Office Depot Inc. Cites Staples Inc. Tie-up for Q1 2016 Financial Decline
Office Depot Inc., a leading global provider of office products, services and solutions, which entered into a definitive agreement on Feb. 4, 2015 to be acquired by Staples Inc., announced results for the first quarter ended March 26, 2016.
“The protracted regulatory review of the pending Staples acquisition continues to have a substantial disruptive impact on our business,” said Roland Smith, chairman and CEO for Office Depot. “Our North American Business Solutions Division and International Division are more impacted by this disruption and accordingly, both failed to meet our sales and profit expectations this quarter. In spite of the uncertainty surrounding the acquisition, our associates around the world continue to demonstrate focus, drive and dedication as we finalize this process.
“Regarding the pending Staples acquisition, we expect U.S. federal district court Judge Sullivan to render his decision by May 10, 2016,” Smith added. “We continue to believe that this transaction provides substantial benefits to our shareholders and all our customers.”
Total reported sales for the first quarter of 2016 were $3.5 billion compared to $3.9 billion in the first quarter of 2015, a decrease of 9 percent.
In the first quarter of 2016, Office Depot reported operating income of $71 million and net income was $46 million, or $0.08 per share. In the first quarter of 2015, the reported operating income was $88 million and net income was $45 million, or $0.08 per share.
Adjusted (non-GAAP) Results
Adjusted operating income for the first quarter of 2016 was $115 million compared to an adjusted operating income of $135 million in the first quarter of 2015. Adjusted net income for the first quarter of 2016 was $57 million, or $0.10 per share, compared to adjusted net income of $71 million, or $0.13 per share, in the first quarter of 2015.
- Adjusted operating income for the first quarter of 2016 excludes special charges and credits totaling $44 million, which consisted of $39 million in expenses related to the Office Depot/OfficeMax merger and the pending acquisition by Staples, and $5 million in restructuring activities.
- Adjusted net income for the first quarter of 2016 excludes the after-tax impact of these items.
North American Retail Division
Retail Division sales were $1.5 billion in the first quarter of 2016, compared to $1.7 billion in the prior year period. First quarter sales declined 9 percent, primarily due to the impact of planned store closures in the fiscal 12 months through March 26, 2016. Same-store sales in the quarter declined 1 percent primarily due to lower transactions. Same-store sales benefited from the positive impact of transferred sales from closed stores and increased operational effectiveness.
Retail Division operating income was $102 million, or 6.8 percent of sales, in the first quarter of 2016 compared to $86 million, or 5.2 percent of sales, in the first quarter of 2015. The improvement from the prior year quarter resulted largely from a higher gross margin rate and a decrease in occupancy costs driven by store closures, as well as a decrease in selling, general and administrative expenses including payroll and advertising.
Office Depot ended the first quarter of 2016 with a total of 1,555 retail stores in the North American Retail Division. During the quarter, the company closed nine stores.
North American Business Solutions Division
Business Solutions Division sales were $1.4 billion in the first quarter of 2016, a decline of 7 percent compared to the prior year period. Sales also declined 7 percent in constant currency, and were lower in both the contract and direct channels. The contract channel sales decline was driven by customer attrition and lower customer additions, primarily due to the substantial business disruption related to the pending acquisition by Staples. In the direct channel, decommissioning its legacy OfficeMax e-commerce sites and the ongoing reduction in catalog sales through its call centers also contributed to the decline in sales.
Business Solutions Division operating income was $46 million, or 3.4 percent of sales, in the first quarter of 2016 compared to $58 million, or 3.9 percent of sales, in the first quarter of 2015. The decrease in operating income compared to the prior year quarter reflected the negative flow-through impact of lower sales, partially offset by a higher gross margin rate and lower selling, general and administrative expenses including payroll and advertising.
International Division sales were $0.7 billion in the first quarter of 2016, a decline of 10 percent compared to the prior year period, reflecting the negative impact of foreign currency translation. International sales declined 6 percent in constant currency primarily due to the continued disruption from Staples’ pending acquisition of Office Depot and the related required European divestiture process, the European restructuring, as well as ongoing competitive market pressures and reduced spend from existing customers.
The International Division operating loss was $10 million, or 1.4 percent of sales, in the first quarter of 2016 compared to operating income of $14 million, or 1.9 percent of sales, in the first quarter of 2015. The decline from the prior year quarter primarily reflected the negative flow-through impact of lower sales and a lower gross margin rate, partially offset by lower selling, general and administrative expenses including payroll and advertising and support costs.
At the end of the first quarter of 2016, there were a total of 274 retail stores in the International Division, including 149 company-owned stores and 125 stores operated by franchisees and licensees.
Corporate includes support staff services and certain other expenses that are not allocated to the three divisions. Unallocated operating costs were $23 million in the first quarter of 2016 compared to $22 million in the first quarter of 2015.
Acquisition by Staples
On Feb. 4, 2015, Office Depot and Staples announced that the companies entered into a definitive agreement under which Staples will acquire all of the outstanding shares of Office Depot. Under the terms of the agreement, Office Depot shareholders will receive, for each Office Depot share, $7.25 in cash and 0.2188 of a share in Staples stock at closing. The transaction has been approved by both companies’ board of directors and Office Depot stockholders. The proposed transaction received antitrust clearance from the regulators in Australia, New Zealand and China.
On Dec. 7, 2015, the United States Federal Trade Commission (FTC) informed Office Depot and Staples that it intended to block the Staples Acquisition and file a request for a preliminary injunction. On the same date, Office Depot and Staples announced their intent to contest the FTC’s decision to block the transaction. Also on Dec. 7, 2015, the Canadian Competition Bureau filed an application to block the transaction with the Canadian Competition Tribunal. On Feb. 2, 2016, the company and Staples announced that they entered into a letter agreement to waive, until May 16, 2016, certain of their respective rights to terminate the Staples Merger Agreement.
On Feb. 10, 2016, the European Commission approved the transaction subject to certain divestiture requirements.
A hearing on the FTC’s preliminary injunction of the transaction was held in federal district court in March and April 2016. A decision is expected by May 10, 2016.
Office Depot continues to expect total company sales in 2016 to be lower than 2015, primarily due to the impact of store closures, the ongoing business disruption from the protracted regulatory approval process related to the pending acquisition by Staples, and continued challenging market conditions in our industry. 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 and the additional requirements of the European and Canadian competition authorities.
Office Depot closed nine stores in the first quarter of 2016 as part of its previously announced U.S. retail store optimization plan. The company continues to expect to close more than 50 stores during 2016 for a total of at least 400 closures under this plan.
The company continues to expect incremental integration synergies, restructuring benefits and operating efficiencies to offset the negative flow-through impact of lower sales in 2016. As a result, Office Depot expects to generate approximately $500 million in adjusted operating income in fiscal 2016, with the year-over-year improvement occurring in the second half of the year.
Office Depot continues to expect total annual run-rate merger synergy benefits of more than $750 million from the OfficeMax integration and expects the integration to be substantially complete by the end of 2017.
The company expects to incur approximately $100 million of merger integration expenses over the remaining 2016-2017 period, and estimates it will incur approximately $30 million of expenses in 2016 related to the pending acquisition by Staples.
In 2016, capital expenditures are expected to be approximately $250 million, including investments that support critical priorities and approximately $50 million related to merger integration. Depreciation and amortization is expected to be approximately $225 million in 2016.