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Office Depot Announces Fourth Quarter Results

DELRAY BEACH, Fla.--(BUSINESS WIRE)--Feb. 26, 2008--Office Depot, Inc. (NYSE:ODP), a leading global provider of office products and services, today announced fourth quarter and full year results for the fiscal period ended December 29, 2007. Fourth Quarter Results(1) Total Company sales for the fourth quarter increased 1% to $3.9 billion. Sales in the North American Retail Division were down 3% with comparable store sales down 7% for the quarter. The North American Business Solutions Division reported a 4% sales decline in the quarter while International Division sales increased 12% in U.S. dollars and 2% in local currencies. Net earnings were $19 million compared to earnings of $127 million in the same period of 2006. Earnings per share on a diluted basis were $0.07 for the quarter, versus $0.45 in the fourth quarter of 2006. On an adjusted basis, diluted earnings per share were $0.10 for the quarter, versus $0.51 in the same period one year ago. Total Company operating expenses, as adjusted, represented 26.3% of sales, an increase of 40 basis points over the fourth quarter of 2006. EBIT, as adjusted, was $6 million in the fourth quarter of 2007 or 0.2% as expressed as a percentage of sales, compared to $201 million or 5.2% in the prior-year period. Results for the quarter included an as adjusted tax benefit of $30 million. The fourth quarter 2007 tax benefit was primarily due to lower North American income and a late quarter tax law change. Return on Invested Capital for the trailing 4 quarters, adjusted for Charges and Credits, was 11.3%. The Return on Equity adjusted for Charges and Credits for the trailing four quarters was 15.2%. Fourth Quarter Division Results North American Retail Division Fourth quarter sales in the North American Retail Division were down 3% at $1.7 billion. Comparable store sales in the 1,158 stores in the U.S. and Canada that have been open for more than one year decreased 7% for the fourth quarter. Results continue to be negatively impacted by difficult housing-related economic conditions in key markets, particularly Florida and California. Combined, these two states represented 26% of total store sales and about 40% of the total comparable sales decrease in the fourth quarter. This economic weakness has spread to other U.S. retail markets with housing issues, creating additional pressure on sales and margins. Sales in the Northeast moderated slightly versus the previous quarter, but continued to be the Division's best performing region in North America despite a limited retail presence in that market. Other drivers negatively impacting comparable sales included cannibalization from the new store build out, competitive intrusion and private brand penetration. The Design, Print and Ship business continued to perform well in the fourth quarter, slightly offsetting the negative drivers. Operating profit in the North American Retail Division was $23 million for the fourth quarter, a decline from $109 million in the same period of the prior year. Although costs were managed effectively in the fourth quarter, broader economic factors continued to pressure profit margins, which decreased 490 basis points versus the fourth quarter 2006. A number of factors contributed to the operating margin decline, including lower than expected vendor program funding, lower product margins, a de-leveraging of fixed property costs, and higher shrink. Partially offsetting some of the decline was the impact of lower operational expenses. Comparable average sales per square foot in the fourth quarter decreased to $231 and average order value was up about 2.3% in the fourth quarter. During the fourth quarter, Office Depot opened 12 new stores and closed 2 stores, bringing the total store count to 1,222. The Company also remodeled 12 stores, bringing the yearly total to 177. As of year end, more than half of the chain was operating under the M2 format. Inventory per store was $960 thousand as of the end of the fourth quarter of 2007, 3% greater than the same period last year. Average inventory per store during the quarter was $1,030 thousand for the fourth quarter of 2007, flat versus the same period last year. North American Business Solutions Division Total sales in the North American Business Solutions Division were $1.1 billion, down 4% compared to the fourth quarter of last year. Sales to small- to mid-sized customers were down 13%. This decrease overshadowed solid sales growth of 5% among large, national account customers and 10% sales growth to the public sector in the fourth quarter. Growth in state government and the K-12 educational sectors have been driving the results in the public sector, both delivering double-digit increases for all four quarters of 2007. The North American Business Solutions Division had an operating profit of $1 million for the fourth quarter of 2007 compared to $72 million for the same period of the prior year. Operating margins declined by 640 basis points versus the fourth quarter 2006. Contributing factors to the margin decline included a less-favorable customer mix, lower vendor program funding, higher reserves for inventory clearance and returned product, and product cost increases that could not be fully passed through in higher prices. International Division The International Division reported a sales increase of 12% in the fourth quarter compared with the same period last year and organic sales in local currency increased by 2%. This marks the eighth consecutive quarter the division has grown the top-line in local currency. In particular, the Contract channel continued its strong performance, growing sales in local currency by 8% in the quarter. This is a reflection of the strength of Office Depot's global brand with an increasingly global customer base. Division operating profit was $60 million in the fourth quarter compared to $77 million in the prior year's fourth quarter. Operating profit margin declined by 230 basis points to 5.3%, from 7.6% in the prior year, as the U.K. business continued to struggle. Continued overall weakness in the U.K. business accounted for much of the profit decline and operating margin compression. Continued investment, including establishing regional offices in Asia and Latin America, centralization of certain support functions in Europe, green-field business expansion in Poland, and consolidation of warehouse facilities to better support the multi-channel business portfolio in Europe, accounted for the remainder of the margin decline. Growth in the large customer segment, which has a lower margin rate than the small- to medium-sized customer segments, drove unfavorable customer mix and compressed overall operating margins as well. Full Year Results(2) For the full year, sales increased 3% to $15.5 billion. Net earnings for fiscal 2007 were $396 million compared to earnings of $503 million in the same period of 2006. Earnings per share on a diluted basis were $1.43 in 2007, compared to $1.75 in the prior year. The as adjusted diluted earnings per share for fiscal 2007 were $1.54 versus, $1.90 in 2006. For the full year, EBIT, as adjusted, decreased 31% from the prior year and EBIT margins compressed by 180 basis points to 3.5%. The as adjusted effective tax rate for the full year was 15%. Capital expenditures for 2007 were $461 million. Capital expenditure estimates for 2008 are expected to be around $375 million, reflecting a reduction in the number of planned new store openings from 150 to about 75, approximately 100 M2 store remodels, and investments in the Company's global supply chain and IT initiatives. The Company will continue to evaluate spending in accordance with operating performance and financial guidelines, and the overall business environment. In 2007, the Company repurchased approximately 5.7 million shares of its common stock for $200 million. The Company also previously announced that its Board has authorized the repurchase of an additional $500 million of its common stock. Current plans are to repurchase common stock if cash flow permits. Over the past three years, the Company has returned to shareholders about 140% of as adjusted after-tax earnings, 106% of operating cash flow and 140% of net cash flow, excluding share repurchases. Other Matters Office Depot is announcing that its Executive Vice President and Chief Financial Officer, Patricia A. McKay, is leaving the Company effective March 1, 2008. Charles E. Brown, the Company's President, International, has agreed to assume the role of acting Chief Financial Officer following McKay's departure. Brown was Office Depot's Executive Vice President and Chief Financial Officer from 2001 to 2005. Office Depot plans to begin its search for a permanent Chief Financial Officer immediately and will announce a successor when this process is completed. Commenting on McKay's departure, Steve Odland, Office Depot's Chief Executive Officer, said: "Pat has made valuable contributions to the Company since joining the management team in 2005. We thank her for her tireless work and dedication to the Company. We also wish her all the best in her future endeavors." Additionally, Kim Maguire, Executive Vice President, Merchandising, is leaving at the end of the month for personal reasons. The Company hopes to fill this role quickly. 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 more than 1,600 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 $15.5 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 43 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. (1) Includes non-GAAP information. Fourth quarter results include impacts of previously announced programs, a legal settlement and a 2006 gain on building sale ("Charges" or "Charges and Credits"). Additional information is provided in our Form 10-K 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. (2) Includes non-GAAP information. Full year results include impacts of previously announced programs, a legal settlement and a 2006 gain on building sale ("Charges" or "Charges and Credits"). Additional information is provided in our Form 10-K 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. OFFICE DEPOT, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) (Unaudited) As of As of December 29, December 30, 2007 2006 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 222,954 $ 173,552 Receivables, net 1,511,681 1,480,316 Inventories 1,717,662 1,539,685 Deferred income taxes 120,162 131,977 Prepaid expenses and other current assets 143,255 116,931 ------------ ------------ Total current assets 3,715,714 3,442,461 Property and equipment, net 1,588,958 1,424,967 Goodwill 1,282,457 1,198,886 Other intangible assets 107,987 114,289 Other assets 561,424 376,835 ------------ ------------ Total assets $ 7,256,540 $ 6,557,438 ============ ============ Liabilities and stockholders' equity Current liabilities: Trade accounts payable $ 1,591,154 $ 1,561,784 Accrued expenses and other current liabilities 1,170,775 1,224,565 Income taxes payable 3,491 135,448 Short-term borrowings and current maturities of long-term debt 207,996 48,130 ------------ ------------ Total current liabilities 2,973,416 2,969,927 Deferred income taxes and other long-term liabilities 576,254 403,289 Long-term debt, net of current maturities 607,462 570,752 Minority interest 15,564 16,023 Commitments and contingencies Stockholders' equity: Common stock - authorized 800,000,000 shares of $.01 par value; issued and outstanding shares - 428,777,625 in 2007 and 426,177,619 in 2006 4,288 4,262 Additional paid-in capital 1,784,184 1,700,976 Accumulated other comprehensive income 495,916 295,253 Retained earnings 3,783,805 3,370,538 Treasury stock, at cost - 155,819,358 shares in 2007 and 149,778,235 shares in 2006 (2,984,349) (2,773,582) ------------ ------------ Total stockholders' equity 3,083,844 2,597,447 ------------ ------------ Total liabilities and stockholders' equity $ 7,256,540 $ 6,557,438 ============ ============ OFFICE DEPOT, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except per share amounts) (Unaudited) 13 Weeks Ended 52 Weeks Ended ------------------------- ------------------------- December 29, December 30, December 29, December 30, 2007 2006 2007 2006 ------------ ------------ ------------ ------------ Sales $ 3,866,927 $ 3,843,030 $15,527,537 $15,010,781 Cost of goods sold and occupancy costs 2,844,391 2,655,929 11,024,639 10,363,437 ------------ ------------ ------------ ------------ Gross profit 1,022,536 1,187,101 4,502,898 4,647,344 Store and warehouse operating and selling expenses 851,985 862,296 3,381,129 3,296,443 Asset impairments -- 7,450 -- 7,450 General and administrative expenses 183,546 173,582 645,661 651,696 Gain and amortization of deferred gain on sale of building (1,874) (21,432) (7,493) (21,432) ------------ ------------ ------------ ------------ Operating profit (loss) (11,121) 165,205 483,601 713,187 Other income (expense): Interest income 3,228 382 9,440 9,828 Interest expense (13,093) (7,693) (63,080) (40,830) Loss on extinguishment of debt -- (5,715) -- (5,715) Miscellaneous income, net 3,739 10,119 28,672 30,565 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes (17,247) 162,298 458,633 707,035 Income taxes (36,021) 35,714 63,018 203,564 ------------ ------------ ------------ ------------ Net earnings $ 18,774 $ 126,584 $ 395,615 $ 503,471 ============ ============ ============ ============ Earnings per common share: Basic $ 0.07 $ 0.46 $ 1.45 $ 1.79 Diluted 0.07 0.45 1.43 1.75 Weighted average number of common shares outstanding: Basic 272,204 274,895 272,899 281,618 Diluted 273,309 280,351 275,940 287,722 OFFICE DEPOT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) 52 Weeks Ended ------------------------- December 29, December 30, 2007 2006 ------------ ------------ Cash flow from operating activities: Net earnings $ 395,615 $ 503,471 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 281,383 279,005 Charges for losses on inventories and receivables 109,798 85,610 Net earnings from equity method investments (34,825) (27,125) Compensation expense for share-based payments 37,738 39,889 Deferred income tax provision (1,022) (15,847) Gain on disposition of assets (25,190) (23,948) Asset impairments -- 7,450 Other operating activities 2,927 (1,704) Changes in assets and liabilities: Decrease (increase) in receivables 25,909 (128,558) Increase in inventories (191,685) (155,955) Net increase in prepaid expenses and other assets (12,342) (23,212) Net (decrease) increase in accounts payable, accrued expenses and other long-term liabilities (176,921) 287,999 ------------ ------------ Total adjustments 15,770 323,604 ------------ ------------ Net cash provided by operating activities 411,385 827,075 ------------ ------------ Cash flows from investing activities: Purchases of short-term investments -- (961,450) Sales of short-term investments -- 961,650 Acquisitions, net of cash acquired, and related payments (48,036) (248,319) Capital expenditures (460,571) (343,415) Proceeds from disposition of assets and other 129,182 106,381 Dividends received 25,000 -- Restricted cash for pending transaction (18,100) -- ------------ ------------ Net cash used in investing activities (372,525) (485,153) ------------ ------------ Cash flows from financing activities: Net proceeds from exercise of stock options and sale of stock under employee stock purchase plans 29,332 101,034 Tax benefit from employee share-based exercises 18,266 43,355 Acquisition of treasury stock under approved repurchase plans (199,592) (970,640) Treasury stock additions from employee related plans (11,201) (12,796) Proceeds from issuance of borrowings 177,413 8,494 Payments on long- and short-term borrowings (6,292) (58,545) ------------ ------------ Net cash provided by (used in) financing activities 7,926 (889,098) ------------ ------------ Effect of exchange rate changes on cash and cash equivalents 2,616 17,531 ------------ ------------ Net increase (decrease) in cash and cash equivalents 49,402 (529,645) Cash and cash equivalents at beginning of period 173,552 703,197 ------------ ------------ Cash and cash equivalents at end of period $ 222,954 $ 173,552 ============ ============ OFFICE DEPOT, INC. Comparative Trailing Four Quarters Data and GAAP to Non-GAAP Reconciliations (Unaudited) Total Company Trailing 4 Quarters ---------------------------------- ------------------------- December 29, December 30, (Dollars in millions) 2007 2006 Change ---------------------------------- ------------ ------------ --------- Sales $15,527.5 $15,010.8 3% EBIT(1) $ 512.2 $ 738.0 -31% % of sales 3.3% 4.9% -160 bps EBIT - as adjusted(1) $ 550.7 $ 802.1 -31% % of sales 3.5% 5.3% -180 bps Net earnings $ 395.6 $ 503.5 -21% Net earnings - as adjusted(1) $ 423.8 $ 545.7 -22% Diluted Earnings Per Share $ 1.43 $ 1.75 -18% Diluted Earnings Per Share - as adjusted(1) $ 1.54 $ 1.90 -19% EBITDA - as adjusted(1) $ 813.7 $ 1,060.8 -23% % of sales 5.2% 7.1% -190 bps Return on Equity (ROE) - as adjusted(1) 15.2% 21.4% -620 bps Return on Invested Capital (ROIC) - as adjusted(1) 11.3% 15.4% -410 bps Average shares 275.9 287.7 -4% (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) Charges % of and Other % of Q4 2007 GAAP Sales Adjustments Non-GAAP Sales ------------------------- -------------------------------------------- Gross Profit $1,022.5 26.4% $ 0.1 $1,022.6 26.4% Operating Expenses $1,033.6 26.7% $(13.6) $1,020.0 26.3% Operating Profit (Loss) $ (11.1) -0.3% $ 13.7 $ 2.6 0.1% Net Earnings $ 18.8 0.5% $ 7.8 $ 26.6 0.7% ========= =========== ======== Diluted Earnings Per Share $ 0.07 $ 0.03 $ 0.10 ========= =========== ======== Charges % of and Other % of Q4 2006 GAAP Sales Adjustments Non-GAAP Sales -------------------------- ------------------------------------------- Gross Profit $1,187.1 30.9% $ 0.2 $1,187.3 30.9% Operating Expenses $1,021.9 26.6% $(25.9) $ 996.0 25.9% Operating Profit $ 165.2 4.3% $ 26.1 $ 191.3 5.0% Net Earnings $ 126.6 3.3% $ 16.7 $ 143.3 3.7% ======== =========== ======== Diluted Earnings Per Share $ 0.45 $ 0.06 $ 0.51 ======== =========== ======== Charges % of and Other % of YTD 2007 GAAP Sales Adjustments Non-GAAP Sales ---------------------------- ----------------------------------------- Gross Profit $4,502.9 29.0% $ 0.3 $4,503.2 29.0% Operating Expenses $4,019.3 25.9% $(38.2) $3,981.1 25.6% Operating Profit $ 483.6 3.1% $ 38.5 $ 522.1 3.4% Net Earnings $ 395.6 2.5% $ 28.2 $ 423.8 2.7% ======== =========== ======== Diluted Earnings Per Share $ 1.43 $ 0.11 $ 1.54 ======== =========== ======== Charges % of and Other % of YTD 2006 GAAP Sales Adjustments Non-GAAP Sales ---------------------------- ----------------------------------------- Gross Profit $4,647.3 31.0% $0.9 $4,648.2 30.9% Operating Expenses $3,934.1 26.2% $(57.5) $3,876.6 25.8% Operating Profit $713.2 4.8% $58.4 $771.6 5.1% Net Earnings $503.5 3.4% $42.2 $545.7 3.6% ======== =========== ======== Diluted Earnings Per Share $1.75 $0.15 $1.90 ======== =========== ======== Office Depot, Inc. DIVISION INFORMATION (Unaudited) North American Retail Division ---------------------------------------------------------------------- Fourth Quarter Year-to-Date ------------------- ------------------- (Dollars in millions) 2007 2006 2007 2006 ------------------------------ --------- --------- --------- --------- Sales $1,667.7 $1,723.2 $6,813.6 $6,789.4 % change -3% --% --% 4% Division operating profit $ 23.5 $ 109.3 $ 354.5 $ 454.3 % of sales 1.4% 6.3% 5.2% 6.7% North American Business Solutions Division ---------------------------------------------------------------------- Fourth Quarter Year-to-Date ------------------- ------------------- (Dollars in millions) 2007 2006 2007 2006 ------------------------------ --------- --------- --------- --------- Sales $1,064.7 $1,110.5 $4,518.4 $4,576.8 % change -4% 1% -1% 6% Division operating profit $ 0.8 $ 71.9 $ 220.1 $ 367.0 % of sales 0.1% 6.5% 4.9% 8.0% International Division ---------------------------------------------------------------------- Fourth Quarter Year-to-Date ------------------- ------------------- (Dollars in millions) 2007 2006 2007 2006 ------------------------------ --------- --------- --------- --------- Sales $1,134.6 $1,009.4 $4,195.6 $3,644.6 % change 12% 13% 15% 5% % change in local currency sales 2% 13% 6% 7% Division operating profit $ 59.6 $ 76.8 $ 231.1 $ 249.2 % of sales 5.3% 7.6% 5.5% 6.8% 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) 52 Weeks Ended 52 Weeks Ended December 29, December 30, 2007 2006 -------------- -------------- Cumulative share repurchases under approved repurchase plans ($): $ 199,592 $ 970,640 Cumulative share repurchases under approved repurchase plans (shares): 5,702 26,417 Shares outstanding, end of quarter 272,958 276,399 Amount authorized for future share repurchases, end of quarter ($): $ 500,000 Selected Operating Highlights 13 Weeks Ended 52 Weeks Ended ------------------------- ------------------------- December 29, December 30, December 29, December 30, 2007 2006 2007 2006 ------------------------- ------------------------- Store Statistics United States and Canada: Store count: Stores opened 12 39 71 115 Stores closed 2 2 7 4 Stores relocated 2 2 3 7 Total U.S. and Canada stores 1,222 1,158 1,222 1,158 North American Retail Division square footage: 29,790,082 28,520,269 Average square footage per NAR store 24,378 24,629 Inventory per store (end of period) $ 960,000 $ 935,000 International Division company- owned: Store count: Stores opened 5 5 26 13 Stores closed 1 -- 3 -- Stores acquired -- -- -- 42 Total International company-owned stores 148 125 148 125 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.