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Office Depot's Financial Results

February 26, 2008

Office Depot Inc. (NYSE:ODP) announced fourth quarter and full-year results for the fiscal period ended December 29, 2007.

Fourth Quarter Results

Total Company sales for the fourth quarter increased 1% to $3.9 billion. Sales in the North American Retail Division were down 3% with comparable store sales down 7% for the quarter. The North American Business Solutions Division reported a 4% sales decline in the quarter while International Division sales increased 12% in U.S. dollars and 2% in local currencies.

Net earnings were $19 million compared to earnings of $127 million in the same period of 2006. Earnings per share on a diluted basis were $0.07 for the quarter, versus $0.45 in the fourth quarter of 2006. On an adjusted basis, diluted earnings per share were $0.10 for the quarter, versus $0.51 in the same period one year ago.

Total Company operating expenses, as adjusted, represented 26.3% of sales, an increase of 40 basis points over the fourth quarter of 2006. EBIT, as adjusted, was $6 million in the fourth quarter of 2007 or 0.2% as expressed as a percentage of sales, compared to $201 million or 5.2% in the prior-year period.

Results for the quarter included an as adjusted tax benefit of $30 million. The fourth quarter 2007 tax benefit was primarily due to lower North American income and a late quarter tax law change.

Return on Invested Capital for the trailing 4 quarters, adjusted for Charges and Credits, was 11.3%. The Return on Equity adjusted for Charges and Credits for the trailing four quarters was 15.2%.

Fourth Quarter Division Results

North American Retail Division

Fourth quarter sales in the North American Retail Division were down 3% at $1.7 billion. Comparable store sales in the 1,158 stores in the U.S. and Canada that have been open for more than one year decreased 7% for the fourth quarter. Results continue to be negatively impacted by difficult housing-related economic conditions in key markets, particularly Florida and California. Combined, these two states represented 26% of total store sales and about 40% of the total comparable sales decrease in the fourth quarter. This economic weakness has spread to other U.S. retail markets with housing issues, creating additional pressure on sales and margins.

Sales in the Northeast moderated slightly versus the previous quarter, but continued to be the Division's best performing region in North America despite a limited retail presence in that market. Other drivers negatively impacting comparable sales included cannibalization from the new store build out, competitive intrusion and private brand penetration. The Design, Print and Ship business continued to perform well in the fourth quarter, slightly offsetting the negative drivers.

Operating profit in the North American Retail Division was $23 million for the fourth quarter, a decline from $109 million in the same period of the prior year. Although costs were managed effectively in the fourth quarter, broader economic factors continued to pressure profit margins, which decreased 490 basis points versus the fourth quarter 2006. A number of factors contributed to the operating margin decline, including lower than expected vendor program funding, lower product margins, a de-leveraging of fixed property costs, and higher shrink. Partially offsetting some of the decline was the impact of lower operational expenses.

Comparable average sales per square foot in the fourth quarter decreased to $231 and average order value was up about 2.3% in the fourth quarter.

During the fourth quarter, Office Depot opened 12 new stores and closed 2 stores, bringing the total store count to 1,222. The Company also remodeled 12 stores, bringing the yearly total to 177. As of year end, more than half of the chain was operating under the M2 format.

Inventory per store was $960 thousand as of the end of the fourth quarter of 2007, 3% greater than the same period last year. Average inventory per store during the quarter was $1,030 thousand for the fourth quarter of 2007, flat versus the same period last year.

North American Business Solutions Division

Total sales in the North American Business Solutions Division were $1.1 billion, down 4% compared to the fourth quarter of last year. Sales to small- to mid-sized customers were down 13%. This decrease overshadowed solid sales growth of 5% among large, national account customers and 10% sales growth to the public sector in the fourth quarter. Growth in state government and the K-12 educational sectors have been driving the results in the public sector, both delivering double-digit increases for all four quarters of 2007.

The North American Business Solutions Division had an operating profit of $1 million for the fourth quarter of 2007 compared to $72 million for the same period of the prior year. Operating margins declined by 640 basis points versus the fourth quarter 2006. Contributing factors to the margin decline included a less-favorable customer mix, lower vendor program funding, higher reserves for inventory clearance and returned product, and product cost increases that could not be fully passed through in higher prices.

International Division

The International Division reported a sales increase of 12% in the fourth quarter compared with the same period last year and organic sales in local currency increased by 2%. This marks the eighth consecutive quarter the division has grown the top-line in local currency. In particular, the Contract channel continued its strong performance, growing sales in local currency by 8% in the quarter. This is a reflection of the strength of Office Depot's global brand with an increasingly global customer base.

Division operating profit was $60 million in the fourth quarter compared to $77 million in the prior year's fourth quarter. Operating profit margin declined by 230 basis points to 5.3%, from 7.6% in the prior year, as the U.K. business continued to struggle.

Continued overall weakness in the U.K. business accounted for much of the profit decline and operating margin compression. Continued investment, including establishing regional offices in Asia and Latin America, centralization of certain support functions in Europe, green-field business expansion in Poland, and consolidation of warehouse facilities to better support the multi-channel business portfolio in Europe, accounted for the remainder of the margin decline. Growth in the large customer segment, which has a lower margin rate than the small- to medium-sized customer segments, drove unfavorable customer mix and compressed overall operating margins as well.

Full Year Results

For the full year, sales increased 3% to $15.5 billion. Net earnings for fiscal 2007 were $396 million compared to earnings of $503 million in the same period of 2006. Earnings per share on a diluted basis were $1.43 in 2007, compared to $1.75 in the prior year. The as adjusted diluted earnings per share for fiscal 2007 were $1.54 versus, $1.90 in 2006.

For the full year, EBIT, as adjusted, decreased 31% from the prior year and EBIT margins compressed by 180 basis points to 3.5%. The as adjusted effective tax rate for the full year was 15%.

Capital expenditures for 2007 were $461 million. Capital expenditure estimates for 2008 are expected to be around $375 million, reflecting a reduction in the number of planned new store openings from 150 to about 75, approximately 100 M2 store remodels, and investments in the Company's global supply chain and IT initiatives. The Company will continue to evaluate spending in accordance with operating performance and financial guidelines, and the overall business environment.

In 2007, the Company repurchased approximately 5.7 million shares of its common stock for $200 million. The Company also previously announced that its Board has authorized the repurchase of an additional $500 million of its common stock. Current plans are to repurchase common stock if cash flow permits. Over the past three years, the Company has returned to shareholders about 140% of as adjusted after-tax earnings, 106% of operating cash flow and 140% of net cash flow, excluding share repurchases.