ODP Plans 400 Store Closures

May 6, 2014

Office Depot said it plans to close 400 of its 2,000 stores as it looks to realize efficiencies related to its merger with OfficeMax.

An estimated 150 of the stores will close this year, according to the company, which reported first quarter results and continued weakness in same store sales.  The company anticipates that the 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.

Total reported sales for the quarter were $4.4 billion compared to $2.7 billion in the first quarter of 2013, and were 3% lower than combined pro forma sales of $4.5 billion in the first quarter of the prior year.

The company reported an operating loss of $79 million and a net loss attributable to common stockholders of $109 million, or $0.21 per share.  The operating loss included special charges totaling $151 million, which were made up 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.  The tax effect of these pretax charges was $4 million.  In the first quarter of 2013, the company reported operating income of $10 million and a net loss attributable to common stockholders of $17 million, or $0.06 per share.

"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," said chairman and CEO Roland Smith.  "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."

The company's North American Retail Division reported sales in the quarter of $1.8 billion compared to $1.1 billion in the first quarter of 2013, reflecting the inclusion of OfficeMax sales in the first quarter of 2014.  On a combined pro forma basis, first quarter 2014 sales declined 5%, and same-store sales declined 3% versus last year.  Same-store sales decreased primarily due to lower transaction counts partially offset by higher average order values.

Meanwhile, the Business Solutions Division reported sales of $1.5 billion in the quarter compared to $0.8 billion in the prior year period, reflecting the inclusion of OfficeMax sales in the first quarter of 2014.  On a combined pro forma basis, sales declined 2%.

International Division reported sales of $1 billion in the quarter compared to $0.8 billion in the proir year quarter, reflecting the inclusion of OfficeMax sales in the first quarter of 2014.  On a combined pro forma basis, sales declined 1% in constant currency.

For the remainder of 2014, Office Depot continues to expect that market trends will remain challenging across the company's product lines and distribution channels, and therefore continues to anticipate total company sales in 2014 will be lower than 2013 combined pro forma sales.  The expense deleverage from lower sales is expected to offset a portion of the merger synergies and operating improvements anticipated during the year.  Based upon earlier than expected realization of cost synergies and improved operational execution in the first quarter, the company now expects to generate adjusted operating income of not less than $160 million in 2014 compared with its prior outlook of not less than $140 million.

Including at least $75 million in annual run-rate synergies from the optimization of the U.S. retail store portfolio, the company also raised its estimated total annual run-rate of synergies to more than $675 million by the end of 2016, compared to its prior outlook of more than $600 million.  Of those synergies, the company now expects to realize approximately $180 million during 2014, and end the year with an annual run-rate of approximately $360 million, not including any benefit from the retail store network optimization.

The company also continues to estimate that $400 million of cash merger integration expenses will be required during the three-year period of 2014 through 2016 to substantially complete the integration, excluding costs related to optimizing the U.S. retail store portfolio, which have not yet been determined.  Approximately $300 million of these cash integration expenses will be incurred in 2014.  The company continues to anticipate integration capital spending of approximately $200 million to $250 million during the 2014 through 2016 period.  In 2014, the company expects capital spending to be approximately $150 million, excluding up to an additional approximately $50 million in integration expenditures.  Depreciation and amortization is expected to be approximately $300 million in 2014.

Source: Retailing Today