Office Depot says chief quits by mutual accord, names interim CEO; "committed" to keeping high-grade ratings

By Paul Deckelman

New York, Oct. 4 - Office Depot Inc. said Monday that the company's chairman and chief executive officer, Bruce Nelson, had resigned his positions by mutual agreement with the company's board of directors, which appointed the chairman of its finance committee, Neil R. Austrian, as interim chairman and CEO. The company retained the executive search firm of Heidrick & Struggles to assist in its efforts to name a permanent replacement for Nelson.

On a hastily scheduled conference call with investors and analysts, Austrian praised Nelson's "significant" contributions to the Delray Beach, Fla.-based office supplies retailer and distributor in terms of building a strong management team and making the company more customer-centric but said that the board had come to the conclusion that "now is the right time to seek a new leader who can take the company to the next level and ensure that it reaches its full potential."

Austrian said that the hope was that the change in leadership would "jump-start growth, give new impetus to the initiatives we already have in place and bring in creative new thinking on ways to make Office Depot a more formidable competitor."

Austrian: No strategy change

He said there would be no significant change in Office Depot's business strategy but would seek to improve "execution and accountability. We don't feel we need new plans - just better and more rapid execution of the plans we already have in place."

In answer to an analyst's query during the question-and-answer portion of the call that followed the official company presentation, Austrian said that "while we had priorities, it appeared as though there wasn't enough focus and attention to a lot of detail in ensuring that the most key priorities got executed well."

Austrian said that his "top priority" would be improving the performance of the company's 901 North American retail stores.

On accountability, he said that his experience as a member of the company's board since 1998 had been that "when questions got asked about accountability, and who might be responsible for what, it was so much of a matrix management concept that it was very difficult to identify an individual department or group who had that task and were accountable for it. That's going to have to change."

On Sept. 14, the company warned investors it now expects third-quarter earnings per share to fall to 26 to 28 cents a quarter, well below the 33 cents a share that analysts were predicting, and said that it "does not expect to recover this shortfall during the fourth quarter, and sees additional risks primarily because of a lowered sales outlook for the balance of the year across all business segments."

Citing "continued softness in European contract sales, lower-than-expected sales growth in North American Business Services Group contract and commercial sales, and weaker-than-expected" comparisons to year-earlier performance levels in its North American retail stores operation, it projected full-year earnings per share to finish in a $1.08 to $1.14 range, versus Wall Street's expectations of $1.22. Earnings for the third quarter ended Sept. 30 are expected to be released on or around Oct. 22, three months after its previous numbers. The company projected its cash position at year-end to be between $1.1 billion and $1.2 billion.

The company has also noted the impact on its performance of the quartet of deadly September hurricanes in Florida, which disrupted operations at Delray Beach for several crucial days.

Company in quiet period

On the conference call, Austrian and chief financial officer Charles Brown noted that legally, Office Depot is in the "quiet period" preceding its earnings report and so would have no comment on the upcoming numbers, other than to reiterate the previous revision to earnings expectations.

Brown said that the company remains "committed" to holding onto the investment-grade rating on its bank debt and its senior unsecured bond debt "and we see no reason to change that at this time."

Moody's Investors Service gives the company a long-term issuer rating of Baa3, the same rating it attaches to its $400 million issue of 6¼% senior notes due 2013, while it gives the company's $250 million issue of 10% senior subordinated notes due 2008 a Ba1 rating. Standard & Poor's rates the 6¼% bonds, as well as its bank debt, such as the company's $750 million senior unsecured revolving credit facility due 2009, at BBB-, while it gives a BB+ to the 10% senior subordinated debt.

Brown noted that the agencies "actually came out and maintained their ratings" after Office Depot's announcement on Sept. 16 - just two days after it lowered guidance - that it would buy back up to $500 million of its common shares. He said the agencies cited "our strong cash position and free cash flow" in deciding not to drop the senior debt ratings to junk levels.

"We did speak with them" at the time the share buyback was announced, "and they had no issue [with it]," Brown added. He said the company would be in touch with the agencies on the CEO switch "over the next two or three days."

Brown said that the stock buyback program - which is to take place over the next 12 to 24 months - had not yet begun because the company wants to finish up its existing stock repurchase program, and it can't start buying back stock during the "quiet period" anyway. He said that "over the next couple of months," he, Austrian and other company officials would study the timing for the new stock buyback - "and we'll pick the right time to start executing it, and when we do - we'll let you know." Office Depot stock currently trades slightly north of $15 a share on the New York Stock Exchange.

Brown also said that the company's program of acquiring closed Kids "R" Us stores from Toys "R" Us Inc. was "about 85% complete," with Office Depot having closed on around 100 of the 124 locations that the troubled Wayne, N.J.-based toy and children's products retailer put up for sale some months ago when it closed its underperforming children's clothing store division. He noted that since the initial announcement in March of a deal between the two companies, about 15 or so of the stores had been taken out of the deal for various reasons, so that Office Depot will eventually take possession of between 105 and 110 of the locations - although not all of these will ultimately become Office Depot sites.

He said Office Depot is reselling some of the locations it can't or doesn't want to use for itself - some of them to Petco Animal Supplies Inc., the San Diego-based chain of pet-care stores, others to unidentified other buyers - and will end up opening about 50 to 55 of its own stores.

"This year, the plan is to get about 35 of those stores open," he said, "and the bulk of them will open this month of October and in November."

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