Synergy Savings Keep Climbing At Office Depot

August 5, 2014

Office Depot softened the blow of weak second quarter sales by bumping up the pace of 400 store closings to drive greater than expected operating profit growth and expense savings related to the merger with OfficeMax.

Office Depot merged with Office Max last November and shortly thereafter announced plans to close 400 stores by the end of 2016.  The total number of closings remains intact, but the company now expects to close 165 of the stores this year compared to an earlier forecast of 150 closings in 2014.  The estimate of expense savings related to the closures was increased to $100 million from a $75 million estimate share at the end of the first quarter.

In total, Office Depot estimates the optimization of its North American store portfolio combined with other savings will result in annual run-rate synergies totaling $700 million.  That figure is well above the $400 to $600 million range shared when the deal was announced last year, and the $675 million estimate shared at the end of the first quarter.

Because the expense savings are being realized faster than initially forecast, the company is growing adjusted operating income faster than planned in the absence of any top line growth.

During the second quarter, our team executed exceptionally well, which enabled us to deliver merger synergies more quickly than anticipated," said Roland Smith, chairman and CEO of Office Depot.  "We are very pleased with the integration of legacy Office Depot and OfficeMax as we create a culture focused on achieving our critical prioities in the near and long term.  As planned, we have completed our analysis of the North America retail store optimization strategy and have continued to make progress on the development of our unique selling proposition.  Based on accelerated synergies and improving execution, we have updated our full year 2014 outlook for adjusted operating income to be not less than $200 million, an increase from our prior outlook of not less than $160 million."

Despite progress on the expense front, sales remain challenging for the company's retail, commercial and international divisions.  On a consolidated basis, sales for the second quarter increased to $3.8 billion from $2.4 billion, reflecting the inclusion of OfficeMax results.  However, on a pro-forma basis, looking at results as if both companies existed on a stand-alone basis, sales declined from $3.9 million.

Sales at the company's North American Business Solutions division declined 1% to $1.5 billion, on a pro forma basis while the operating profits ticked up to $59 million from $53 million.  International sales were essentially flat on a pro forma basis with the division's loss declining to $2 million from $6 million.

Source: Retailing Today