Office Depot, Inc. (NYSE:ODP) announced second quarter results for the fiscal period ended July 1, 2006. Total company sales for the second quarter grew 4% to $3.5 billion compared to the second quarter of 2005. Sales in North America were up 5%, while International sales increased 1% in U.S. dollars and 2% in local currencies. North American Retail comparable store sales were up 1% for the quarter.
Net earnings for the quarter were $118 million compared to $100 million in the same quarter of the prior year, and diluted earnings per share were $0.41 in the second quarter of 2006 versus $0.31 in the same period a year ago. The second quarter 2006 results included 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-K and 10-Q filings with the Securities and Exchange Commission. Second quarter charges (the "Second Quarter Charges") in 2006 had a $0.02 per diluted share negative impact on results. Without these charges, our second quarter 2006 net earnings were $125 million(1) or $0.43 per share(1), up 39% from the second quarter earnings per share of the prior year.
During the quarter Office Depot completed the previously announced acquisitions of businesses in North America and South Korea, and acquired an incremental interest leading to a majority stake in the company's business in Israel. While each of these businesses provides growth opportunities in the future, they did not have a significant impact on second quarter performance.
For the quarter, gross profit as a percentage of sales was 30.9%, a 10 basis point improvement from the same period last year. Gross margin in the North American Retail Division increased during the quarter while the North American Business Solutions Division and the International Division posted slight decreases in gross margin as compared to the prior year, primarily due to cost pressures in certain product categories.
Total operating expenses as a percent of sales were 25.9%, an improvement of 70 basis points compared to the prior year. Second Quarter Charges of $8 million negatively impacted operating expenses as a percentage of sales by 20 basis points in the quarter.
In the second quarter, Office Depot repurchased approximately 7 million shares of common stock for $272 million under the repurchase programs previously approved by the board of directors.
Return on invested capital for the quarter was 10.5%. Charges taken in the twelve months prior to June 2006 negatively impacted the calculation of the company's current return on invested capital. Adjusted to exclude these charges, ROIC improved to 13.9% for the second quarter of 2006 as compared to 11.4% in the prior year.
"We are pleased with our overall performance in the second quarter with each of our Divisions contributing to the increase we achieved in earnings per share," said Steve Odland, Office Depot's chairman and CEO. "We achieved sales growth in each of our divisions, lowered total operating expenses, and expanded our operating margin. The North American Retail Division recorded its tenth consecutive quarter of positive comparable sales, our North American Business Solutions Division increased its sales by 6% and the International Division increased its sales in local currency by 2%. We also leave the quarter with continued improvement in working capital management and another increase in ROIC."
Second Quarter Division Results
North American Retail Division
Second quarter sales in the North American Retail Division increased 4% compared to the same period last year. Comparable store sales in the 986 stores in the U.S. and Canada that have been open for more than one year increased 1% in the second quarter. This represents the tenth consecutive quarter of positive comparable sales led by strength in the technology product category.
The North American Retail Division had an operating profit of $96 million for the quarter, up 26% from the same period in the prior year, and as a percentage of sales was 6.4%, up 110 basis points from the prior year. Second Quarter Charges negatively impacted operating results for the period by $1 million. Division operating profit margins expanded due to both a continuation of gross margin expansion and a reduction in the division's cost structure. Gross margins improved over last year, in part reflecting an expansion in product margins driven by category management and an increase in private brand sales. Cost management initiatives have resulted in reduced operating costs. These improvements in gross margin and savings from cost management initiatives continue to more than offset incremental expenses associated with new store openings and store remodel activities now underway.
Inventory per store was $995,000 as of the end of the second quarter, down from $1.06 million per store in the prior year.
During the second quarter, the company opened 22 new stores and completed the remodel efforts for 49 stores. At the end of the second quarter, Office Depot operated a total of 1,071 stores throughout the U.S. and Canada.
North American Business Solutions Division
North American Business Solutions Division sales increased by 6% in the second quarter compared to the same period last year. The Business Solutions Division experienced growth in key product categories, and average order values increased compared to the second quarter of 2005. In the second quarter the Company also completed the acquisition of Allied Office Products, a contract stationer, whose results have been consolidated into Office Depot's results for part of the second quarter.
Division operating profit was $101 million for the quarter, up 16% from the prior year, and as a percentage of sales was 8.9%, up 80 basis points from the same period in 2005. 2006 Second Quarter Charges negatively impacted operating profit by $4 million.
Division operating profit margins expanded due to improvements in costs, which were slightly offset by a modest decline in gross margin. Overall gross margin for the Division was negatively impacted by cost pressures in certain product categories and a shift in the mix of sales. Expense leverage was achieved from call center optimization efforts initiated in past quarters and from current period advertising efficiencies. Office Depot continued to invest in the expansion of the company's sales force in the quarter.
International Division
International Division second quarter sales increased 1% in U.S. dollars, and increased 2% in local currencies compared to the same period in 2005. The change in exchange rates from the corresponding prior year period decreased sales reported in U.S. dollars by approximately $8 million for the quarter. This quarter Office Depot completed the previously announced acquisition of Best Office, an office supply company located in South Korea and increased the company's ownership interest to a majority stake in Office Depot Israel. Their results have been consolidated into our results for part of the second quarter.
Division operating profit was $46 million or 5.3% of sales as compared to $51 million or 6% of sales in the prior year''s second quarter. Second Quarter Charges negatively impacted operating profit by $3 million, or 30 basis points as a percentage of sales. The comparison for the second quarter is impacted by the allocation of certain one-time credits realized in 2005 that increased the prior year operating margin by as much as 70 basis points.
The operating profit margin for 2006 was impacted by a slight decline in gross margin which was due to the effect of mix of sales, and continued pricing and cost pressures in key product categories. This decline was offset by broad based expense savings resulting from consolidation and cost management efforts.
