Office Depot Inc. (NYSE:ODP) announced improved first quarter results for the fiscal period ending March 29, 2008, versus the fourth quarter results for the fiscal period ending December 29, 2007.
First Quarter Results
Total company sales for the first quarter decreased 3% to $4.0 billion. Total company operating expenses represented 26.8% of sales, an increase of 130 basis points over the first quarter of 2007. EBIT, adjusted for Charges, was $124 million in the first quarter of 2008 or 3.1% as a percentage of sales, compared to $246 million or 6.0% in the prior-year period.
Net earnings were $69 million in the first quarter of 2008, compared to $154 million in the same period of 2007. Earnings per share on a diluted basis were $0.25 for the quarter, versus $0.55 in the first quarter of 2007 and $0.07 for the fourth quarter of 2007. On an adjusted basis, diluted earnings per share were $0.29 for the first quarter, versus $0.59 in the same period one year ago and $0.10 for the fourth quarter of 2007.
First Quarter Division Results
North American Retail Division
First quarter sales in the North American Retail Division were down 7% to $1.7 billion. Comparable store sales in the 1,169 stores in the U.S. and Canada that have been open for more than one year decreased 9% for the first quarter. Florida and California continue to weigh heavily on reported results, as small business customers in these two markets continue to be disproportionately impacted by difficult housing-related economic conditions. Combined, these two states represented approximately 26% of total store sales and about 35% of the total comparable sales decrease in the first quarter. Outside of Florida and California, a deterioration has occurred over the last couple of quarters in other markets with housing-related issues. Other drivers negatively impacting comparable sales included competitive intrusion, cannibalization from the new store build out and a shift of the Easter holiday from the second quarter of 2007 to the first quarter of 2008.
Operating profit in the North American Retail Division was $82 million for the first quarter, a decline from the record high $152 million in the same period of the prior year, but $59 million higher than the fourth quarter of 2007. Operating profit as a percentage of sales decreased 340 basis points to 4.8% versus 8.2% in the first quarter of 2007, but was 340 basis points higher than the fourth quarter of 2007. Operating margin was negatively impacted by lower product margins, inventory-related items, a de-leveraging of fixed property costs and an increase in operating expenses due to a higher rate of store openings versus the prior year. Partially offsetting this margin decline was increased private brand penetration and the impact of controlling payroll and advertising expenses.
Comparable average sales per square foot were $233 in the first quarter 2008 and average order value remained relatively flat compared to the first quarter of 2007.
During the first quarter, Office Depot opened 45 new stores, most delayed from 2007, and relocated one store, bringing the total store count to 1,267. The Company remodeled one store in the first quarter of 2008. As of the end of the first quarter, approximately 55% of the chain or 690 stores were operating under the M2 format.
Inventory per store was $864 thousand at the end of the first quarter of 2008, down approximately 9% from the prior year. This decrease is a result of inventory management and the mitigation of inventory risk through clearance activities.
North American Business Solutions Division
First quarter sales in the North American Business Solutions Division were $1.1 billion, down 5% compared to the same period last year. Sales to small- to medium-sized customers were down 12%. This decrease overshadowed 3% sales growth among large, national account customers and 4% public sector sales growth in the first quarter of 2008. Sales were also negatively impacted by continued softness among customers in Florida and California, which accounted for about 30% of the Division's sales in the quarter and nearly two-thirds of the decline.
The North American Business Solutions Division operating profit was $60 million for the first quarter of 2008 compared to $72 million for the same period of the prior year, but $59 million higher than the fourth quarter of 2007. Operating margin declined by 80 basis points to 5.4% versus 6.2% in the first quarter 2007, but was 530 basis points higher than the fourth quarter of 2007. Approximately 70 basis points of the decrease in operating margin reflects a combination of higher incentives, some cost increases that could not be fully passed along to customers and a shift in the sales mix to lower margin customers and products. Partially offsetting this margin decline was a reduction in selling costs and lower advertising expenses.
International Division
The International Division reported a sales increase of 6% in the first quarter of 2008 compared with the same period last year, while sales in local currency decreased by 4%. The local currency sales decline was driven by lower sales mostly in the U.K. and France. Customer service levels have shown steady improvement in the U.K., but the economic slowdown continues to impact operations in that country. The sales comparison to last year also was negatively impacted by the timing of Easter, reducing the number of selling days in 2008.
Division operating profit was $60 million in the first quarter of 2008 compared to $82 million in the same period of the prior year, and flat with the fourth quarter of 2007. Operating profit margin declined by 230 basis points to 5.3%, from 7.6% in the prior year, due primarily to the negative impact of the U.K. business, and was flat with the fourth quarter of 2007. While the U.K. business has stabilized, it accounted for much of the profit decline and operating margin compression in the first quarter. Continued investment, including establishing regional offices in Asia and Latin America, centralization of certain support functions in Europe, and consolidation of warehouse facilities to better support the multi-channel business portfolio in Europe, accounted for the remainder of the margin decline.
