Office Depot Announces Second Quarter 2011 Results

Total Company sales for the second quarter of 2011 were $2.7 billion, essentially flat compared to the second quarter of 2010. On a constant currency basis and excluding sales related to dispositions and deconsolidation in the fourth quarter of 2010 and an acquisition in the first quarter of 2011, total Company sales in the second quarter of 2011 decreased 2% compared to the same period in the prior year.

The Company reported a loss, after preferred stock dividends, of $29 million or $0.11 per share in the second quarter of 2011, compared to a loss of $25 million or $0.09 per share in the second quarter of 2010.

Second quarter 2011 results included charges primarily related to restructuring activities and other costs intended to improve efficiency and benefit operations in future periods. Excluding these charges, which totaled $20 million before tax, the net loss, after preferred stock dividends, was $17 million or $0.06 per share in the second quarter of 2011.

Total Company operating expenses increased 2% in the second quarter of 2011, when compared to the second quarter of 2010. Total Company operating expenses in the second quarter of 2011, adjusted for charges, decreased by $4 million compared with the prior year. EBIT, adjusted for charges, was $11 million in the second quarter of 2011, compared to an EBIT loss of $23 million in the prior year period.

The effective tax rate for the second quarter of 2011 was 27% compared to 59% for the same period in 2010.

"Our second quarter 2011 operating results improved versus the prior year due to the successful execution of our key initiatives throughout the Company," said Neil Austrian, Office Depot's Chairman and Chief Executive Officer. "We are pleased with the progress across the enterprise and our associates will continue to direct their efforts toward achieving our goals."

SECOND QUARTER DIVISION RESULTS

North American Retail Division

Second quarter 2011 sales in the North American Retail Division were $1.1 billion, a decrease of 2% compared to the prior year. Same store sales in the 1,108 stores that have been open for more than one year decreased 1% in the second quarter 2011 compared to the prior year period. A decline in comparable sales of computers and related products experienced during the later part of the second quarter contributed significantly to the overall comparable sales decline. The second quarter 2011 customer transaction counts were down approximately 2% compared to the same period last year, while average order value increased approximately 1%.

The North American Retail Division reported operating profit of approximately $3 million in the second quarter of 2011, compared to approximately $9 million in the same period of 2010. Included in Division operating profit are approximately $12 million of charges related to the closure of the 10 remaining stores in Canada during the second quarter of 2011. The charges primarily relate to accrued lease costs as well as severance and other closure costs.

After considering the closure costs, Division operating profit for the second quarter of 2011 was approximately $15 million. The increase versus prior year reflects gross margin improvements, including lower property costs, reduced advertising expenses and the Division's portion of benefits from removing recourse provisions from the Office Depot private label credit card program, partially offset by the negative flow-through effect of lower sales and expenses associated with investments in key growth initiatives.

During the second quarter of 2011, the Division closed 14 stores, opened four stores and relocated four stores, bringing the total count for North America Retail to 1,131 stores as of June 25, 2011.

North American Business Solutions Division

Second quarter 2011 sales in the North American Business Solutions Division were $803 million, a 2% decrease compared to the prior year. Both average order value and transaction counts for the second quarter of 2011 were below the same period in the prior year. Sales in the direct channel were 1% lower than the same period in 2010, reflecting a reduction in promotional activity that was not improving overall profit margins. Sales in the contract channel declined 2%. The change reflects retention of over 85% of the customers previously serviced through a buying consortium contract that expired on January 1, 2011. However, the Division experienced weakness in the Federal and state government business as these customers faced budgetary pressures. Somewhat offsetting this decline, contract sales in the large account customers increased, and sales to small- to medium-sized businesses increased slightly.

The North American Business Solutions Division reported operating profit of approximately $45 million in the second quarter of 2011, compared to $14 million in the same period of the prior year. This increase reflects lower distribution, advertising and payroll expenses that result from operational improvements put in place earlier this year. Additionally, operating profit for the second quarter 2011 includes approximately $10 million of benefits that may not recur in future periods, such as the Division's portion of benefits from removing recourse provisions from the Office Depot private label credit card program and adjustments relating to customer incentive programs.

International Division

Second quarter 2011 sales in the International Division were $827 million, an increase of 6% in U.S. dollars and a decrease of 5% in constant currencies compared to the prior year. Excluding the revenue impact from the fourth quarter 2010 dispositions and deconsolidation, as well as the first quarter 2011 acquisition, constant currency sales were 1% lower than the comparable period of the prior year. Constant currency sales in the contract channel increased across Europe and Asia in the second quarter of 2011, while sales in the direct channel were lower than the same period in 2010. Retail channel sales increased in the second quarter compared to the prior year in constant currency, excluding sales from the Division's business in Israel that was divested in late 2010 and the first quarter 2011 acquisition of Svanströms in Sweden.

The International Division reported operating profit of approximately $13 million in the second quarter of 2011, compared to $19 million in the same period of 2010. Included in Division operating profit are approximately $6 million of charges related to restructuring and process improvement activities. The charges primarily related to severance and accrued lease costs, as well as costs incurred to drive business process improvements.

After considering these costs, Division operating profit for the second quarter of 2011 was $19 million. The negative flow-through effect of lower constant currency sales for the second quarter of 2011 was offset by net reductions in operating expenses as the Division is realizing benefits from restructuring and continuous process improvement activities taken late in 2010 and to date in 2011.

Other Matters

During the second quarter of 2011, the Company entered into a $1.0 billion Amended and Restated Credit Agreement with a group of lenders, most of whom participated in the Company's previously-existing $1.25 billion credit agreement. The Amended Credit Agreement extends the maturity date to May 25, 2016, reduces the applicable borrowing spread by 50 basis points, permits the Company to redeem, tender or otherwise repurchase its existing 6.25% Senior Notes subject to a $600 million minimum liquidity requirement and modifies certain covenants.

At the end of the second quarter of 2011, the Company had $45 million drawn in Europe and $766 million of availability under the Amended Credit Agreement. The drawn funds were applied to the first quarter of 2011 acquisition of Svanströms Gruppen. With $766 million of availability under the Amended Credit Agreement and $374 million in cash on hand as of June 25, 2011, the Company ended the second quarter of 2011 with $1.1 billion in total available liquidity.

On June 20, 2011, the Company entered into an amended and restated merchant services agreement effective June 1, 2011 with Citibank (South Dakota), N.A., the financial institution that previously provided and administered the Company's private label credit card program. The agreement extends the arrangement for five years through September 30, 2016, eliminates recourse to the Company for losses, obtains portfolio rights at termination, lowers the overall fees, and modifies other terms and conditions. Additionally, the previously-established funded bad debt reserve of approximately $6 million was retained by the financial institution, eliminating recourse to the Company on the existing portfolio. As a result of this amendment to eliminate current and future recourse to the Company for losses, a previously-established unfunded bad debt accrual of approximately $8 million was reversed during the second quarter of 2011. The reversal is included in the determination of operating profit for the North American Retail Division and North American Business Solutions Division.

Additional information on the Company's second quarter 2011 results can be found in our Form 10-Q filed with the Securities and Exchange Commission on July 26, 2011. Additional information on the Company's second quarter results can also be found in the Investor Relations section of our corporate website, http://www.officedepot.com, under the category Financial Information.

Non-GAAP Reconciliation

A reconciliation of GAAP results to non-GAAP results excluding certain items is presented in this release and also may be found in the Investor Relations section of our corporate website, http://www.officedepot.com, under the category Financial Information.

Conference Call Information

Office Depot will hold a conference call for investors and analysts at 9:00 a.m. (Eastern Time) today. The conference call will be available to all investors via Web cast at http://investor.officedepot.com. Interested parties may contact Investor Relations at 561-438-7893 for further information.