Store closings accelerate as Office Depot awaits FTC ruling

The pace of store closings at Office Depot is accelerating and employee retention costs are rising as the retailer maintains that its merger with Staples will close by year end.

Staples announced plans to acquire Office Depot on Feb. 4 and Office Depot shareholders approved the deal on June 19. With the fate of the merger now in the hands of the Federal Trade Commission, Office Depot is still looking to achieve cost savings and merger synergies stemming from its acquisition of OfficeMax on Nov. 5, 2013. A key aspect of any retail merger involves store closings, or as Office Depot calls it, “retail store portfolio optimization,” and the company’s plan from the beginning has been to shutter 400 of the combined companies’ stores.

After closing a greater than expected 99 stores in the second quarter, Office Depot boosted its 2015 store closing target to 175 locations with another 60 due to close in 2016. Those closings are on top of 153 closing throughout 2014, including 108 stores in the fourth quarter of last year.

Office Depot hasn’t changed its initial 400 store closing target announced at the end of the first quarter last year that resulted from a real estate portfolio analysis. However, the pace has quickened as the combined Office Depot and OfficeMax company moves toward what it hopes is a favorable antitrust ruling by the FTC that clears the way for the acquisition by Staples.

“We remain on track with the regulatory review process, and we continue to anticipate this transaction will close by the end of 2015,” Office Depot chairman and CEO Roland Smith said in a press release announcing the company’s second quarter results.

The company highlighted the fact that the deal received clearance from the Commerce Commission of New Zealand and the Ministry of Commerce of the People’s Republic of China, as if those actions have any bearing on the FTC’s review, and noted it also needs approval from the regulators in the European Union, Canada, and Australia.

While it awaits actions from regulators, the company also said it expects to incur $100 million in expenses this year primarily due to employee retention costs and advisory fees related to the pending acquisition by Staples. If completed, the deal will almost certainly result in the closure of Office Depot’s headquarters, just as Office Depot closed OfficeMax’s headquarters in the name of merger synergies.

As Smith acknowledged, Office Depot’s second quarter performance was especially pleasing because of what he called, “inherent disruption associated with the pending acquisition by Staples.”

Total sales declined 10% to $3.4 billion from $3.8 billion and the company reduced the size of its losses, posting a net loss of $58 million, or 11 cents a share, compared to a loss of $190 million, or 36 cents a share. The sales decline would have been a less severe 3% without the negative effects of foreign currency translation, U.S. store closings and the loss of sales from the sale of the company’s interest in a Mexican joint venture.

The profit picture also improves if some non-recurring expenses are excluded. On an adjusted basis, Office Depot said its net income was $32 million, or 6 cents a share, compared to an adjusted net loss of $12 million or two cents a share.

“In the second quarter we significantly improved operating income versus last year, primarily due to continued excellent execution on our merger integration, synergies and efficiencies, and positive same-store sales growth,” said Roland Smith, Office Depot’s chairman and CEO. “While total company sales declined compared to prior year, driven primarily by planned store closures and foreign currency translation, continued success in the consolidation of our U.S. retail store portfolio and increased operational effectiveness drove positive quarterly same-store sales growth for the first time in many years.”

The accelerated pace of store closings comes as Office Depot’s North American Retail Division was something of a bright spot in the second quarter. Sales declined 8% to $1.34 billion from $1.46 billion, due largely to the closure of 99 stores which reduced the North American store count to 1,626. The store closures had a favorable impact on same store sales which increased 1%, marking the first time in several years the beleaguered retail division produced a positive comp. The store closings also benefitted the division’s operating income which increased to $42 million from a prior year loss of $6 million.

Sales in the company’s North American Business Solutions Division declined 4% to $1.43 billion from nearly $1.5 billion while operating profits increased slightly to $63 million from $59 million.