Office Depot

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Depot to axe stores and jobs

 

Almost 10 percent of North American stores to close

 

Office Depot has finally unveiled its cost reduction plans to cope with the global economic slowdown.
While store closures and staff cuts took place throughout the year, Depot waited until the month of December before announcing more drastic measures.

 

The measures see the shuttering of 126 North American stores, the closure of six distribution centres and the loss of around 2,200 jobs, including corporate headquarters and BSD sales staff reductions.
112 of the stores will shut up shop over the next three months, while 14 others have been earmarked for closure in 2009 as leases expire.

 

The stores to be closed are located in various geographic regions, but those in the central US (45) and the northeast (40) – the home turfs of rivals OfficeMax and Staples respectively – are the hardest hit.
The news does not come as a real surprise as Depot announced at the end of October that it was conducting a "strategic review" that included the possible closure of stores. Indeed, one may wonder why Depot has waited this long to take action after seeing sales and profits slide consistently over the last 12 months, culminating in a $7 million net loss in the third quarter on the back of an alarming 14 percent drop in same-store sales. ‘Max slashed 2,700 in-store jobs back in June and Staples has already let go 1,000 former Corporate Express employees.

 

In addition to the store closures, Depot will close six of its 33 North American distribution facilities. These include five DCs and one cross-dock facility which would probably have been closed in the future anyway – Depot is just speeding up the process and incurring the charges in 2008 rather than further down the line.

 

New store openings for 2009 have once again been reduced. The figure had already been reduced to 40, and now this number has been halved to 20.

 

The cuts will not stop here. Further announcements are expected before the end of the year and this is likely to include the exiting of some markets, with the loss-making Japanese operations looking the most vulnerable. Depot also warned of further business "restructuring" which usually means further job losses.

 

The closures and reductions come at a price. Staff severance is estimated at $16 million, but the biggest hit comes with lease obligation costs which could be as high as $184 million. However, Depot has negotiated a minimum of $50 million from Gordon Brothers which is handling the sell-off of inventory at the closing stores, and expects total cash usage over the next 12 months to be in the region of $40 million. Between $230-260 million will also be taken as a non-cash charge relating to the write-downs of fixed assets and lease reserves on closed stores.

 

The upside for Depot is an anticipated benefit of $90 million in 2009 in pre-tax earnings and a $70 million improvement in cash flow as capital expenditure is slashed to under $200 million, compared to around $350 million in 2008.

 

"I am not surprised by the closures," Jefferies analyst Dan Binder told OPI, who added that he had been expecting around 100 stores to go.

 

However, Binder also added that, in his view, the reductions do not fundamentally alter Depot’s situation. "The cuts stem some losses and improve liquidity, but not much else has changed," he stated.