Office Depot's 4Q Results
February 14, 2007
- GAAP Diluted EPS up 41% vs. Q4 Last Year
- Adjusted, Diluted EPS up 42% vs. Q4 Last Year
- Twelfth Consecutive Quarter of Positive North American Retail Comps
Office Depot, Inc. (NYSE:ODP) announced fourth quarter and year end results for the fiscal period ended December 30, 2006.
FOURTH QUARTER RESULTS Total Company sales for the fourth quarter grew 3% to $3.8 billion compared to the fourth quarter of 2005. Excluding the 53rd week of 2005, sales increased 8% as compared to the prior year. North American Retail comparable store sales were up 1% for the quarter, the twelfth consecutive quarter of positive comp sales.
Net earnings for the quarter were $135 million compared to $106 million in the same quarter of the prior year. Diluted earnings per share were $0.48 in the fourth quarter of 2006 versus $0.34 in the same period a year ago. Excluding certain items in both periods (primarily Charges and the effect of the 53rd week in 2005), net earnings as adjusted increased to $152 million in the fourth quarter of 2006 from $117 million in 2005. Diluted earnings per share as adjusted increased 42% to $0.54 in the fourth quarter of 2006 from $0.38 in the same period last year(1).
For the quarter, operating profit as a percentage of sales was 4.7% compared to 3.7% in the prior year. Operating profit margin, as adjusted for the items described above, increased 40 basis points to 5.3% from 4.9% in the prior year. This improvement resulted from a reduction in operating expense ratio which reflects leverage on higher sales and cost efficiencies realized.
In the fourth quarter, Office Depot repurchased approximately 2.4 million shares of common stock for $100 million under the repurchase programs previously approved by the Board of Directors. At the end of the quarter, approximately $200 million remained authorized for future repurchases.
Return on Invested Capital (ROIC) for the year, as adjusted, improved 300 basis points to 15.6% as compared to 12.6% in the prior year. Return on Equity (ROE), as adjusted, increased 730 basis points to 21.9% for the year compared to 14.6% for the same period of 2005.
"We are pleased with the performance of our business in the fourth quarter," said Steve Odland, Office Depot's Chairman and CEO. "The strategic initiatives that we have implemented have led to sales growth in each of our Divisions as well as lower operating expenses and expanded total company margins. This overall growth in sales and operating margin expansion was realized despite a highly promotional holiday retail environment and reduced technology sales due to the impending release of Microsoft(R) Windows Vista(TM) at the end of January. This reflects the strength of our overall business model."
FOURTH QUARTER DIVISION RESULTSNorth American Retail Division
Fourth quarter sales in the North American Retail Division were $1.7 billion, approximately even with the same period last year. However, sales increased 7% over the prior year after consideration of the impact of the 53rd week in 2005.
Comparable store sales in the 1,036 stores in the U.S. and Canada that have been open for more than one year increased 1% in the fourth quarter, lapping a high 5% comp from the prior year. This represents the 12th consecutive quarter of positive comparable sales. Comparable sales are more influenced in the fourth quarter by consumer holiday spending versus our more traditional business customer sales and were impacted in 2006 by a heavily promotional consumer sales environment coupled with a lapping of the influence from 2005 hurricane recovery sales that helped boost sales in the fourth quarter of 2005. Also, the growth in private brand products, while more profitable, reduced comps due to their lower average selling price than branded comparisons.
The North American Retail Division had an operating profit of $122 million for the fourth quarter of 2006, up from $103 million in the same period of the prior year. Gross profit, expressed as a percent of sales, improved over last year, in part reflecting 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. The Division also had lower payroll and related costs as a percent of sales, reflecting improvements in store operating efficiencies.
During the quarter, Office Depot continued to accelerate the pace of store expansions and remodels by opening 39 new stores (115 for the year) and remodeling 63 (176 in 2006). These activities raised operating expenses by 30 basis points compared to the fourth quarter of the prior year. Despite these cost pressures, operating profit margin improved 120 basis points to 7.1% in the quarter from 5.9% in the prior year period.
At the end of the fourth quarter, Office Depot operated a total of 1,158 stores throughout the U.S. and Canada.
Inventory per store was $935 thousand as of the end of the fourth quarter of 2006. This is lower than the prior year and normal seasonal levels due to winter storms in the Western U.S. which impacted late quarter replenishment efforts, and lack of supply of computers pre-Microsoft(R) Windows Vista(TM) launch.
North American Business Solutions DivisionSales in the North American Business Solutions Division increased by 1% compared to the fourth quarter of last year. However, sales increased 10% over the prior year after consideration of the impact of the 53rd week in 2005. From a channel perspective, fourth quarter 2006 revenue reflects "like for like" sales growth of 21% in the contract channel (including the recent Allied acquisition) which more than offset expected declines in the direct selling channel from the Division's brand consolidation which deliberately reduced some unprofitable business.
The North American Business Solutions Division operating profit was $72 million for the fourth quarter of 2006 compared to $108 million for the same period of the prior year. Operating margins declined in the fourth quarter of 2006 reflecting temporarily higher expense levels associated with the integration of the Allied acquisition, continued investment in the expansion of both the contract sales force (which accelerated late in the fourth quarter of 2005), as well as telephone account managers, and implementation costs associated with a new delivery initiative. These expenses, which significantly raised operating costs in the fourth quarter, were the primary contributors to the short term margin erosion and are expected to moderate over the next few quarters. For example, the Division will lap the accelerated levels of investment in the contract sales force as it enters 2007, and should see a reduction in the costs associated with the telephone account management program expansion as well as benefits from the fully integrated Allied acquisition as those activities were substantially complete at the end of 2006.
International DivisionSales in the International Division increased 13% in U.S. dollars compared to the fourth quarter of 2005. Local currency sales also increased 13% over the prior year after consideration of the impact of the 53rd week in 2005. Importantly, all channels contributed positive growth and the Division has realized its fourth straight quarter of sales growth in local currencies.
Division operating profit was $77 million in the fourth quarter of 2006 compared to $57 million in the prior year's fourth quarter. Operating profit margin expanded by 120 basis points to 7.6% in the fourth quarter of 2006 from 6.4% in the same period of 2005, as modest gross margin pressures experienced from a shift in sales mix were more than offset by continued improvements in operating expenses and leverage achieved from higher sales. As expected, acquisitions completed during the year did not dilute Division operating income.
Other MattersDuring the fourth quarter of 2006, Office Depot completed the sale and short-term leaseback of its existing corporate headquarters in anticipation of the late 2008 completion of its new headquarters. That sale resulted in a net pre-tax gain of $15.7 million (net of debt retirement charge). Additionally, the company recorded a $16.5 million charge associated with the pending settlement of a legal matter. Both of these items have been included as part of the adjustments to the fourth quarter results.
FULL YEAR RESULTSFor the year, sales were $15 billion, an increase of 5% from the prior year. Excluding the 53rd week of 2005, sales for the year increased 6% as compared to 2005. Comparable sales for the year in the North American Retail Division increased by 2%.
Net earnings for 2006 were $516 million compared to $274 million in 2005. Diluted earnings per share were $1.79 in 2006 versus $0.87 last year. Excluding certain items in both years (primarily Charges and the effect of the 53rd week in 2005), net earnings as adjusted increased to $558 million in 2006 from $444 million in 2005. Diluted earnings per share as adjusted increased 38% to $1.94 for the year from $1.41 in 2005.
For the year, operating profit as a percentage of sales was 4.9% compared to an operating profit of 2.4% in the prior year. Operating profit margin, as adjusted, increased 90 basis points to 5.3% from 4.4%. This improvement resulted from a 20 basis point expansion in gross profit margin and a 70 basis point reduction in our operating expense ratio which reflects leverage on higher sales and cost efficiencies.
