Office Depot Reports Q1 Gains, Plans Store Closings

For the first quarter ended March 29, Office Depot, Inc. posted sales and earnings that included a gain in adjusted earnings. At the same time, however, the company proposed closing 400 stores.

Office Depot’s posting incorporates financial results from OfficeMax in the aftermath of its merger with the former rival. Office Depot first quarter 2013 results include only the financial reporting of originally controlled namesake stores, so it provided pro forma results for the first quarter of 2013 that combine Office Depot and OfficeMax operations assuming the merger closed at the beginning of fiscal 2013 and providing for adjustments covering purchase accounting, charges and reclassifications.

Sales in the 2014 first quarter were $4.35 billion versus $2.72 billion as reported and $4.48 pro forma, in the period a year earlier, Office Depot stated. Operating income come in as a loss of $79 million versus a $10 million gain as reported in the year-prior period. First quarter net loss was $109 million, or 21 cents per share, versus a net loss of $17 million, or six cents per share, in the year-earlier period, Office Depot maintained.

The 2014 first quarter operating loss included special charges totaling $151 million, comprised of $96 million in merger-related expenses, $41 million in non-cash IT-related impairment charges, $9 million in non-cash store impairment charges and $5 million in International restructuring and other operating expenses, according to Office Depot. The tax effect of these pretax charges was $4 million, it added. Adjusted operating income for the 2014 first quarter, which excludes such special items, increased 33% to $72 million compared to combined pro forma adjusted operating income of $54 million in the 2013 first quarter, and adjusted net income gained 111% to $38 million, or seven cents per share, versus a combined pro forma adjusted net income of $18 million, or three cents per share, in the 2013 first quarter.

Adjusted net income beat a Thomson Reuter’s average analyst estimate by four cents per share.

North American Retail Division reported first quarter sales of $1.8 billion, including OfficeMax revenues, versus $1.1 billion in the year-before period. On a combined pro forma basis, first quarter 2014 sales fell 5%, and comparable store sales slipped 3% versus the year prior. Lower transaction counts hit comps, partially offset by higher average order values, Office Depot noted. Divisional operating income was $37 million verses a reported $21 million for the 2013 first quarter and a combined pro forma operating income of $31 million.

Roland Smith, Office Depot chairman and CEO, said in announcing the financial results, “We are pleased with our first quarter performance. After a weather-challenged start to the year, sales trends improved as the quarter progressed, and we exceeded our expectations for both cost reduction and operational execution. With our new organizational structure established and leadership team largely in place, the execution on our critical priorities is improving, and we are delivering merger integration synergies more quickly than anticipated. Accordingly, we have increased our full year 2014 outlook for adjusted operating income to be not less than $160 million from our prior outlook of not less than $140 million.”

Smith said a critical company priority “is to improve our store footprint in North America to best meet customer demand, ensure we are appropriately positioned in the markets we serve, and align with our unique selling proposition, which we are developing this year. The overlapping retail footprint resulting from the merger provides us with a unique opportunity to consolidate and optimize our store portfolio while maintaining the retail presence necessary to serve our customers. Based on our preliminary analysis, we expect to close at least 400 locations in the U.S., with 150 stores slated to close in 2014. We anticipate the total store closures will generate annual run-rate synergies of at least $75 million by the end of 2016 and will begin to be accretive to earnings in 2015.”