Office Depot Inc. Reports Operating Results (10-Q)
Office Depot Inc has a market cap of $506.7 million; its shares were traded at around $1.74 with a P/E ratio of 89.3.
Highlight of Business Operations:Second quarter sales in the North American Retail Division were approximately $994 million, a decrease of 8% compared to the second quarter of 2011. The decline in total sales reflects a decrease of approximately 200 basis points related to the closing of stores in Canada last year and additional closures in the U.S. since the second quarter of 2011, and another 200 basis points from the calendar shift impacts in 2012 because 2011 was a 53 week fiscal period. Comparable store sales in the 1,094 stores that have been open for more than one year, and aligned to match the same selling weeks, decreased 4% for the second quarter of 2012, a sequential improvement from the 6% decline in the first quarter of 2012. The decline in comparable sales of computers and related products largely explains the Divisions overall comparable sales decline for the second quarter and first half of this year. Customers switching from laptop computers to tablets contributed to lower sales but improved product margins. Sales in our Copy and Print Depot and office furniture and seating increased. Sales in the supplies category were flat, while sales of ink and toner increased slightly. Average order value was slightly negative in the second quarter and customer transaction counts declined approximately 3% compared to the same period last year. Total sales for the first half of 2012 decreased 8% also reflecting store closures and the net impact of the calendar shift; comparable store sales declined 5%, aligned to match the same selling weeks.
The Division recognized non-cash asset impairment charges of approximately $24 million and $18 million in the second and first quarters of 2012, respectively. These charges followed impairment charges of $6 million and $4 million in the fourth and third quarters of 2011, respectively, and an additional $1 million recognized in the first half of 2011. During these periods, total Division comparable store sales declined 4%, 6%, 5%, 2% and 1%, respectively. At the same time of these sales declines, Division gross profit margins increased each quarter compared to the same period of the prior year. These two factors moving in opposite directions have impacted our impairment analyses.
The International Division reported second quarter 2012 sales of approximately $717 million, reflecting a decrease of 13% in U.S. dollars and a decrease of 6% in constant currencies compared to the second quarter of 2011. The second quarter of 2012 included fewer working days compared to the same period last year which contributed to the decline in sales in constant currencies. The European contract channel sales in constant currency decreased 2% overall with growth in the U.K. and Germany offset by lower sales in other countries. Contract channel sales in Asia increased versus the prior year. Second quarter and first half 2012 sales in the direct channel were lower across the Division. This negative trend in direct sales continues to be an area of focus for the company with additional resources allocated to efforts to acquire and retain customers. The retail channel sales decreased in Europe and increased in Asia compared to the second quarter of 2011. Sales for the first half of 2012 decreased 8% in U.S. dollars and 3% in constant currencies. Sales in the contract channel increased, while sales in the direct channel continue to reflect the downward trend.
Total G&A includes charges related to restructuring activities and actions to improve future operating performance of approximately $7 million and $23 million in the second quarter and first half of 2012, respectively. Similar charges of $6 million and $12 million were recognized during the second quarter and the first half of 2011. Of these amounts, approximately $5 million and $14 million for the second quarter and first half of 2012, respectively, and approximately $2 and $5 million for the second quarter and first half of 2011, respectively were included in Corporate G&A; the remainder was included in determination of Division operating profit discussed above. After considering the charges, the comparative increase in Corporate G&A primarily relates to additional project costs and personnel intended to improve performance in future periods partially offset by a reduction in accrued variable pay.
Miscellaneous income, net for all periods presented is primarily attributable to earnings from our joint venture in Mexico, Office Depot de Mexico. The company accounts for this joint venture on the equity method and summarized financial information is included in Note L of the Notes to the Condensed Consolidated Financial Statements. Joint venture sales for the second quarter of 2012 decreased 4% in U.S. dollars but increased 11% in constant currency. Joint venture sales for the first half of 2012 were flat in U.S. dollars but increased 12% in constant currencies. The joint venture added two stores during the second quarter and 11 stores in Mexico, Central America, and Colombia in the first half of 2012 for a total of 252 stores and distribution facilities. Second quarter 2012 net income was approximately $10 million with 50% of that amount included in our Miscellaneous income, net. Reported earnings in U.S. dollars for the second quarter of 2012 reflect negative foreign currency translation impacts as well as additional costs incurred associated with store expansion. Our 50% of joint venture earnings for the first half of 2012 was approximately $13 million compared to approximately $16 million in the same period of 2011. In addition to results from Office Depot de Mexico, and results from another equity method investment, Miscellaneous income, net includes gains and losses on our deferred compensation plan and foreign currency transactions.
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