Why Office Depot Will Close 400+ Stores

May 07, 2014 1:06 PM  By

Office Depot Inc. will close at least 400 stores by the end of 2016, chairman and CEO Roland Smith said during its first-quarter earnings call on May 6.

The decision to close as many as 400 stores – including a minimum of 150 after the 2014 back-to-school shopping season – is a cost-cutting effort that is tied in to its pre-determined post-merger plans. Office Depot and OfficeMax completed its merger on Nov. 11.

Smith said a staged approach to store closures allows Office Depot to minimize risk and adapt its learnings to future groups of store closings.

“We anticipate that by the end of 2016, the optimization of our retail store portfolio will generate additional annual run-rate synergies of at least $75 million, in addition to our previously announced $600 million of cost synergies, and will be accretive to earnings beginning in 2015,” Smith said.

Office Depot worked with Bain Consulting to help it conduct a comprehensive analysis of its retail store portfolio. Smith said store-specific decisions are being made through a three-stage holistic market evaluation process, focused on optimizing, productivity and profitability.

Smith said Office Depot is also looking to define and implement our store of the future.

“This will require experimentation and testing in order to achieve the right product and service mix,” Smith said. “But it’s critical to our long-term success, particularly given the evolution in our industry and the changes in how customers shop.”

Office Depot also announced it would close all 19 Grand & Toy stores in Canada. Those stores represent only 3% of its Canada sales, and Smith said Office Depot believes it can serve its customers there more efficiently through its ecommerce website, field and telephone sales representatives and customer service centers.

Smith said Office Depot is also in negotiations with its Mexican joint venture partners to sell its 51% interest in Grupo OfficeMax, which consists of 92 OfficeMax-branded retail stores. Office Depot expects this transaction to close in the second quarter.

Office Depot reported sales of $4.4 billion for the first quarter compared to $2.7 billion in the same period of 2013. However, total sales were 3% lower than combined pro forma sales of $4.5 billion in the first quarter of the prior year.