Office Depot (ODP)

Q1 2011 Earnings Call

April 26, 2011 9:00 am ET


Brian Turcotte - Vice President, Investor Relations

Charles Brown - President of International

Kevin Peters - President of North American Retail Division

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Previous Statements by ODP
» Office Depot's CEO Discusses Q4 2010 Results - Earnings Call Transcript
» Office Depot Management Discusses Q3 2010 Results - Earnings Call Transcript
» Office Depot Q2 2010 Earnings Call Transcript

Neil Austrian - Interim Chairman, Interim Chief Executive Officer, Member of Corporate Governance & Nominating Committee and Member of Finance Committee

Michael Newman - Chief Financial Officer and Executive Vice President

Steven Schmidt - President of North American Business Solutions Division


Joseph Feldman - Telsey Advisory Group

Daniel Binder - Jefferies & Company, Inc.

Kate McShane - Citigroup Inc

Matthew Fassler - Goldman Sachs Group Inc.

Stephen Chick - FBR Capital Markets & Co.

Christopher Horvers - JP Morgan Chase & Co

Alisa Guyer

Colin McGranahan - Sanford C. Bernstein & Co., Inc.

Mike Perez



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Good morning, and welcome to the First Quarter 2011 Earnings Conference Call. [Operator Instructions] At the request of Office Depot, today's conference is being recorded. I would like to introduce Mr. Brian Turcotte, Vice President of Investor Relations, who will make a few opening comments. Mr. Turcotte, you may now begin.

Brian Turcotte

Thank you, and good morning. With me today are Neil Austrian, Interim Chairman and Chief Executive Officer; Mike Newman, Chief Financial Officer; Kevin Peters, President of North American Retail; Steve Schmidt, President of North American Business Solutions; and Charlie Brown, President of International.

Before we begin, I'd like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these factors and uncertainties is contained in the company's filings with the SEC.

In addition, during the conference call, we refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to directly comparable GAAP financial measures, as well as our press release and accompanying webcast slides for today's call, are available on our website at, click on Investor Relations under Company Information.

Neil Austrian will now summarize Office Depot's first quarter 2011 earnings. Neil?

Neil Austrian

Thanks, Brian, and good morning. Before I review our first quarter 2011 results, I'd like to update you on our CEO search. Our search committee continues to meet with a shortlist of candidates, and we hope to conclude the process soon. However, as I've said in the past, we'll take as much time as we need to find the right leader for Office Depot. In addition, I would like to make it very clear that the 2010 restatement announced on March 31 has had no negative impact whatsoever on our CEO search process.

In regard to the restatement, it's unfortunate that the Internal Revenue Service denied our claim to carry back certain tax losses to prior tax years under economic stimulus-based tax legislation enacted in 2009, and that we needed to correct the 2010 financial statements. While we're disappointed to have had to restate our 2010 financial results, it's important to note that this restatement had no impact on our previously reported 2010 EBIT or EBITDA and no net impact on 2010 cash flows.

Turning to Office Depot's first quarter 2011 results. Sales totaled $3 billion, a decrease of 3% compared to our first quarter results in 2010. Excluding sales related to asset dispositions and deconsolidation in the fourth quarter of 2010 and an acquisition in the first quarter of 2011, total company sales decreased 2% versus prior year.

The company reported a net loss, after preferred stock dividends of $15 million or $0.05 per share in the first quarter of 2011 versus earnings of $20 million or $0.07 a share in the same period 1 year ago. The first quarter 2011 reported results include a 164% tax rate that Mike will review in detail later in the call.

First quarter 2011 results also included charges primarily related to restructuring and integration activity costs and actions to improve future operating performance. Excluding these charges, which totaled $8 million before tax, net earnings after preferred stock dividends were marginally profitable.

Total company gross profit margin decreased about 20 basis points in the first quarter compared to the prior year. This was driven primarily by gross margin pressures in the International division.

In North America, gross margins were flat for Retail and only slightly down for Business Solutions in a weak sales environment.

Total company operating expenses adjusted for charges were down $7 million compared to the first quarter of 2010. EBIT, adjusted for charges, was $34 million in the first quarter of 2011 compared to EBIT of $62 million in the prior year period.

The year-over-year decline was related to a number of factors, but the negative flow-through impact from lower sales, without a gross profit offset in the first quarter, was the primary driver. Mike will go into more first quarter financial details later in the call.

I'll now ask Kevin to review North American Retail's first quarter 2011 performance.

Kevin Peters

Thanks, Neil, and good morning. In the North American Retail division, first quarter 2011 sales were $1.3 billion, down 2% versus 1 year ago. Same-store sales were down 1% versus the prior year period.

Average order value rose modestly during the first quarter versus the prior year, while customer transaction counts declined after 2 quarters of growth, due in part to the negative impact of weather in January and February.

If we look at the product categories, furniture comp sales were positive again in the first quarter as seating remains strong. Other key product groups showing year-over-year improvement in the first quarter include paper, writing instruments, laptops and printers.

Total peripheral sales comped negatively in the first quarter, but we have identified actions that we can take to drive sales within that group going forward.

As I've mentioned on past calls, growing sales of our high margin service offerings continues to be a great opportunity for our Retail business. In the first quarter, Tech Depot Services, again, reported double-digit sales gain versus the prior year, and Copy & Print Depot comped positively for the fifth consecutive quarter. We're encouraged that these value-added services are gaining awareness with our customers, and we will continue to allocate resources to drive their growth.

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