Profits improve as Office Depot awaits FTC action

Office Depot continues to hope its merger with Staples secures approval from U.S. regulators, but in the meantime the performance of its retail operations is looking much better should it remain an independent company.



Office Depot’s North American retail footprint did shrink to 1,564 locations at the end of the year after the company closed a total of 181 stores, including 56 in the fourth quarter. Thinning the herd a bit helped the overall profitability of Office Depot’s largest division during the period ended Dec. 26 even though sales declined.



Retail Division sales declined 9% to $1.4 billion in the fourth quarter due to the impact of the closed stores. Same-store sales were flat and benefitted from sales that transferred from closed locations. Full year retail division sales totaled $6 billion, down from $6.5 billion and same-store sales were flat.



Closing stores helped Office Depot’s profitability as operating profits increased to $63 million from $16 million during the quarter and increased to $310 million from $126 million for the year. The effects of store closing are likely to continue as Office Depot had previously announced a plan to close 400 locations.



"We were pleased to deliver another year of strong operating results in 2015, despite experiencing substantial business disruption related to the pending acquisition by Staples," said Roland Smith, chairman and CEO of Office Depot. Office Depot and Staples entered into a merger agreement on Feb. 4, 2015. "Regarding the pending acquisition by Staples, we look forward to presenting our case in U.S. federal district court and expect resolution by May 10, 2016. We continue to believe that this transaction provides substantial benefits to our customers and shareholders."



Although the deal has received approval from regulators outside the U.S., On Dec. 7, the U.S. Federal Trade Commission said it planned to block the merger and Office Depot and Staples said they intended to contest that decision. The matter will come to a head on March 21 when a hearing begins on the FTC’s preliminary injunction with a decision expected by May 10. The protracted process was among the sources of weakness Office Depot cited in its 2016 outlook.



The company said it expects total company sales in 2016 to be lower than 2015, primarily due to the impact of store closures, continued challenging market conditions in our industry, and ongoing business disruption from the extended regulatory approval process related to the pending acquisition by Staples. The company expects this disruption to continue through at least the first half of 2016, while the company completes the ongoing litigation with the FTC, according to a statement.



In the meantime, business condition in the company two other divisions remain challenging. The North American Business Solutions Division saw sales decline 6% to $1.4 billion in the fourth quarter and 4% to $5.7 billion for the year. Operating profits dropped to $39 million from $66 million in the quarter and fell to $226 million from $232 million for the year.



“The sales decline was primarily due to substantial business disruption related to the pending acquisition by Staples, the scheduled transition out of a legacy OfficeMax buying arrangement, lower sales in Canada, and lower customer order fill rates attributable to delays in certain merger integration activities,” according to the company.



The company’s worst performing division was the much smaller international division where sales declined 5% to $712 million on a constant currency basis in the quarter and declined 6% to $2.8 billion on the year. The sales decline for the international unit, which consists of 270 stores and contract operations was attributed to, “competitive market pressures, reduced spend from existing customers and disruption related to the European restructuring and pending acquisition by Staples.”



The company’s total reported sales for the fourth quarter of 2015 were nearly $3.5 billion compared to $3.8 billion in fourth quarter 2014, a decrease of 9%. Full year sales were approximately $14.5 billion, down from $16 billion. Reported net income was $15 million, or three cents a share, in the fourth quarter, compared to a prior year loss of $84 million, or 15 cents a share.



Full year profits totaled $8 million, or one cent a share, compared to a prior year net loss of $354 million, or 66 cents a share.