also exclude a gain on sale of a building and
 a legal settlement, both recognized in the fourth quarter of 2006.
                          OFFICE DEPOT, INC.
                   GAAP to Non-GAAP Reconciliations

The non-GAAP numbers presented along with the most closely related
 GAAP numbers, and the reconciliations are provided in the following
 tables. ($ in millions)


                                       % of                     % of
Q3 2008                        GAAP     Sales Charges Non-GAAP   Sales
----------------------------------------------------------------------
Gross Profit                 $1,024.5  28.0%  $ --    $1,024.5   28.0%
Operating Expenses           $1,018.7  27.8%   $(5.3) $1,013.4   27.7%
Operating Profit             $    5.8   0.2%   $ 5.3  $   11.1    0.3%
Net Earnings (Loss)          $   (6.7) (0.2)%  $ 5.0  $   (1.7)   0.0%
                             =========        ======= =========
Diluted Earnings (Loss) Per
 Share                       $  (0.02)         $0.01  $  (0.01)
                             =========        ======= =========
Q3 2007                          GAAP   % of   Charges Non-GAAP % of
                                         Sales                   Sales
----------------------------------------------------------------------
Gross Profit                   $1,115.1  28.3% $  0.1  $1,115.2  28.3%
Operating Expenses             $  992.8  25.2% $ (0.7) $  992.1  25.2%
Operating Profit               $  122.3   3.1% $  0.8  $  123.1   3.1%
Net Earnings                   $  117.5   3.0% $ --    $  117.5   3.0%
                               ========        ======= ========
Diluted Earnings Per Share     $   0.43        $ --    $   0.43
                               ========        ======= ========
YTD 2008                         GAAP   % of   Charges Non-GAAP % of
                                         Sales                   Sales
----------------------------------------------------------------------
Gross Profit                   $3,176.6  28.3% $ --    $3,176.6  28.3%
Operating Expenses             $3,067.2  27.3% $(31.6) $3,035.6  27.0%
Operating Profit               $  109.4   1.0% $ 31.6  $  141.0   1.3%
Net Earnings                   $   60.1   0.5% $ 21.6  $   86.2   0.8%
                               ========        ======= ========
Diluted Earnings Per Share     $   0.22        $ 0.10  $   0.32
                               ========        ======= ========
 YTD 2007                        GAAP   % of   Charges Non-GAAP % of
                                         Sales                   Sales
 -------------------------------------- ------ ------- -------- ------
 Gross Profit                  $3,480.4  29.8% $  0.3  $3,480.7  29.9%
 Operating Expenses            $2,985.7  25.6% $(24.5) $2,961.2  25.4%
 Operating Profit              $  494.7   4.2% $ 24.8  $  519.5   4.5%
 Net Earnings                  $  376.8   3.2% $ 20.5  $  397.3   3.4%
                               ========        ======= ========
 Diluted Earnings Per Share    $   1.36        $ 0.08  $   1.44
                               ========        ======= ========
                          Office Depot, Inc.
                         DIVISION INFORMATION
                             (Unaudited)

North American Retail
 Division
-----------------------------

                                Third Quarter         Year-to-Date
                             -------------------- --------------------
(Dollars in millions)           2008      2007       2008      2007
--------------------------------------- --------- ---------- ---------

Sales                        $1,578.5   $1,772.0  $4,725.0   $5,145.9
% change                          (11)%   --%           (8)%        2%

Division operating profit    $   11.9   $   79.5  $   90.0   $  331.1
% of sales                        0.8%       4.5%      1.9%       6.4%
North American Business
 Solutions Division
----------------------------

                                Third Quarter         Year-to-Date
                            --------------------- --------------------
(Dollars in millions)          2008       2007       2008      2007
-------------------------------------- ---------- ---------- ---------

    Sales                   $1,054.2   $1,168.1   $3,222.3   $3,453.7
% change                         (10)%       (3)%       (7)%   --%

Division operating profit   $   39.0   $   68.8   $  147.9   $  219.3
% of sales                       3.7%       5.9%       4.6%       6.4%
International Division
-------------------------------

                                 Third Quarter        Year-to-Date
                               ------------------ --------------------
(Dollars in millions)              2008     2007      2008       2007
----------------------------------------- ------- ---------- ---------

   Sales                       $1,025.1   $995.4  $3,277.6   $3,061.0
% change                              3%      13%        7%        16%
   % change in local currency
    sales                            (2)%      5%       (1)%        8%

Division operating profit      $   35.9   $ 47.2  $  147.3   $  171.4
% of sales                          3.5%     4.7%      4.5%       5.6%

Division operating profit excludes Charges from the Division
 performance, as those Charges are evaluated at a corporate level.
                          Office Depot, Inc.
                SELECTED FINANCIAL AND OPERATING DATA
                             (Unaudited)

Other Selected Financial Information
(In thousands, except operational data)  39 Weeks Ended 39 Weeks Ended
                                         September 27,  September 29,
                                              2008           2007
                                         -------------- --------------

Cumulative share repurchases under
 approved
repurchase plans ($):                      $ --         $      199,592

Cumulative share repurchases under
 approved
repurchase plans (shares):                   --                  5,702

Shares outstanding, end of quarter              274,886        272,888

Amount authorized for future share
repurchases, end of quarter ($):          $     500,000
Selected Operating Highlights
                               13 Weeks Ended        39 Weeks Ended
                           ----------------------- -------------------
                           September   September   September September
                             27, 2008    29, 2007   27, 2008  29, 2007
                           ----------- ----------- --------- ---------
Store Statistics

United States and Canada:
   Store count:
    Stores opened                    6          28        57        59
    Stores closed                    3           2         4         5
    Stores relocated                 2           1         6         1
    Total U.S. and Canada
     stores                      1,275       1,212     1,275     1,212

North American Retail
 Division square footage:   30,862,571  29,602,651
Average square footage per
 NAR store                      24,206      24,425
Inventory per store (end of
 period)                   $   777,000 $   916,000
International Division
 company-owned:
   Store count:
    Stores opened                   --           8         2        21
    Stores closed                   --           1         1         2
    Stores acquired                 13           1        13         2
Total International
 company-owned stores              162         144       162       144

(1) Includes non-GAAP information. Third quarter results include impacts of previously announced programs ("Charges"). Additional information is provided in our Form 10-Q filing. Reconciliations from GAAP to non-GAAP financial measures can be found in this release, as well as on the corporate web site, www.officedepot.com, under the category Investor Relations.

CONTACT: Office Depot, Inc., Delray Beach
Brian Turcotte, Investor Relations, 561-438-3657
brian.turcotte@officedepot.com
or
Brian Levine, Public Relations, 561-438-2895
brian.levine@officedepot.com

SOURCE: Office Depot, Inc.

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