Office Depot, Inc. (NYSE:ODP), a leading global provider of office products and services, today announced record third quarter results for the fiscal period ended September 30, 2006.
Third Quarter ResultsTotal Company sales for the third quarter grew 10% to a record $3.9 billion compared to the third quarter of 2005. Sales in North America were up 10%, while International sales increased 13% in U.S. dollars and 9% in local currencies. North American Retail comparable store sales were up 3% for the quarter.
Net earnings for the quarter were $133 million compared to a net loss of $48 million in the same quarter of the prior year. Diluted earnings per share were $0.47 in the third quarter of 2006 versus a per share loss of $0.15 in the same period a year ago. Excluding certain charges (Third Quarter Charges), net earnings as adjusted increased to $139 million in the third quarter of 2006 from $111 million in 2005. Diluted earnings per share as adjusted increased 40% to $0.49 in the third quarter of 2006 from $0.35 in the same period last year.
For the quarter, operating profit as a percentage of sales was 5.0% compared to an operating loss of 2.8% in the prior year. Operating profit margin, as adjusted, increased 110 basis points to 5.1% from 4.0%. This improvement results from a 30 basis point expansion in gross profit margin and an 80 basis point reduction in our operating expense ratio which reflects leverage on higher sales and cost efficiencies.
Office Depot continued executing against its strategic goal of global expansion with the acquisition during the quarter of Papirius, one of the largest business-to-business suppliers of office products and services in Eastern Europe. Papirius has annual revenues of more than $56 million, and operations in the Czech Republic, Lithuania, Hungary and Slovakia. This business has been included in the International Division''s results since the date of acquisition but the impact was not material to results. Last week, Office Depot closed on the acquisition of AsiaEC, one of the largest suppliers of office products and services in China. Financial results of that acquisition will be included in Company operations beginning in the fourth quarter of 2006.
In the third quarter, Office Depot repurchased approximately 5.3 million shares of common stock for $200 million under the repurchase programs previously approved by the Board of Directors. At the end of the quarter, approximately $300 million remained authorized for future repurchases.
ROIC, as adjusted, improved to 14.8% for the trailing four quarters of 2006 as compared to 11.8% in the prior year. ROE, as adjusted, increased to 19.8% for the trailing four quarters of 2006 compared to 13.1% for the same period of 2005.
"We are extremely pleased with the record sales and earnings Office Depot achieved in the third quarter," said Steve Odland, Office Depot''s Chairman and CEO. "The strategic initiatives that we have implemented have led to significant sales growth in each of our Divisions as well as lower operating expenses and expanded margins."
Third Quarter Division Results
North American Retail Division
Third quarter sales in the North American Retail Division increased 8% to $1.8 billion compared to the same period last year. Comparable store sales in the 998 stores in the U.S. and Canada that have been open for more than one year increased 3% in the third quarter, led by the technology product category and back-to-school season. This represents the 11th consecutive quarter of positive comparable sales.
The North American Retail Division had an operating profit of $120 million for the third quarter of 2006, up from $108 million in the same period of the prior year. Gross margins also improved over last year. This improvement reflected an expansion in product margins driven by category management and an increase in private brand sales from both growth in existing products and the introduction of new products across many categories. During the quarter, Office Depot accelerated the pace of remodeling and store expansions by opening 50 new stores (76 year to date) and remodeling 64 (113 year to date). These retail initiatives raised operating expenses by 70 basis points compared to the third quarter of the prior year. Despite these cost pressures, operating profit margin improved 20 basis points to 6.8% in the quarter from 6.6% in the prior year period.
At the end of the third quarter, Office Depot operated a total of 1,121 stores throughout the U.S. and Canada.
Inventory per store was $923 thousand as of the end of the third quarter of 2006, relatively consistent with the prior year.
North American Business Solutions Division
Sales in the North American Business Solutions Division increased by 12% to $1.2 billion in the third quarter compared to the same period last year. This increase was due to growth in key product categories and average order values. Third quarter revenue reflects strong organic growth in the contract sales channel, as well as a full quarter of revenue from Allied Office Products, a contract stationer acquired during the second quarter of 2006. This growth more than offset declines experienced in the direct selling channel as the Company executed brand consolidation in this Division and deliberately reduced some unprofitable business.
The North American Business Solutions Division operating profit was $97 million for the third quarter of 2006 compared to $82 million for the same period of the prior year. Operating profit margin increased approximately 40 basis points to 8.0% in the third quarter of 2006 from 7.6% in the same period of 2005. This improvement resulted from slight gross margin expansion, as well as cost savings and operating efficiencies. Division results for the quarter also reflect costs associated with the continued investment in the expansion of the Company''s contract sales force and certain short-term costs associated with the integration of the Allied acquisition. Additionally, Office Depot''s supply chain continued its history of improvements in operating expense leverage.
International Division
Sales in the International Division increased 13% in U.S. dollars to $882 million compared to the third quarter of 2005. Sales in local currencies increased 9%, representing the third straight quarter of positive growth. This significant increase was attributable to both organic growth, achieved across all channels, and to revenue from recent acquisitions. These acquisitions have been consolidated since their respective purchase dates, but operating income was not material to the Division results for the quarter.
Division operating profit was $55 million in the third quarter of 2006 compared to $42 million in the prior year''s third quarter. Operating profit margin expanded by 90 basis points to 6.3% in the third quarter of 2006 from 5.4% in the same period of 2005 due to continued improvements in operating activities coupled with the stabilization of gross margins.
