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Office Depot Posts Profit, But Will Close 400 Stores

Boca Raton, Fla. — Office Depot’s pro forma profits surged 111 percent in the first quarter as its integration with OfficeMax exceeded plan.

The company reported adjusted net income of $38 million for the three months ended March 29, compared with combined pro forma adjusted net income of $18 million for the first quarter last year.

The pro forma figures assume the two chains merged at the beginning of fiscal 2013, rather than last November, to provide more meaningful year-over-year comparisons.

The adjusted net income excludes merger-related expenses and impairment and restructuring charges that contributed to an operating loss of $79 million for the period.

Net sales slipped 3 percent to $4.4 billion compared with combined pro forma sales of $4.5 billion for the year-ago quarter, which chairman/CEO Roland Smith attributed to “a weather-challenged start to the year.” However, he reported improved sales trends as the quarter progressed.

Smith said cost reductions and operational execution exceeded expectations, and that the company is beginning to reap the benefits of the merger more quickly than anticipated, leading it to raise minimum projected full-year adjusted operating income by $20 million to $160 million.

In addition, the company has now determined that overlapping real estate will allow it to shut at least 400 U.S. stores, or about 20 percent of its store base, by the end of 2016, which will generate annual savings of at least $75 million while still maintaining a sufficient retail presence, he said. About 150 locations will close this year alone, mostly in the fourth quarter.

Within its North American retail division, sales declined 5 percent to $1.8 billion on a pro forma basis and comp sales slipped 3 percent year over year due to fewer, though pricier, transactions.

Operating income was $37 million, or 2 percent of sales, compared with combined pro forma operating income of $31 million, or 1.6 percent of sales in the first quarter of 2013. The results reflected a decrease in selling, general, and administrative expenses including payroll, advertising, and other in-store expenses, partially offset by the negative flow-through impact of lower sales, the company said.

Office Depot ended the quarter with a total of 1,900 retail stores in the North American retail division, comprised of 1,082 Office Depot and 818 OfficeMax branded locations. It closed nine and opened two Office Depot branded stores, and closed five OfficeMax branded stores during the period.

Looking ahead, the company expects that “market trends will remain challenging across the company’s product lines and distribution channels” for the balance of 2014, leading to lower full-year sales compared with 2013 combined pro forma sales.

Retail analyst David Strasser of Janney Montgomery Scott said he found “lots of positive news” in the earnings report. “This industry has issues, we know that, but it is becoming clearer that Office Depot is under competent leadership,” he observed in a research note. “Office Depot may not have the top line figured out, but as this quarter demonstrates, the company is making substantial progress integrating OfficeMax into the fold.”