Office Depot Announces First Quarter 2016 Results

Stationery giant Office Depot, Inc. announced its first quarter results of 2016 since it was acquired by Staples, Inc. (“Staples”) on 4th, Feb., 2015.

The chairman and chief executive officer for Office Depot Roland Smith said, “The protracted regulatory review of the pending Staples acquisition continues to have a substantial disruptive impact on our business. Our North American Business Solutions Division and International Division are more impacted by this disruption and accordingly, both failed to meet our sales and profit expectations this quarter. In spite of the uncertainty surrounding the acquisition, our associates around the world continue to demonstrate focus, drive and dedication as we finalize this process.”

Smith added, “Regarding the pending Staples acquisition, we expect U.S. federal district court Judge Sullivan to render his decision by May 10, 2016. We continue to believe that this transaction provides substantial benefits to our shareholders and all our customers.”

Reported (GAAP) Results

Total reported sales for the first quarter of 2016 were $3.5 billion compared to $3.9 billion in the first quarter of 2015, a decrease of 9%.

In the first quarter of 2016, Office Depot reported operating income of $71 million and net income was $46 million, or $0.08 per share. In the first quarter of 2015, the reported operating income was $88 million and net income was $45 million, or $0.08 per share.

Adjusted (non-GAAP) Results (1)

Adjusted operating income(1) for the first quarter of 2016 was $115 million compared to an adjusted operating income of $135 million in the first quarter of 2015. Adjusted net income(1) for the first quarter of 2016 was $57 million, or $0.10 per share, compared to adjusted net income of $71 million, or $0.13 per share, in the first quarter of 2015.

• Adjusted operating income for the first quarter of 2016 excludes special charges and credits totaling $44 million, which were comprised of $39 million in expenses related to the Office Depot/OfficeMax merger and the pending acquisition by Staples, and $5 million in restructuring activities.

• Adjusted net income for the first quarter of 2016 excludes the after-tax impact of these items.

North American Retail Division

Retail Division sales were $1.5 billion in the first quarter of 2016 compared to $1.7 billion in the prior year period. First quarter sales declined 9%, primarily due to the impact of planned store closures in the fiscal twelve months through March 26, 2016. Same-store sales in the quarter declined 1% primarily due to lower transactions. Same-store sales benefited from the positive impact of transferred sales from closed stores and increased operational effectiveness.

North American Retail (in millions)   1Q16   1Q15

Sales                                                       $1,506   $1,653

Same-store sales change from prior year (1)%

Division operating income                     $102   $86

Division operating income margin       6.8%   5.2%

Retail Division operating income was $102 million, or 6.8% of sales, in the first quarter of 2016 compared to $86 million, or 5.2% of sales, in the first quarter of 2015. The improvement from the prior year quarter resulted largely from a higher gross margin rate and a decrease in occupancy costs driven by store closures, as well as a decrease in selling, general and administrative expenses including payroll and advertising.

Office Depot ended the first quarter of 2016 with a total of 1,555 retail stores in the North American Retail Division. During the quarter, the Company closed nine stores.

North American Business Solutions Division

Business Solutions Division sales were $1.4 billion in the first quarter of 2016, a decline of 7% compared to the prior year period. Sales also declined 7% in constant currency, and were lower in both the contract and direct channels. The contract channel sales decline was driven by customer attrition and lower customer additions, primarily due to the substantial business disruption related to the pending acquisition by Staples. In the direct channel, decommissioning our legacy OfficeMax ecommerce sites and the ongoing reduction in catalog sales through our call centers also contributed to the decline in sales.

Business Solutions (in millions)   1Q16   1Q15

Sales                                                  $1,368   $1,477

Sales decline in constant currency from prior year (7)%

Division operating income                  $46   $58

Division operating income margin   3.4%   3.9%

Business Solutions Division operating income was $46 million, or 3.4% of sales, in the first quarter of 2016 compared to $58 million, or 3.9% of sales, in the first quarter of 2015. The decrease in operating income compared to the prior year quarter reflected the negative flow-through impact of lower sales, partially offset by a higher gross margin rate and lower selling, general and administrative expenses including payroll and advertising.

International Division

International Division sales were $0.7 billion in the first quarter of 2016, a decline of 10% compared to the prior year period, reflecting the negative impact of foreign currency translation. International sales declined 6% in constant currency primarily due to the continued disruption from Staples’ pending acquisition of Office Depot and the related required European divestiture process, the European restructuring, as well as ongoing competitive market pressures and reduced spend from existing customers.

International (in millions)   1Q16   1Q15

Sales                                        $670   $747

Sales decline in constant currency from prior year (6)%

Division operating income (loss)   $(10)   $14

Division operating income (loss) margin   (1.4)%   1.9%

The International Division operating loss was $10 million, or 1.4% of sales, in the first quarter of 2016 compared to operating income of $14 million, or 1.9% of sales, in the first quarter of 2015. The decline from the prior year quarter primarily reflected the negative flow-through impact of lower sales and a lower gross margin rate, partially offset by lower selling, general and administrative expenses including payroll and advertising and support costs.

At the end of the first quarter of 2016, there were a total of 274 retail stores in the International Division, including 149 company-owned stores and 125 stores operated by franchisees and licensees.

Corporate includes support staff services and certain other expenses that are not allocated to the three divisions. Unallocated operating costs were $23 million in the first quarter of 2016 compared to $22 million in the first quarter of 2015.

As of March 26, 2016, Office Depot had $0.9 billion in cash and cash equivalents and approximately $1.1 billion available under the Amended and Restated Credit Agreement, for total available liquidity of approximately $2.0 billion. Total debt was $661 million, excluding $813 million of non-recourse debt related to the credit-enhanced timber installment notes. For the first quarter of 2016, cash used in operating activities was $139 million, including $115 million in merger and Staples acquisition-related expenses, and $9 million in International restructuring costs. Capital expenditures were $26 million in the first quarter of 2016, $6 million of which were related to the merger integration.

On February 4, 2015, Office Depot and Staples announced that the companies entered into a definitive agreement under which Staples will acquire all of the outstanding shares of Office Depot. Under the terms of the agreement, Office Depot shareholders will receive, for each Office Depot share, $7.25 in cash and 0.2188 of a share in Staples stock at closing. The transaction has been approved by both companies’ Board of Directors and Office Depot stockholders. The proposed transaction received antitrust clearance from the regulators in Australia, New Zealand and China.

On December 7, 2015, the United States Federal Trade Commission (the “FTC”) informed Office Depot and Staples that it intended to block the Staples Acquisition and file a request for a preliminary injunction. On the same date, Office Depot and Staples announced their intent to contest the FTC’s decision to block the transaction. Also on December 7, 2015, the Canadian Competition Bureau filed an application to block the transaction with the Canadian Competition Tribunal. On February 2, 2016, the Company and Staples announced that they entered into a letter agreement to waive, until May 16, 2016, certain of their respective rights to terminate the Staples Merger Agreement.

On February 10, 2016, the European Commission approved the transaction subject to certain divestiture requirements.

A hearing on the FTC’s preliminary injunction of the transaction was held in federal district court in March and April 2016. A decision is expected by May 10, 2016.

Detailed information at: http://news.officedepot.com

Source: http://news.officedepot.com