Office Depot (ODP)

Q2 2010 Earnings Call

July 27, 2010 9:00 am ET

Executives

Brian Turcotte - Vice President, Investor Relations

Charles Brown - President of International

Kevin Peters - President of North American Retail Division

Steve Odland - Chairman and Chief Executive Officer

Michael Newman - Chief Financial Officer and Executive Vice President

Steven Schmidt - President of North American Business Solutions Division

Analysts

Colin McGranahan - Bernstein Research

Daniel Binder - Jefferies & Company, Inc.

Kate McShane - Citigroup Inc

Gary Balter - Crédit Suisse AG

Matthew Fassler - Goldman Sachs Group Inc.

Stephen Chick - FBR Capital Markets & Co.

Christopher Horvers - JP Morgan Chase & Co

Mitchell Kaiser - Piper Jaffray Companies

Michael Baker - Deutsche Bank AG

Presentation

Operator

Good morning, and welcome to the Second Quarter 2010 Earnings Conference Call. [Operator Instructions] 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, Michelle, and good morning. Before we begin, I'd like to remind you that our discussion this morning may include 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 today, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the 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.

Office Depot's Chairman and CEO, Steve Odland, will now summarize our second quarter 2010 results. Steve?

Steve Odland

Good morning, and thank you for joining us for Office Depot's Second Quarter 2010 Earnings Conference Call and Webcast. With me today are 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.

The second quarter is traditionally our weakest sales quarter of the year and 2010 followed that trend. Total company sales were $2.7 billion, which is a decrease of 4% compared to our second quarter results last year. Although it's still negative, this is the best sales trend that we've had in eight quarters, and I should note that foreign exchange and business restructuring activities impacted sales by about 200 basis points in this quarter.

The second quarter loss was $19 million or $0.07 a share versus a loss of $82 million or $0.31 a share in the same period a year ago. Second quarter 2010 results included significant tax benefits, while second quarter 2009 included charges related to our restructuring activities which negatively impacted earnings by $0.09 per share.

Total company operating expenses in the second quarter of 2010 decreased by 8% or $68 million from the second quarter of 2009. This decrease primarily reflects charges related to the restructuring taken last year in 2009 and lower distribution costs in the second quarter of this year 2010. EBIT was a loss of $23 million in the second quarter and a $39 million improvement over EBIT adjusted for charges reported in the same period last year.

Total company gross margin increased by 130 basis points in the quarter versus last year. This is the fourth consecutive quarter of year-over-year gross profit margin improvements. All three divisions were again successful in increasing their gross margin profits in weak sales environments. We beat our expectations for the quarter, and we're pleased with our execution across the company.

We know, of course, we can't control the economy. But what we can control was executed well, and I'm proud of our team. Now I'll ask Kevin Peters to talk about the North American Retail second quarter performance. Kevin?

Kevin Peters

Thanks, Steve, and good morning. In the North American Retail division, sales for the second quarter were $1.1 billion, down 2% versus the second quarter of 2009. Our comparable store sales in the U.S. and Canada decreased 1% versus the second quarter of 2009, the same rate of decline as the first quarter.

The comp sales decline showed mixed results across the U.S., with some areas showing signs of improvements, such as California, though this region still faces many challenges. Our best-performing sales markets continued to be the Northeast and Midwest, which again achieved positive sales comps. Additionally, the Gulf Coast market has posted four consecutive quarters of sales comp improvement.

Second quarter customer transactions were slightly negative compared to last year and continued to drive the overall comp decline. Our average order value increased versus the prior year for the second consecutive quarter. Sales on our supplies and technology categories were relatively consistent with the first quarter, with furniture maintaining positive comps though lower sequentially.

In the second quarter of 2010, we opened seven stores and closed four, bringing our total North American store count to 1,152 at quarter end.

Operating profit in the second quarter of the 2010 for North American Retail was $9 million versus a loss of $13 million a year earlier. And our operating profit margin was up 200 basis points from the second quarter of 2009. The increase in operating profit was driven by favorable product margins due in part to the ongoing line review process and increasing our direct import penetration.

We have improved product margins over the last eight consecutive quarters, but this benefit will diminish as we anniversary these improvements. I should note that the second quarter results last year included a $5 million charge to reflect updated assumptions on subleases of closed stores.

We continue to implement sales driving and cost-reduction activities, as well as make prudent investments in both our infrastructure and customer-facing activities. First, we believe that we can drive profitable sales through a number of initiatives. These include offering an exciting new assortment in technology, increasing brand awareness through direct mail and broadcast media and rolling out the U.S. Postal Service offerings in our stores.

Second, we're opening a new state-of-the-art, combination distribution facility in Pennsylvania. This facility will provide world-class service to both our retail stores and BSD customers in the Northeast.

Third, we're investing in Copy & Print Depot and Tech Depot Services. Our efforts to market these services to increase awareness, train our associates and invest in the infrastructure are producing favorable results. As a result, we are seeing positive incremental sales growth compared to last year.

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