Office Depot (NYSE:ODP) announced first quarter results for the fiscal period ended April 1, 2006.
Total Company sales for the first quarter grew 3% to $3.8 billion compared to the first quarter of 2005. Excluding the effects of foreign exchange, total company sales were 5% higher than the first quarter of last year. Sales in North America were up 6%. North American Retail Division comparable store sales increased 3% for the quarter.
Net earnings for the quarter were $130 million compared to $115 million in the same quarter of the prior year, and diluted earnings per share were $0.43 in the first quarter of 2006 versus $0.37 in the same period a year ago. The first quarter 2006 results include the effects of charges related to exit costs and other operating items which we had previously announced and are more fully described in our Form 10-Q filed on April 25 with the Securities and Exchange Commission. First quarter charges (the "First Quarter Charges") in 2006 had a $0.05 per diluted share negative impact on results. Without these charges, our first quarter 2006 net earnings were $144 million or $0.48 per share, up 30% from the first quarter earnings per share of the prior year.
For the quarter, gross profit as a percentage of sales was 31.5%, a 40 basis point improvement from the same period last year. Gross margin in the North American Retail Division increased during the quarter while our North American Business Solutions Division declined slightly. Our International Division posted a slight increase in gross margin as compared to the prior year.
Total operating expenses, as a percentage of sales, were 26.5% for the quarter, improving 10 basis points from the same period of the prior year. First Quarter Charges negatively impacted operating margin by 50 basis points in the current quarter.
Operating profit for the quarter was $192 million as compared to $165 million in the first quarter of the prior year. First Quarter Charges negatively impacted operating results by $19 million in 2006.
In the quarter, we repurchased approximately 12 million shares of our common stock for $398 million under the repurchase programs previously approved by the Board of Directors.
Return on invested capital for the quarter was 9.9%. Charges taken in the twelve months prior to April 2006 negatively impacted the calculation of our current return on invested capital. Adjusted to exclude the First Quarter Charges, ROIC improved to 13.3% for the first quarter of 2006 as compared to 10.9% in the prior year.
"We are pleased with our overall performance in the first quarter," said Steve Odland, Office Depot's Chairman and Chief Executive Officer. "We achieved sales growth in each of our Divisions, as well as expansion of each Division's operating margin excluding the impact of First Quarter Charges. The North American Retail Division recorded its ninth consecutive quarter of positive comparable sales, our North American Business Solutions Division increased its sales by 8%, and for the first time in eight quarters, local currency sales were up in our International Division."
FIRST QUARTER DIVISION RESULTS
Segment Reporting
As we have previously disclosed, we have been analyzing the further allocation of our general and administrative ("G&A") costs to our Division results for purposes of segment disclosure. Beginning with this quarter, we now include in our Division operating profit those G&A costs that have been identified as directly or closely attributable to those units. After allocating these costs to the Divisions, a certain amount of Corporate G&A remains unallocated. These costs cannot be directly attributable to the activities of any one Division and so are held out separately as corporate G&A. We believe this is the most appropriate way to measure each Division's performance and the Division performance has been recast to reflect this new allocation methodology as well as certain other minor reclassifications.
North American Retail Division
First quarter sales in the North American Retail Division increased 5% compared to the same period last year. Comparable store sales in the 966 stores in the U.S. and Canada that have been open for more than one year increased 3% in the first quarter.
The North American Retail Division had an operating profit of $134 million for the quarter up 25% from the same period in the prior year, and as a percentage of sales was 7.5%, up 120 basis points from the prior year. First Quarter Charges negatively impacted operating results for the period by $1 million. Higher operating profit in 2006 was achieved as the result of broad based product margin improvements from category management initiatives and increased private brand sales coupled with reduced operating costs from our cost management initiatives. These improvements more than offset incremental expense associated with store remodel activities that are now underway.
During the first quarter, the Company opened 4 new stores, while closing 2 stores. At the end of the first quarter, Office Depot operated a total of 1,049 stores throughout the U.S. and Canada.
North American Business Solutions Division
North American Business Solutions Division sales increased by 8% in the first quarter compared to the same period last year. Our contract business experienced growth in all three product categories, and our direct business successfully completed the catalog migration process from Viking to Office Depot.
Division operating profit was $92 million for the quarter, up 24% from the prior year, and as a percentage of sales was 8.2%, up 110 basis points from the same period in 2005. 2006 First Quarter Charges negatively impacted operating profit by $1 million.
Gross margin for the Division declined slightly as compared to the prior year due to cost pressures in certain categories. Expense leverage was achieved from call center optimization efforts and advertising efficiencies, including those realized from the consolidation of our catalog operations.
International Division
International Division first quarter sales increased 2% in local currencies, but decreased 6% in U.S. dollars compared to the same period in 2005. In the quarter, direct and contract sales were up, and retail comparable store sales in Europe grew by 4%. The change in exchange rates from the corresponding prior year period decreased sales reported in U.S. dollars by approximately $80 million for the quarter.
Division operating profit was $53 million or 5.9% of sales as compared to $58 million or 6.0% of sales in the prior year's first quarter. First Quarter Charges negatively impacted operating profit by $16 million, or 180 basis points as a percentage of sales.
Gross margin increased slightly in the quarter despite continued pricing and cost pressures in key product categories, and broad based expense savings also contributed to performance in the quarter.
Acquisitions
After the end of the quarter, we completed the acquisition of a controlling interest in a $44 million South Korean office supply business, Best Office. Earlier this month we also announced that we increased our ownership interest to a majority stake in Office Depot Israel which generated revenue in excess of $100 million in 2005. We will fully consolidate the results of these businesses into our results in the second quarter of 2006.
