A Oiiratarrt iim. An Wayne E. Smith Argosy University - Dallas campus ODP woww.officedepot.com Office Depot was chosen by readers of TheStreet.com as the most likely retail takeover target in 2011. Office Depot's CEO Steve Odland left the company in 2010 after a SEC investigation for inappropriately revealing confidential information. Office Depot lost $15 million in the first quarter of 2011, compared to a $20 million profit the first quarter the prior year. The company’s first quarter 2011 revenue fell 3 percent to $2.97 billion from $3.07 billion a year ago. Revenue at the 1,115 Office Depot stores in the United States and Canada that have been open more than & year fell | percent. New Office Depot CEO Neil Austrian desperately needs a clear strategic plan to reverse declining revenues and profits. As the whole world shifts to paperless transactions, Office Depot's historical business model is questionable. Second Quarter of 2011, Office Depot's second quarter 2011 sales totaled $2.7 billion, almost the same as the prior year. ‘The company however reported a loss of $29 million for the second quarter, compared toa loss of $25 million in the same period a year ago. The company's North America Retail feported sales the second quarter of $1.1 billion, down 2 percent versus one year ago, le by & ‘harp decline in compute als, Furniture sales however increased as did sles for storage items, printers, wring instruments and cleaning and breakroom supplies. Office Depot's Tech Depot Zomices segment reported double-digit sales gains versus the prior year. Copy & Print Depot sales grew positively fo the sixth consecutive quarter. ‘Gitce Depot's North American store count at the end of the second quarter was 1,131 stores. During that quarter the company opened 4 new stores and closed 14 stores, including sire of their remaining 10 stores in Canada, During that quarter, Office Depot remod cea" s stores and relocated 4, successfully reducing the square footage in those 9 locations ty about 30 percent on average. The company's North American Retail segment reported Pxerating profit of $15 million inthe second quarter of 2011, compared to $9 million the rior year Priot ice Depot's North American Business Solutions Division (BSD) reported second quarter ‘oii sales of $803 million, down 2 percent versus the same period last year. Positive sales ‘eas reported though in seating and cleaning and breakroom supplies. Hosrever, paper ero jeclined os did ink and toner sales. Second quarter sales in Texas and Florida were better ses te overall BSD rae, but sales in California stores was worse. Second quarter operating tra for BSD was S48 milion, up significantly from the $14 milion reported inthe sme Period one yearago. ‘The company’s Intemational division reported second quarter 2011 sales of $827 million, an ineease of 6 pereent compared to the prior year in U.S. dollars and a decease of S percent 2a intr currency. These results include the negative impacts ofthe company divesting its in con Japan, Israel, and India in 2010 and the postive impact from acquiring Svansttims in orca during te Hirst quater of 2011. Geographically, BSD sales in France were relatively flat compared to the prior year, while the UK. and Germany reported small declines in fat Company sores in Asia reported high single-digit growih in the second quarter. The sats, ponal division reported operating profit of $13 milion for the second quarter compared Jie million the prior year. Office Depot de Mexico reported sales of $272 million and net 1c of just over $14 milion inthe second quarter of 2011. a ee ee aeWAYNE E. SMITH. IF you are interested in purchasing a tablet computer, Office Depot stores currently offer ‘tablets with complete accessories: the HP TouchPad, the ASUS Transformer, the Black Berry Playbook, the Toshiba Thrive, the Acer Icon, the Lenovo IdeaPad, the ViewSonic G-Tublet and the Velocity Micro Cruz. History ‘The first three Office Depot stores opened in 1986 in Florida with company sales of $2 mil- lion, By its 10th anniversary, Office Depot had $70 stores in North America, $6 billion in sales, and 31,000 employees. When it reached its 20th year, Office Depot had $0,000 employees, sales of $15 billion, and accolades as “Humanitarian of the Year” and one of America’s top corporations for women's business enterprises for the fifth year. Office Depot's corporate social responsibility continued to grow and in April 2011, Office Depot partnered with Local Governments for Sustainability USA (ICLED to launch the 2011 Green Business Challenge, Office Depot is a very “green” company, as indicated in Exhibit 1. All that is the good news. ‘The bad news is that Office Depot is an unprofitable company competing in an unprofitable industry. Vision/Values/Ethics/Mission As provided in Exhibit 2, Office Depot has a five-point vision statement. To fulfill this vision, Office Depot has a values statement as given in Exhibit 3. The company has a one-sentence code of business ethics, as follows: “We eam the trust and confidence of associates, customers, sup- pliers and shareholders by being open, honest and truthful in all that we do." Office Depot does ‘not have a written mission statement, but two analysts recently suggested the mission statement provided in Exhibit 4. EXHIBIT 1_ Office Depot's 2010 “Green” Accolades and Accomplishments *+ Launched “Recycling Rules” program to reward schools + Recognized as America’s greenest large retailer in Newsweek magazine's annual Green Ranking + Named “Best New Product” award winner with Lil" Drug Store Products by Convenience Store News + Showcased 40 new “green” initiatives in honor of the 40th anniversary of Earth Day + Awarded LEED Gold Certification for Existing Buildings for corporate headquarters ‘+ Announced nationwide rollout of United States Postal Service offerings *+ Opened first LEED for Commercial Ineriors registered retail store ‘+ Announced Forest Stewardship Council (FSC) Certification of Off ™ acta, Fo Sena ice Depot® Green™ 30% + Selected as one of America’s Top Corporations for Women's Business Enterprs ' Busines Enterprise National Council (WBENC) forthe ninth consecutive ee Nomen + Recognized as a Top Company Dedicated to the Advance me i Recap Top Company ment of Women by National Association ‘Appointed one ofthe Te for Matic Si ‘Anpin ono the Tp Orato for Malu Busines Oporto 10h Celebrated successful second season as sponsor of Te re inns NASA ret onto of Tony Stewan diver of the No, 14 Otce Dept *+ Launched Greener Shipping solution for business customers ‘+ Teamed up with Lexmark and Operation Homefront to provide mili * Released second annual Historically Underutlized Businesses (HU ‘+ Announced new partnership with National Intergovernmental + Launehed “Document Shredding While You Wait” an in-store Became an ENERGY STAR® Commercial Buildings Partner So tary families with free printers 1B) catalog Purchasing Alliance shredding serviceCASE 26 * OFFICE DEPOT, INC.—2011 26 EXHIBIT 2 Office Depot's Vision Statement Delivering Winning Solutions That Imire Wonkive™ + Delivering—Our actions spe ‘account ‘ ns speak louder than words, We are y Bolag weal e902) tig do—eticey and on ines nn an MEM arena: ig whe wey Wee + Winning—We act with confides ‘And we don’t settle for less + Solutio nce. We're proud to win, We push ourselves to greater heights i than being the best, ons—We listen to out customers and understand their needs. We offer products, services pes thinking that enable our customers to achieve success {nspire—Our inspiration is contagious and enables usw unleash erat ? s 8 cs us o unleash creativity to help people achieve their goals. Our motivation and enthusiasm imitates osteo + Worklife™ aor aan combine our energy for work wit or passion forlife— creating afl, more style. We share the desire to maximize human potential to achieve personal dreams. Source: www.ficedepet.com, EXHIBIT 3 Office Depot's Values Statement ‘+ Integrity—We earn the trust and confidence of associates, customers, suppliers and sharcholders by ‘being open, honest and truthful in all that we do. + Innovation—With a culture of creativity and a has never been done. + Inctusion—We approach all opportunities and challenges by respecting the diverse thoughts, beliefs, backgrounds, cultures and energies of all associates, customers and supplicrs: + Customer Focus—We fuel our customers’ dreams by anticipating and listening to their needs ‘and passionately delivering on our promises. Failure isnot an option, as we promise to “wow” fon recovery. + Accountability—We are responsible for achieving and sustaining unprecedented results that create textraordinary value to our shareholders, customers, and employees. for intelligent risk-taking, we aspire to do what Source: www officedepot.com. EXHIBIT 4 A “Proposed” Mission Statement for Office Depot =e lero oes pecs od orice bepa vob gl dig inno ara pi office prot nmin Oe ei Bh pate secs or cons came nhl el pec, el ct He conta ing and printing technology. We will ar the tnt of our stakeholders by being eee aaa and faithful in all hat we do. We will also be responsible for achieving ‘and sustaining sere ee Mesults that create value to our customers, employees, and stakeholders through personal ‘commitment, sensible thrift, ‘collaboration, and shared leadership. no ee scplain that they not only follow the letter of the law, but the cae Depot even So ary vate that they are responsible for knowing the law, rules, spirit ofthe law as WE" hue in which they conduct business and that all employees should Steptoe oe oo ive to no Internal Issues Business Segments isions or segments. The first, the company's North American Office Depot operas in thee Gio chandse, such as general office supplies, computer Retail division, sells an as ‘end related supplies, and office furniture under various labels, includ- supplies, business machines m0 act, Foray, Ava, Break Escapes, Niceday, and Worklife ing Office Depot, Viking ‘supply stores. It also provides printing, reproduction, mailing, shipping, through its chain of fe er cral compuler support and network installation sevice This sed ther avr a ergy or tn Urn St CS262 WAYNE E. SMITH. ‘The company's second division, North American Business Solutions, Division (BSD) sels nationally branded and private-rand office supplies technology products, fois and serves to small- to medium-sized customers through a dedicated sales force, catalogs, Internet ‘The company’s third division, Internationa, sells office products and services through direct. ‘mail catalogs, contract sales forces, Internet sites, and retail stores using a mix of company-owned ‘operations, joint ventures, licensing and franchise agreements, alliances, and other arrangements, Office Depot sold office products to customers in 53 countries in North America, Europe, Asia, ‘and Latin America. This division operated, through wholly-owned or majority-owned entities, 97 retail store in France, Hungary, South Korea, and Sweden and participates under licensing and merchandise arrangements in South Korea, Thailand, India, Israel, Japan, and the Middle East. Financial performance data for Office Depot's three divisions is provided in Exhibit 5, Notice all the negative numbers that indicate falling revenue and profit totals. Management Neil R. Austrian is Office Depot’s chairman and CEO. Mr. Austrian’s top management team, which oversees more than 50,000 employees, is illustrated in Exhibit 6. Exhibit 7 reveals year- end 2010 information about the 1,147 Office Depot stores in the United States and Canada and the 97 company stores outside North America. Finance Office Depot lost less money in 2010 than in the prior two years but continues to lose money every ‘quarter in 2011. The company’s income statements and balance sheets are provided in Exhibits 8 and 9 respectively, As indicated in Exhibit 10, Office Depot has an extensive information system EXHIBIT 5 _Office Depot—Performance by Division (S in millions) (OFFICE DEPOT’S DIVISION INFORMATION. NocthAmerican Rett Division Fourth Quarter Yearto-Date 2010 2009 2010 2009 Sales 312643 $1828 $4908 $5,136 change “20% 0% 30% 1608 Division opening profit sis2 s22 sis si0ss eobales 13% 02% 26% 21% North American Business Solutions Division (BSD) North American BosinessSoletions Divison BSD) Fourth Quarter YeartoDate 2010 2009 2010 2009 ee weTE Ruan Gare reer % change 20% 11.05% 6.0% 16.0% Division operating profit $37.1 213 $96.5 $98.2 of sales 47% 26% 29% 28% {International Division aarti i faut Quarter Yearto-bate 2010 2009 2009 = 2010 Sak 39299 $982.0 333798 $3572 ‘% change: 5.0% 2.0% 5.0% 16.0% ‘% change in local currency sles 0.0% 60% -20% 9.0% Division operating profit 3206 seas sis $1196 of sales 22% 65% 336 34% ‘Source: Orie Depot, Ine. Form 10K, 2010,ny AOE eae CASE 26 + OFFICE DEPOT, INC.— 2011 263, EXHIBIT6 Office Depot—top Executives and Organizational Chart { . Ghairman ana) | Chief Executive Oficer President, North American Retail Division Kevin Peters Surce: www: offcedepot.com EXHIBIT 7 Office Depot Store Dat: 13 Weeks Ended 52 Weeks Ended Dec. 25,2010 Dec. 26,2009 Dec. 25,2010 Dec. 26, 2009, Store Statistics United States and Canada: Store count Stores opened. 3 2 7 6 Stores closed 6 8 2 m2 Stores relocated 4 1 6 6 1147 1152 17 1182 Toul U.S, and Canada stores [North American Retail Division square footage 27,559,184 28,109,844 ‘Average square footage per store 24027 24401 Inermational Division company-owned: Store count: ; : ‘ Stores opened 2 : 2 Stores closed/deconsolidated i. Soret sccatred ” 137 7 1 ‘Total Intemational company-owned Stores ‘Source: Company documents B. ee uieit 8 Office Depot's Income Statements (in thousands) ex Dec. 26,2010 Dec. 26,2009 Dec. 27, 2008 Bertod Ending $11,633,004 12144467 ——(14.495.548 ‘Total Revenue $8,275,957 $8,752,283 $10,489,785 cost of Revenve os 3,357,137 3.392.184 4,005,759 Gross Profit ‘Operating Expenses ss E 7 Research Development 3343133 3,631,014 4,065,836 nd Adinistraive ‘Selling | =264 WAYNE E. SMITH “36,2010 Dec. 26,2009 Dec. 27, 2008 Period Ending Dec. p26, 2009 Dev. 2 Nonrecuring 31095 Te Opting xen suum mare soa Operating Income or Loss e129) (265,005) 1.545.041) Income from Continuing Operations Total Other Income/Expenses Net sous 1981 35.44 Eamings Before Interest and Taxes 192324552) (1,509,297) Interest Expense 58,498 65,628, 68,286 Income Before Tax (56675) BULIS2) 1.577.583) Income Tax Expense (19470) 287.872 (98,648) Minority Interest 1.582 2259 : Net Income from Continuing Ops (44623) (596.465) (1.478.938) Nonrecurring Events Discontinued Operations 2 E = Extraordinary lems ~ : 3 Effect of Accounting Changes . : = ‘Other lems e : = Net Income (44623) (596,465) ——_(1.478 938) Prefered Stock and Other Adjustments (7,113) (20,506) _ [Net Income Applicable to Common Shares (81,736) _$(626,971)__S(1.478,938) ‘Source: Company documents EXHIBIT 9 Office Depot's Balance Sheets (in thousands) Period Ending Dec. 26,2010 Dec. 26, 2009 Dec, 27, 2008 Asets Current Asset ‘Cash and Cash Equivalents soxa7e $659,898 $158.45 ‘Short-Term vestments es b - Net Receivables 963.787 1211601481927 Inventory 1233687 1.82979 1,331,593 Other Curent Assets 203,020 172.342 193,122 Tota Curent Assets 3027982320029 3,122,387 ‘Long-Term tnvestments z i z Property Pant and Equipment 11s7013, 1.277655 1,587,301 Goodwill 19431 19.431 19431 Intangible Assets 21,840 25,333 28311 ‘Accumulated Amortization f rs % Other Asses 309.892 29492 540.796 Deferred Long-Term Asset Charges 33319 81,706 <2 ‘Total Assets 4500457 490346 5,268,206 Usbiides Current Liabilities ‘Accounts Payable s22n077 aT s2433at2 ‘ShorvCurent Long-Term Debt 72.368 sash Other Current Liabilities: = a etal Current Liabilities 2B4S—aaznans 228.744 (continued)CASE 26 + OFFICE DEPOT, INC. — 2011 EXHIBIT 9 continued a Fotos Eran Dec, 26, 2010 apa Da 26, Dec. 26, 2009 Dec. 27, 2008 Other Liabilities one ere coun Deferred Long-term Liability Ch " 7 i arges Seas ie sate 654,851 585,861 Negative Goodwill 7a] 4883 Linbiit ras of $3517.962 $3,748,623 $3,905.276 Stockholders’ Equity Mise. Stocks Options Warrants = p u Redeemable Preferred Stock 355979 355,308, Z Preferred Stock x z 2 Common Stock 2.831 2807 2,808 Retained Earnings (634.818) (590.195) 6270 ‘Treasury Stock (57,733) (57,733) (1947 Capital Surplus 1,161,408 1193157 1.194.622 (Other Stockholders’ Equity 223,807 238379 217.197 ‘Total Stockholders’ Equity 695.496 786415 1,362,950 ‘Total Liabilities and SEquity $4,569,437 $4,890.46. $5,268,226 ETC EEE Source: Company documents EXHIBIT 10 Office Depot's Public Websites Outside of North America a ae waw.officedepot.be (Dutch), www.office-depot be (French); Kage ‘www.vikingdirect.be (Dutch) and eee ae a Se ita s * Costa Rica: ecient oe Sern, So ee 2 a wwwofficedepot.eu i s www officedepot.tr, www.office-depot fr, and www: -vikingdirect. ‘ pe vrevwoicedepot de, wwrwvikingde, and wrwstechdepot de 5 y; wirw.officedepot.com.gt ee www officedepot-bu ier: wwrs.officedepot.ie and www. vikingdirect ie ees wvw.otficedepot.co.il peaeast ‘wwwoffice-depotit and www.vikingop.it Si www.officedepat.coJP eres ww wofficedepot.lu (French) and www. wviking-directu ems, y officedepot.com.mx ieee rn eepent wewecheots- an wowitingieta — glee www.officedepot sk Ph se wow bestoffice.co-kr et266 wayne E. sMITH + Sei vowatcdepotes and wigs rodeo ch Fes » Shit: wr chrcsepeh (German, we ofc dea rae _www.vikingdirekt.ch (French), and www.viking-direkt.ch (Germany) + Ud Kingdom: Fowaticteotco ak, wwwsikng dst cosk and wince ee ‘Source: wow officedepot.com. that Links each store in the global network. The company utilizes websites in 40+ countries out of North America, Each website provides extensive service offering all products and many pay- ‘ment methods. Competition Staples Headquartered in Farmingham, Massachusetts, Staples is the largest office products supply com- pany in the world with about 2,240 stores in the United States, Canada, Belgium, Denmark, Germany, Ireland, the Netherlands, Norway, and other countries. The company also operates 125 distribution centers and sells products through a catalog, its website, and a sales force. Staples” sales for 2010 increased 1.1 percent to $24.5 billion. Cost controls helped push ‘operating income up 13.8 percent to $1.6 billion, and net income jumped 19.4 percent to $881.9 million. However, the company’s operating cash flow fell nearly 31 percent due to 1) the need to spend to rebuild inventories and 2) higher receivables, meaning the company was less able to collect payment from customers. Exhibit 11 compares Staples to Office Depot. OfficeMax Headquartered in Naperville, Iinois, OfficeMax operates 44 distribution centers and just over 1,000 office products stores in the United States, Mexico, Canada, Australia, New Zealand, and Puerto Rico, OfficeMax’s first-quarter 2011 net income fell to $11.4 million, or 13 cents a share, from $24.8 million, or 29 cents a share, a year earlier. Sales that quarter fell 2.8 percent to $1.86 billion, Sales at OfficeMax's contract segment, which caters o business customers fll 3.9 percent ‘Same-store sales fell 1.2 percent. a OfficeMax has begun to sell additional goods to business customers, such as furniture and cleaning products, as well as print services to offset declines in the traditional office product category. The company plans to close 15 stéres in the United States in 2011 and has seen its stock price drop continuously to below $10 per share. Mexico is a bright spot for OfficeMax as ‘the company plans to open nine stores in that country in 2011 ‘ the United States. mitry in 2011 compared to closing nine stores in EXHIBIT 11_ Office Depot's Competitors oT —Difice Products Companies Office Depot Office Max Staples ‘$Market Cap: L18B 1.108 Wat Mart Indust 14.868 187.068 259.52M ‘Employees: 40.000 1300052919 2.100.000 ask ‘Quy Rev Growth: 340% 2408 OK 240% 430% her 71SB 24558 421.858 442.08M 6 MR ATR 0s sam asa IDA: 26645M = 2.138 33.188 20.49M ‘Operating Margin: 034% 232% 665% 6.06% 624% $SNet Income: “SLM 6863M_—SBLOSM is36p SERS: 030 0.79 ie 121 446 07 Pe eeCASE 26 © OFFICE DEPOT, INC. —2 Conclusion The big three office supply firm Paihia te nese s, including Office Depot, operate very similar business models, ¢ best strategic plan and operational efficiencies will ultimately competitors are also taking market share from the big three. Maybe the big three should diversify away from selling traditional offi i i cosy ine tn rf ne EEN tw sng Maybe the big three office supply firms should focus more on emerging economies and slobal expansion. For example, Staples just formed a new strategic alliance with one of the lead ing Swiss office Products companies, Biiro Schoch Direct AG. Within Switzerland, Staples and Biro Schoch Direct will work together exclusively on international accounts and collaborate to exchange best practices. Maybe Office Depot could emulate OfficeMax’s success in Mexico. Celebrating 25 years as a leading global provider of office ‘supplies and services, Office Depot received the Corporate Business Achievement Award from the U.S. Postal Service (USPS) at the National Postal Forum held May 1-4, 2011, in San Diego, California. Office Depot was honored for its commitment to a successful business partnership with the USPS, offering postal services and products within the company’s retail store locations nationwide. Through this partnership, Office Depot became the first national retailer to offer USPS shipping products and services at the same prices as the post office. Services offered in every Office Depot include: Priority Mail Flat Rate Service; Priority Mail Service; Express Mail Service; First-Class Mail Service; and stamp purchases in books or large coils. Office Depot recently teamed up with 3M and NASCAR stars Tony Stewart, driver of the No. 14 Office Depol/Mobil 1 Chevrolet, and Greg Biffle, driver of the No. 16 3M Ford, to offer the exciting possibility of a $1 million payday for one small business owner through the “Official Small Business of NASCAR, Courtesy of Office Depot” sweepstakes. Do you think this marketing expense will be worth the money Office Depot is spending? Prepare a three-year strategic plan for Office Depot's CEO Neil Austrian.