Office Depot (ODP)

Q4 2011 Earnings Call

February 28, 2012 9:00 am ET

Executives

Brian Turcotte -

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

Kevin Peters - President of North America

Michael D. Newman - Chief Financial Officer and Executive Vice President

Analysts

Christopher Horvers - JP Morgan Chase & Co, Research Division

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Kate McShane - Citigroup Inc, Research Division

David Gober - Morgan Stanley, Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Michael Baker - Deutsche Bank AG, Research Division

Joseph I. Feldman - Telsey Advisory Group LLC

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Presentation

Operator

Good morning, and welcome to the Fourth 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

Thanks. With me today are Neil Austrian, Chairman and Chief Executive Officer; Mike Newman, Chief Financial Officer; Kevin Peters, President of North America; and Steve Schmidt, 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 can cause actual results to differ materially. A detailed discussion of these factors and uncertainties are 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 the most 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 www.officedepot.com. Click on Investor Relations under Company Information.

Neil will now summarize Office Depot's fourth quarter and full year 2011 results. Neil?

Neil R. Austrian

Thank you, Brian, and good morning. Before I speak to the results, I would like to thank our associates for their efforts to deliver a really solid operational quarter at the end of 2011. The results were encouraging despite a slow economic recovery in the U.S. and increasing business pressures across Europe. I'm pleased with the traction we're getting in improving our North American businesses and with the restructuring actions being taken in the International division. I believe that our results are a testament to our improving execution across the enterprise and our focus on fewer initiatives.

Now turning to our results. Office Depot reported fourth quarter 2011 sales of $3 billion, essentially flat compared to the prior year. Excluding sales related to an acquisition in 2011, the disposition of certain businesses in 2010 and the impact of the 53rd week in 2011, constant currency sales in the fourth quarter of 2011 decreased about 4% versus prior year. The company reported net earnings after preferred stock dividends of $12 million or $0.04 per diluted share in the fourth quarter of 2011 versus a loss of $109 million or $0.39 a share in the same period one year ago.

Fourth quarter 2011 results included approximately $23 million of charges primarily related to restructuring activities and actions to improve future operating performance. The quarter also included a $24 million tax benefit related to the reversal of an uncertain tax position accrual and the release of a valuation allowance. Excluding these charges and tax benefits, net earnings after preferred stock dividends would have been approximately $8 million or $0.03 a share. I should note that our fourth quarter 2010 reported earnings also included $87 million in charges and a $6 million tax benefit. The net after-tax impact of the charges and tax benefit negatively impacted fourth quarter 2010 earnings by about $0.29 a share.

The total company gross profit margin increased about 170 basis points in the fourth quarter of 2011 compared to the prior year. This was the seventh quarter out of the past 8 quarters that we've increased our total company gross margin year-over-year. The gross margin improvement this quarter was driven by increases of 300 basis points in North American Retail, 100 basis points in the International division and 70 basis points in North American Business Solutions.

EBIT, adjusted for charges, was $47 million in the fourth quarter of 2011 compared to $26 million in the prior year period. This $20 million year-over-year improvement was attributable to strong operating performances in all 3 divisions.

Turning to our full year results. Office Depot reported 211 (sic) [ 2011] sales of $11.5 billion, down 1% compared to 2010. Excluding sales related to previous portfolio actions and the impact of the 53rd week, 2011 constant currency sales decreased about 3% versus prior year. Reported net earnings for 2011 after preferred stock dividends were $60 million or $0.22 per diluted share compared to a loss of $82 million or $0.30 per share for 2010.

Adjusted for charges and certain tax benefits, the 2011 net loss and the diluted loss per share after preferred stock dividends were $8 million and $0.03 a share, respectively. Adjusted for charges and the impact of certain tax benefits, the 2010 net loss and the diluted loss per share were $39 million and $0.14 a share, respectively.

EBIT, adjusted for charges, was $122 million in 2011, up significantly compared to $84 million in 2010. This $38 million year-over-year improvement of EBIT was attributable to strong operating performances in both North American Retail and BSD in 2011.

I'll now ask Kevin to review our fourth quarter and full year 2011 performance in the North American Retail and Business Solutions divisions.

Kevin Peters

Thanks, Neil, and good morning. The North American Retail division reported fourth quarter 2011 sales of $1.2 billion, flat versus the prior year. The 53rd week added approximately $78 million to fourth quarter 2011 sales. Same-store sales in the 1,107 stores that have been open for more than a year decreased 5% for the fourth quarter of 2011. However, our operating profit doubled versus prior year. The significant year-over-year increase in operating profit reflects about 300 basis points of gross margin improvement, including improved product margins from higher sales mix of supplies, better promotional management and lower property costs.

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