Office Depot CEO Pleased With Progress on OfficeMax Merger
Office Depot CEO Neil Austrian is “pleased” with the progress that has been made on his company’s planned merger with OfficeMax (CED Feb 21 p8), he said on an earnings call Tuesday. A special shareholder meeting on the merger will be “sometime this summer,” and he expects the FTC “will need several months to analyze the data” the retailers provided “before giving us the green light to proceed,” he said. “Based on what we know today,” the retailer still expects the merger will close by the end of 2013, he said.
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"The overwhelming feedback” that Austrian has heard from vendors, customers and shareholders about the merger has been “extremely positive,” he said. Once Office Depot’s S-4 filing with the SEC is “finalized and becomes effective,” it will set a date for the special shareholders meeting, mail a proxy statement to shareholders and hold the meeting “as soon as reasonably practical,” he said. Since submitting its initial Hart-Scott-Rodino filing to the FTC March 8, Office Depot has had “ongoing communication” with the FTC and complied with its preliminary data requests, he said. On April 8, Office Depot received a second request for information from the FTC and will “respond as quickly as possible,” he said.
Shares in Office Depot closed 4.3 percent higher Tuesday at $3.86 despite it reporting weaker results for Q1 ended March 30 than in Q1 last year. It had a loss of $16.8 million, or 6 cents a share, after a profit of $41.3 million, or 14 cents, in Q1 last year. The results included about $25 million of pre-tax charges, mainly merger-related costs, restructuring activities, and about $5 million related to non-cash store asset impairment charges in its North American Retail Division, it said. Excluding the charges, earnings would have been about $1 million in Q1, it said. Revenue fell 5 percent to $2.7 billion, with about $58 million impacted by the shift in the timing of the New Year and Easter holidays compared to last year, it said.
Office Depot saw “modest improvement” in March and early April, said Austrian. Office Depot saw sales growth in its contract business within the small- and medium-sized business segment, he said. It plans to add “additional resources behind this initiative” this year, including “dedicated technology sales representatives,” he said. Sales in the direct channel were down due to the holiday timing and being “pressured by lower purchases from customers who shop using catalogs and order through our inbound call centers,” he said. But Office Depot was “pleased” that its e-commerce investments are “paying off with positive improvements to buyer conversion, growth in mobile sales and increased customer satisfaction scores” in surveys, he said.
Office Depot ended Q1 with 1,111 stores in North America after closing one store and opening none, said Juan Guerrero, senior vice president-North American retail. It remodeled one store and relocated four, reducing square footage of the five locations by more than 50 percent on average, he said.
The retailer continued to see “consumer demand shift out of laptops and into tablets” in Q1, said Guerrero. Tablet sales grew “significantly” from Q1 last year, but he said “the lower price point of both tablets and related” products “did not offset the sales decline from higher-priced” laptops and PC accessories.
European contract sales decreased in “mid-single digits” in Q1 from a year ago as growth, mainly in Germany, was “more than offset by sales weaknesses” in other countries, said Steven Schmidt, president-international. The company is “encouraged by the ongoing improvements” in its online business in Germany, he said. European retail channel sales declined from last year, with weaknesses especially in Sweden and France, he said. Office Depot had 1,628 stores globally as of Tuesday.
Citi Research analyst Kate McShane said the retailer “continues to face significant near-term cyclical challenges,” and predicted “sales momentum” for office product retail will “remain sluggish” due to a “tepid domestic recovery, continued inflationary pressures,” the “weak European macro environment, and increased competition.”
OfficeMax shares closed 4.3 percent higher Tuesday at $11.51. It will report Q1 results May 7, it said. The combined company, post-merger, “has significant opportunity to create value in the longer term,” said Janney Montgomery Scott analyst David Strasser. But “we do not see major catalysts to drive either stock meaningfully higher in the near term, until more details of the merger are finalized,” he said.