Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Office Depot (NYSE:ODP)

Q4 2011 Earnings Call

February 28, 2012 9:00 am ET

Executives

Brian Turcotte -

Neil R. Austrian - Chairman, Chief Executive Officer, Member of Corporate Governance & Nominating Committee, Member of Corporate Governance & Nominating Committee and Member of Finance Committee

Kevin Peters - President of North America

Steve Schmidt -

Michael D. Newman - Chief Financial Officer and Executive Vice President

Analysts

Christopher Horvers - JP Morgan Chase & Co, Research Division

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Kate McShane - Citigroup Inc, Research Division

David Gober - Morgan Stanley, Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Michael Baker - Deutsche Bank AG, Research Division

Joseph I. Feldman - Telsey Advisory Group LLC

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Operator

Good morning, and welcome to the Fourth Quarter 2011 Earnings Conference Call. [Operator Instructions] At the request of Office Depot, today's conference is being recorded. I would like to introduce Mr. Brian Turcotte, Vice President of Investor Relations, who will make a few opening comments. Mr. Turcotte, you may now begin.

Brian Turcotte

Thanks. With me today are Neil Austrian, Chairman and Chief Executive Officer; Mike Newman, Chief Financial Officer; Kevin Peters, President of North America; and Steve Schmidt, President of International.

Before we begin, I'd like to remind you that our discussion this morning includes forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company's current expectations concerning future events and are subject to a number of factors and uncertainties that can cause actual results to differ materially. A detailed discussion of these factors and uncertainties are contained in the company's filings with the SEC.

In addition, during the conference call, we refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures, as well as our press release and accompanying webcast slides for today's call, are available on our website at www.officedepot.com. Click on Investor Relations under Company Information.

Neil will now summarize Office Depot's fourth quarter and full year 2011 results. Neil?

Neil R. Austrian

Thank you, Brian, and good morning. Before I speak to the results, I would like to thank our associates for their efforts to deliver a really solid operational quarter at the end of 2011. The results were encouraging despite a slow economic recovery in the U.S. and increasing business pressures across Europe. I'm pleased with the traction we're getting in improving our North American businesses and with the restructuring actions being taken in the International division. I believe that our results are a testament to our improving execution across the enterprise and our focus on fewer initiatives.

Now turning to our results. Office Depot reported fourth quarter 2011 sales of $3 billion, essentially flat compared to the prior year. Excluding sales related to an acquisition in 2011, the disposition of certain businesses in 2010 and the impact of the 53rd week in 2011, constant currency sales in the fourth quarter of 2011 decreased about 4% versus prior year. The company reported net earnings after preferred stock dividends of $12 million or $0.04 per diluted share in the fourth quarter of 2011 versus a loss of $109 million or $0.39 a share in the same period one year ago.

Fourth quarter 2011 results included approximately $23 million of charges primarily related to restructuring activities and actions to improve future operating performance. The quarter also included a $24 million tax benefit related to the reversal of an uncertain tax position accrual and the release of a valuation allowance. Excluding these charges and tax benefits, net earnings after preferred stock dividends would have been approximately $8 million or $0.03 a share. I should note that our fourth quarter 2010 reported earnings also included $87 million in charges and a $6 million tax benefit. The net after-tax impact of the charges and tax benefit negatively impacted fourth quarter 2010 earnings by about $0.29 a share.

The total company gross profit margin increased about 170 basis points in the fourth quarter of 2011 compared to the prior year. This was the seventh quarter out of the past 8 quarters that we've increased our total company gross margin year-over-year. The gross margin improvement this quarter was driven by increases of 300 basis points in North American Retail, 100 basis points in the International division and 70 basis points in North American Business Solutions.

EBIT, adjusted for charges, was $47 million in the fourth quarter of 2011 compared to $26 million in the prior year period. This $20 million year-over-year improvement was attributable to strong operating performances in all 3 divisions.

Turning to our full year results. Office Depot reported 211 (sic) [ 2011] sales of $11.5 billion, down 1% compared to 2010. Excluding sales related to previous portfolio actions and the impact of the 53rd week, 2011 constant currency sales decreased about 3% versus prior year. Reported net earnings for 2011 after preferred stock dividends were $60 million or $0.22 per diluted share compared to a loss of $82 million or $0.30 per share for 2010.

Adjusted for charges and certain tax benefits, the 2011 net loss and the diluted loss per share after preferred stock dividends were $8 million and $0.03 a share, respectively. Adjusted for charges and the impact of certain tax benefits, the 2010 net loss and the diluted loss per share were $39 million and $0.14 a share, respectively.

EBIT, adjusted for charges, was $122 million in 2011, up significantly compared to $84 million in 2010. This $38 million year-over-year improvement of EBIT was attributable to strong operating performances in both North American Retail and BSD in 2011.

I'll now ask Kevin to review our fourth quarter and full year 2011 performance in the North American Retail and Business Solutions divisions.

Kevin Peters

Thanks, Neil, and good morning. The North American Retail division reported fourth quarter 2011 sales of $1.2 billion, flat versus the prior year. The 53rd week added approximately $78 million to fourth quarter 2011 sales. Same-store sales in the 1,107 stores that have been open for more than a year decreased 5% for the fourth quarter of 2011. However, our operating profit doubled versus prior year. The significant year-over-year increase in operating profit reflects about 300 basis points of gross margin improvement, including improved product margins from higher sales mix of supplies, better promotional management and lower property costs.

In terms of the same-store sales, the sequential deceleration reflects our deliberate and continued focus on improving the profitability of the business, which, as we've described in prior quarters, is enabled by taking a more strategic, thoughtful and economically defensible approach to our product assortment, pricing and promotion actions. As an example, based on our new category management strategy, we used product bundling and value-based pricing throughout the quarter, including Black Friday, to create differentiation and enhance the offering to our customers while driving improved profitability.

Furthermore, this strategy also enabled us to accelerate the rationalization and disposition of certain mature or end-of-life cycle, peripheral and technology SKUs in our assortment. In doing so, we were able to create room for new product introductions in destination and emerging categories scheduled to arrive late first quarter and into the second quarter of this year. As a result of this assortment and promotion strategy, which includes the rationalization of peripherals and technology, same-store sales for the fourth quarter were negatively impacted by an incremental 300 basis points.

Now drilling down deeper into our individual product category performance in the fourth quarter, I'm pleased to report that sales of core office products like office essentials, writing instruments, cleaning and breakroom products, presentation supplies, office collections and seating were all positive versus prior year. We also saw strong sales in tablets and e-readers, however, not strong enough to offset the decline in sales from the rest of the technology category.

In addition, Copy & Print Depot sales increased high-single digits and produced positive same-store sales for the eighth consecutive quarter. Therefore, I think it's important to note that if we excluded the sales of computers and their related products, same-store sales would have been positive in the fourth quarter of 2011.

North America's Retail average order value was slightly negative in the fourth quarter, and customer transaction counts declined approximately 4% compared to the same period last year. Our goal to increase direct import of products continues to go well. For example, direct import penetration in North America Retail increased 200 basis points in the fourth quarter versus the prior year to 12%. The North American Retail store count at the end of the fourth quarter was 1,131 stores. During the quarter, we opened one new store and closed 2. We also remodeled 21 stores and relocated 6, successfully reducing the square footage in over 2/3 of those locations by almost 40% on average. We currently plan to add a low-single digit number of new retail stores in North America in 2012, and we'll evaluate locations as leases expire. As we've said in the past, we will continue to close, relocate or downsize stores when appropriate.

Now as referenced earlier, North American Retail reported operating profit of $32 million in the fourth quarter of 2011 compared to $16 million in the same period last year. In addition to the positive gross margin dollars, profitability also benefited from the favorable impact of the 53rd week and reduced advertising expense during the quarter. These benefits were partially offset by the negative flow-through effect of lower sales, higher operating expenses incurred to fund key initiatives and higher variable base pay in the fourth quarter of 2011 versus the prior year.

Now in anticipation of a number of questions on this topic, I would like to provide a little bit more color on the impact of the 53rd week in North America Retail. Our analysis indicated that the extra week contributed about $11 million of operating profit benefit in the fourth quarter due to our ability to leverage fixed cost. To be more specific, although we still paid normal operating costs related to our store fleet during the 53rd week, rent costs for that week have been amortized over previous periods.

Turning to our full year 2011 performance, North America Retail sales were $4.9 billion, down 2% from the prior year. The decline in sales reflects the closing of 12 stores in Canada during 2011. Comparable store sales for the 1,107 stores that were open for more than one year decreased 2%. 53rd week added approximately $78 million to our full year 2011 reported sales.

The North America Retail division reported 2011 operating profit of approximately $135 million, up from $128 million in 2010. 2011 division operating profit included approximately $12 million of charges associated with the closures of stores in Canada. Gross margins increased in 2011 as a result of a change in the mix of sales away from technology products, lower promotional activity and continuing benefits from lower occupancy costs. Operating expenses included severance and other costs associated with the store closures, higher variable base pay and incremental costs incurred to drive the increased customer-focused selling activities. These costs were offset by decreased advertising expenses and other benefits.

Division operating profit was also negatively impacted by the unfavorable impact of our sales volume decline that had on gross margin and operating expenses.

I'll now provide an update on our key initiatives to drive profitable sales and reduce cost for North America Retail. First, we successfully rolled out our new in-store customer experience model in over 300 stores before the year ended right on schedule. We're in the process of rolling out the new service model to an additional 360 stores in the first quarter and plan to complete the remaining fleet by mid-2012. Secondly, to improve the sales and productivity of our stores, we remodeled 38 stores and relocated 15 stores in 2011, reducing the average store size in over 2/3 of those locations by approximately 40% over the past 4 quarters. In total, we lowered our North America Retail occupancy cost by about $19 million during 2011. Also in the fourth quarter, as many of you may remember, we opened our 5K store in Hoboken, New Jersey. This opening, in addition to the relocation of a store during the quarter into the 5K format, raised our total to 8 locations at the end of the year. We remain very excited about the potential for this new 5,000-square foot store across our fleet. And third, we continue to pursue additional opportunities to improve margins, including price optimization and increasing promotional effectiveness. We've made nice progress in this area as evidenced by our results in the back half of 2011, which Mike will review later in the call.

In summary, we're very pleased with our results and the quality of earnings in the fourth quarter of 2011. We view the progress in North America Retail as a continuum. About one year ago, we began investing in the business and executing key initiatives to put us in the best position to win. The next step in this continuum is to drive sales growth through the execution of our ongoing in-store customer experience initiative and improved merchandising. I'm really excited about these initiatives and ready for customers to return to our stores and be delighted by the service they receive and the product offerings available in 2012 and beyond.

Looking forward, the first quarter is our back-to-business season and the highest sales volume for the quarter. We expect the core office products, as described earlier, to be positive. However, we anticipate our same-store sales rate to be in the range of our fourth quarter performance given the lead time associated with the execution of our new technology and peripherals assortment strategy. With that said and despite the lower sales, our first quarter operating profit will be flat to slightly positive versus the prior year.

Now let's turn our attention to the North American Business Solutions division or BSD. BSD results reported for the fourth quarter of 2011 sales of $832 million, a 4% increase versus the same period last year. After considering the 53rd week's positive sales impact of approximately $34 million, sales in the fourth quarter of 2011 would have been flat versus the prior year. In the Direct channel, sales were up 5% versus last year, including the impact of the 53rd week. While the average order value was up slightly year-over-year on a percentage basis in the fourth quarter, customer transaction counts were down a similar amount.

Within the Contract channel, sales were up 4% versus last year and approximately flat if you exclude the 53rd week. Sales to large accounts increased high-single digits versus prior year, including the impact of the 53rd week, due to successful large customer acquisitions in the back half of the year. Contracts’ average order value was slightly down in the fourth quarter versus one year ago, while customer transaction counts were positive. Our sales to small and medium-sized business Contract customers were up slightly in the fourth quarter versus prior year, including the impact of the 53rd week, and we remain very pleased with the traction we're getting in this key customer group. In addition, during the fourth quarter, we made significant progress filling seats in our new inside sales organization based in Austin, Texas, which is assuming responsibility for the accounts formerly managed by our outsourced telephone account management providers.

We're excited about bringing this critical sales function back in-house, and during the fourth quarter, 67 of the 152 inside sales representatives and sales managers started with the company. We have subsequently added several more associates, and we expect to be fully staffed and trained by early in the second quarter of this year. It's worth noting that these resources are essentially being self-funded through the elimination of outsourced providers. To drive further growth in the segment, during the fourth quarter of last year, we hired approximately 100 new field sales reps, who will acquire new business to be managed by the inside sales organization. These reps are incremental to our existing field sales force and will be funded through enhanced productivity. We believe that the foregoing moves will drive high-margin, small business customer sales growth in the Contract channel and improve our retention rates. In other parts of the Contract business, we achieved positive sales growth in our large and national account segment. Generally, our Contract business experienced weaker sales to many of our existing customers, which was partially offset by sales arising from new customers. Along these lines, we continue to see weakness in the Public Sector as those customers continue to experience budgetary pressures.

Now looking at our fourth quarter sales by product category, we reported positive year-over-year sales growth in seating, printers, Copy & Print and cleaning and breakroom supplies. We continue to gain traction in the breakroom supplies with the sales rate improving at a double-digit rate again in the fourth quarter. While supplies sales, including paper and ink and toner, were lower versus last year, the rate of decline sequentially improved for most of the products within the supplies category.

Fourth quarter 2011 operating profit for BSD was $45 million, up $8 million from the same period one year ago. The increase reflects a 70 basis point gross margin improvement and lower advertising expense that was partially offset by higher supply chain expenses and overhead mainly due to the impact of the 53rd week and higher variable base pay in the fourth quarter of 2011 versus the prior year.

Overall, the 53rd week had a relatively neutral impact on the fourth quarter as a modestly higher profit contribution in the Direct channel was mostly offset by higher expenses in Contract. For the full year in 2011, BSD sales were $3.3 billion, down 1% versus 2010. The 53rd week added approximately $34 million sales in 2011. Sales in the Direct channel increased in 2011, while Contract channel sales were slightly lower versus prior year. During 2011, our Contract business retained approximately 87% of the revenue from customers formerly associated with the legacy public sector purchasing cooperative on which we chose not to bid in 2010 and which expired on January 1, 2011. Sales in the Contract channel, other than the customers buying under this group purchasing arrangement, were positive in 2011. I should note that we lapped the transition away from the legacy public sector purchasing cooperative in the first quarter of 2012 but sales to the Public Sector generally remain soft as such entities continue to feel the impact of budgetary constraints.

BSD full year 2011 operating profit was $145 million, up $96 million from 2010. The year-over-year operating profit increase reflects an 80-basis point increase in gross margin rate from reduced promotions, product and pricing initiatives and lower property and inventory costs. In addition, lower selling, distribution and advertising expenses were incurred in 2011 compared to prior year. These benefits were partially offset by the negative flow-through impact of lower sales and higher variable base pay in 2011.

In the fourth quarter, we continued to see benefits from the initiatives that were put in place in prior quarters to improve the division's overall profitability through increased efficiency and productivity. These initiatives include eliminating certain investments in low-value added or no-value added areas, reducing overhead and supply chain expenses and taking a much more disciplined approach to promotions and measuring their effectiveness. In addition, we continue to focus on improving product margins by reviewing our practices and policies in regard to product pricing and by successfully converting customers to Office Depot's own-branded products.

In summary, it was a terrific year for the North America Business Solutions team. We continued to win new business and retain existing customers in the Contract channel. Our Direct channel performed well once again, maintaining its competitive position in the market. We improved margins in both channels as cost containment initiatives put in place in the second quarter of 2010 and prudent investments in the business drove improved operational performance. As we move through 2012, we look forward to even better performances for both channels.

In regard to BSD's first quarter 2012 outlook, we expect our sales to be slightly up versus prior year and operating profit to be up significantly on a year-over-year basis and down slightly on a sequential basis.

I'll now turn the call over to Steve to review our fourth quarter 2011 performance in the International division.

Steve Schmidt

Thanks, Kevin. The International division reported fourth quarter 2011 sales of $901 million, a decrease of 3% compared to the prior year period in both U.S. dollars and in constant currency. Excluding the revenue impact from the 2010 dispositions and deconsolidation and the 2011 acquisition, constant currency sales were approximately flat versus the same period one year ago.

The 53rd week added approximately $28 million in sales to the fourth quarter of 2011. As I speak to year-over-year sales comparisons, please note that I'll do so in constant currency and including the impact of the 53rd week unless otherwise noted.

Total European Contract channel sales increased in the fourth quarter of 2011 versus the prior year, with the growth in the U.K. and Germany partially offset by weaknesses in other regions. Despite the macroeconomic pressures in Europe, the acquisition of several Public Sector and large key accounts and sales growth in key customer verticals contributed to the improved Contract channel sales performance.

In our Contract channel in Asia, we reported a double-digit increase in year-over-year sales in the fourth quarter of 2011, excluding the sale of our Japanese business and the deconsolidation of our India joint venture late in 2010. Fourth quarter 2011 sales in the European Direct channel were lower than a year ago. We continue to focus management attention and resources on our Direct channel business to reverse the unfavorable trends in this channel and are seeing encouraging signs in e-commerce with activity growth in all markets from a larger number of customers placing a higher number of orders online. Our objective is to improve the customer experience both online and offline in order to increase customer retention, acquisition and development.

Excluding sales from the division's business in Israel that was divested in 2010 and the 2011 acquisition in Sweden, fourth quarter 2011 sales in the European Retail channel increased by low-single digits compared to prior year. In Asia, we continue to see growth in our Korean Retail business.

The International division reported fourth quarter 2011 operating profit of approximately $33 million compared to $31 million reported in the same period prior year. Excluding approximately $15 million of charges related to business restructuring actions and process improvement activities, adjusted operating profit was $48 million compared to $44 million in the same period in 2010. The adjusted operating profit increase versus prior year was driven primarily by a 100 basis point increase in gross margins and a reduction in operating expenses, partially offset by the negative flow-through impact of lower sales, several favorable onetime items recorded in the same period last year and the unfavorable impact of the 53rd week. The increase in gross margin was driven primarily by the various portfolio actions taken in late 2010 and early 2011 and improved Contract channel margins.

If we look at our joint venture in Latin America, Office Depot de Mexico reported fourth quarter 2011 sales of $275 million -- $279 million and net income of $16 million. Office Depot's portion of the net income was approximately $10 million for the quarter.

Turning to full year results, the International division's 2011 sales were $3.4 billion, down approximately 1% in U.S. dollars versus the prior year. Excluding the revenue impact from the 2010 dispositions and deconsolidation, the 2011 acquisition and the 53rd week in 2011, constant currency sales were 2% lower in 2011. The 53rd week added approximately $28 million to total division sales in 2011.

By channel, Contract and Retail constant currency sales increased in 2011, while Direct channel sales declined versus prior year. Full year 2011 reported operating profit was $93 million compared to $111 million in 2010. Excluding $31 million of charges in 2011 and $23 million in 2010, adjusted operating profit was $124 million in 2011, down $10 million from the prior year. The main drivers of this year-over-year decline in adjusted operating profit including gross margin pressure from an unfavorable channel mix and the negative flow-through impact from lower sales volume. These pressures were partially offset by the benefit from the various portfolio actions, a reduction in operating expenses during the year and foreign exchange gains of around $4 million.

Office Depot de Mexico reported full year 2011 sales of over $1 billion and net income of approximately $64 million. The joint venture sales are neither reflected in our revenue nor in our consolidated Retail comparable store statistics. Our portion of the net income for 2011 was approximately $34 million and is reported in miscellaneous income, net, on our income statement. I should note that our 2011 10-K filing includes consolidated financial statements for Office Depot de Mexico.

Turning to our International division initiatives, we continue to implement our strategic plan to enhance sales and drive overall profitability. Let me update you on 2 of these key initiatives.

First, the portfolio optimization strategy we've discussed over the past few quarters is producing the results we projected and achieved 2011 benefits of $17 million. We believe that we have additional opportunities to strengthen the overall International portfolio, and we'll continue to review our options. And second, we're making progress on the business restructuring and continuous process improvement initiatives in Europe as we reduced SG&A costs in the fourth quarter by $12 million. We continue to find opportunities to enhance our current processes and leverage our resources, enabling us to further reduce our overall cost structure.

I should point out that most of the benefit from initiatives achieved in 2011 were reinvested in our business to drive the initiatives and address the sales pressures. In summary, the International Contract channel continues to perform well in the fourth quarter, and we're making progress in improving the performance of our Direct channel. We have made a number of structural changes to our organizations in Europe, Asia and Latin America and believe that we have strengthened the International division's management team. As we look forward, we'll continue to carry out our strategic initiatives to profitably increase sales and reduce costs.

In regard to our first quarter 2012 outlook, we expect our sales in constant currency to be approximately flat on a like-for-like basis versus the prior year and operating profit, excluding charges, to be roughly flat as well to prior year. I should note that our sales in the first quarter of 2012 will benefit from the 53rd week in 2011. This is due to the slower holiday week not falling in the first quarter of 2012 as it did in 2011. Excluding the timing shift, the first quarter of 2012 sales run rate would be consistent with the fourth quarter of 2011 run rate, down 4% over a year.

Before I turn the call over to Mike to review the company's fourth quarter and full year 2011 financial results in more detail, I would like to mention that it is the intent of Office Depot and Dirk Collin, Executive Vice President and Managing Director, Europe and the Middle East, to terminate his employment agreement with mutual consent. During this time of transition, I have taken over the day-to-day management of the European region. On behalf of the Office Depot, I would like to thank Dirk for his leadership and the many contributions he's made since joining our company in April 2006. I'd now like to turn the call over to Mike Newman. Mike?

Michael D. Newman

Thanks, Steve. I'll begin my comments by repeating what Neil mentioned earlier. Fourth quarter 2011 total company EBIT, excluding charges, was $47 million, a $20 million increase versus one year ago, with strong performances year-over-year in all divisions. The waterfall chart on Slide 14 summarizes the year-over-year change in EBIT. I would like to point out that while the 53rd week positively impacted total company sales in the fourth quarter by $140 million or about 500 basis points, the overall EBIT impact from the 53rd week was only $6 million. The remaining $14 million of EBIT growth in the quarter included approximately $60 million in benefits realized from our business initiatives, partially offset by about $30 million from the negative impact of lower sales volume and approximately $15 million from initiative spend and business reinvestment.

Moving to Slide 15, I'll now update you on our restructuring charges. In the fourth quarter, we reported $24 million of restructuring-related charges and other costs intended to improve efficiency and benefit operations in future periods. These charges included about $15 million for European process improvements and approximately $9 million for business process improvement at the corporate level. The full year 2011 charges totaled approximately $58 million, and the negative cash impact from these charges was about $30 million, relating mostly to severance and facility closure costs.

Next, I'd like to discuss our key business initiatives and the positive impact that they have had on EBIT for the full year. Slide 16 in the earnings presentation is an updated version of the waterfall chart reviewed last quarter, providing details on the various components of our full year 2011 EBIT growth versus the prior period. Starting on the left-hand side of the chart, we realized approximately $180 million in growth initiative benefits during 2011 mainly from the following initiatives: approximately $65 million in benefits from pricing and promotional effectiveness; about $25 million in occupancy reductions in both North America Retail and BSD businesses; over $60 million in reductions from indirect procurement and International business process improvements; and finally, about $30 million in cost reductions in BSD.

If you continue viewing to the right across the chart, you will see that we also had approximately $140 million of offsets to the full year benefits in 3 areas. First, we incurred about $20 million in incremental spending in 2011 to drive these initiatives. The costs are largely onetime in nature, including consulting fees. Second, we also reinvested about $25 million of these gross benefits back into the company, including adding International division sales personnel to drive small to medium-sized business sales, investing our domestic merchandising and marketing organizations to drive key business initiatives, investing in business process improvement organization to drive our continued focus on process improvements and finally, costs related to the increased payroll and benefits for our associates. The third offset to the benefit is the impact of lower sales volume, which negatively impacted EBIT by about $95 million for the full year.

So to summarize, our full year 2011 EBIT of $122 million was up about $38 million from the $84 million reported in 2010. Gross benefits from initiatives totaled about $180 million and were partially offset by approximately $95 million from lower sales volume and about $45 million from initiative spending and business reinvestment. It's also important to note that we continue to expect the rate of incremental spending and business reinvestment to decline as we move forward, allowing us to drive more of the gross benefits achieved to the bottom line. For 2012, we expect to realize approximately $150 million to $170 million of gross benefits from the execution of our initiatives across the enterprise.

Moving to Slide 17, free cash flow for the fourth quarter of 2011 was $139 million, which exceeded our original projections. The key drivers included accounts receivable reductions due to better collections, the impact from our key business initiatives and a return to an accounts payable-to-inventory ratio of 87%. I'm pleased that our focus on working capital reductions through key business initiatives has clearly benefited free cash flow. I should note that discrete timing issues with the 53rd week also impacted cash flow positively in the fourth quarter, and $20 million to $30 million of benefit could reverse in the first quarter of 2012.

Full year 2011 free cash flow was $69 million, about $20 million to $30 million higher than previous guidance mostly due to higher-than-projected fourth quarter EBIT and better working capital performance. Based on current projections, we expect to generate free cash flow of about $80 million to $100 million in 2012. The cash flow components include the following: capital expenditures of about $160 million; depreciation and amortization of about $200 million; working capital reductions of $30 million to $50 million; and cash restructuring costs of about $60 million to $70 million, about 1/3 of which are from previously announced restructuring activities and the balance from projected 2012 activities.

Turning to our liquidity, we ended the year with $571 million of cash and cash equivalents and $734 million available from our Amended Credit Agreement for total liquidity of over $1.3 billion. No amounts were drawn under the Amended Credit Agreement at year end.

On Slide 18, I'll now provide further details for our fourth quarter and full year 2011 results. Total company fourth quarter 2011 store and warehouse operating and selling expenses, adjusted for charges of $683 million, were up $11 million versus the prior period. The 53rd week added approximately $34 million of additional expense in the fourth quarter. The year-over-year reduction in expenses, excluding the 53rd week, was driven by International division productivity improvements, lower global distribution costs and lower domestic advertising spending. Total company fourth quarter G&A expenses, adjusted for charges of $181 million, were up $19 million versus the prior year. The 53rd week added approximately $7 million of additional G&A expense in the fourth quarter, and the year-over-year increase in expenses, excluding the 53rd week, was mostly due to increased bonus accruals in 2011.

Total company full year 2011 store and warehouse operating and selling expenses, adjusted for charges of approximately $2,679,000,000, were up $9 million versus the prior year. The 53rd week added approximately $34 million of additional expense in fiscal 2011, and the year-over-year reduction in expenses, excluding the 53rd week, was again driven by International division productivity improvements, lower global distribution costs and lower domestic advertising spending.

Total company full year 2011 G&A expenses, adjusted for charges of $657 million, were up $20 million versus last year. The 53rd week added approximately $7 million of additional G&A expense in fiscal 2011. The year-over-year increase in expenses, excluding the 53rd week, was again principally due to increased bonus accruals in 2011.

The effective tax rate for the quarter on a reported basis was a negative 111% primarily due to the reversal of $15 million in accruals for uncertain tax positions from prior periods and also a release of the $9 million valuation allowance. The effective tax rate on our earnings, adjusted for discrete items, was 50% in the fourth quarter.

For the full year, the effective tax rate on a reported basis was a negative 193% primarily due to the reversal of $90 million in accruals for uncertain tax positions from prior periods and the release of the valuation allowance. The effective tax rate adjusted for discrete items was 53% for the full year 2011. We recorded about $17 million in book taxes in the fourth quarter and a total of $31 million for the full year, excluding any discrete items. On a cash tax basis, we paid about $3 million in the fourth quarter and a total of $13 million for the full year. For 2012, we estimate paying cash taxes of about $15 million to $20 million.

I should note as part of the ongoing 2009 and 2010 tax audits, the U.S. Internal Revenue Service has proposed a significant loyalty assessment from our foreign operations, which is outlined in our 10-K. We disagree with this assessment and, based on the technical merits of the issue, believe that no accrual is required at this time. We are working with our outside tax advisors and the IRS to resolve this dispute in a timely manner. During the fourth quarter, we recorded a dividend on our convertible preferred stock of approximately $8 million, which was paid in kind on January 1. We have made the decision to pay the preferred stock dividend in kind in 2012 to preserve cash as we address the 2013 bond maturity.

On February 17, we commenced a cash tender offer to purchase up to $250 million of our outstanding 6 1/4% senior notes due August 2013, of which $400 million are currently outstanding. The company has evaluated and will continue to evaluate the mechanics of the refinancing of that indebtedness, and the tender offer is the first step. We will continue to closely monitor the debt capital markets for opportunities going forward.

In anticipation of questions about our cash position in 2012, I should note that we exited 2011 with approximately $1.3 billion of liquidity and are projecting $80 million to $100 million of free cash flow in 2012. This projected range does not include a European receivable factoring program of about $50 million to $60 million, if needed, and an additional $37 million of cash available versus 2011 versus picking the preferred dividend.

Looking at the first quarter of 2012, we expect total company sales to be down about 3% to 4% versus the prior year and adjusted EBIT to be up $15 million to $20 million compared to last year. For the full year, we anticipate adjusted EBIT to be in the $140 million to $150 million range, and this projected year-over-year increase would make the fourth year in a row that we've driven higher EBIT results for the company in a challenging economic environment.

With that, I'll now turn the call back over to Neil.

Neil R. Austrian

Thank you, Mike. 2011 was my first full calendar year in the role of Chairman and CEO of Office Depot, and we accomplished a great deal across the entire enterprise. When our associates, customers, shareholders and vendors ask me about the progress being made at the company, I tell them that we are changing the way we do things across the organization. This is not the same old Office Depot. We're changing the culture, driving accountability to all levels of the organization, breaking down silos, increasing productivity, improving execution and strengthening the management team. I remain very excited about the prospects for Office Depot. As I tell our associates, it's our time. It's Depot time.

Brian Turcotte

Thanks, Neil. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Chris Horvers.

Christopher Horvers - JP Morgan Chase & Co, Research Division

JPMorgan. First, on the proposed debt paydown, that $250 million, do you anticipate that you'll take -- you'll refinance that debt with new debt offering, or do you think that's going to come out of cash? And if you're potentially going to issue new debt, why wouldn't you refinance the whole maturity?

Michael D. Newman

Yes, Chris, this is Mike. We're not going to say much more than what's in the script. We're looking at options today. The market has improved from December, and we're evaluating our options, and we'll let you know as we know more.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And so then, I guess, on a related question, the interest expense increase for 2012, what's behind that?

Michael D. Newman

Yes, there's a placeholder there that anticipates that we'll do something there, but we're not at a position to talk about what that would be.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. And then going to the Retail business, can you talk specific -- Kevin, can you talk specifically about what product categories you exited in North American Retail in 4Q and maybe how many SKUs or what percentage of sales that historically drove? And what new products are coming in to replace those products?

Kevin Peters

Sure, Chris. I think we've spent a lot of time over the last several quarters shoring up our supplies assortment, our furniture assortment. We've done a lot of work around rationalizing our supply chain and, as you know, reducing the size of our stores. As we look to the role of the store in the future, clearly, it's going to be around convenience and kind of that now buying occasion. So we've tried to be thoughtful about the SKUs in our assortment that consumers would purchase and use kind of in the now buying occasion. So as we look to the final kind of 2 categories that still need some work, it was both peripherals and technology. And I think with regard to peripherals, it's really the accessories that are related to computer purchases. And when we looked inside that assortment, the tail of that assortment was longer than the tail of most other categories. And so the idea was here, beginning late in the third quarter and through the fourth quarter and, quite frankly, into the first quarter, is that we'll begin to repackage a lot of that peripheral product into kind of value-based bundles, sell down that inventory and reduce the long tail in the peripheral category. And as we've talked about before, we're also going to exit out of the low-priced, low-end laptop business because quite frankly, you got to buy those customers, and they're not sticky. So that's really the work that we've been doing, is reducing the long tail in the peripheral assortment, getting out of the low-end laptop assortment. And with regard to the new products, I don't think we're going to go into too many details on the new products now just for competitive reasons, but I think it would be fair to say that the life cycle associated with products inside the peripheral assortment is relatively short compared to other categories. We've probably not been fast enough in terms of speed to market and getting new products in, and we're taking actions to correct that now.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And then on the -- I was just curious. You talked about comps being down, similar to what it was in the fourth quarter. I guess I thought it would have been, perhaps, a little bit better, considering that you had some weather comparisons here in January, and I would guess that the mix towards tech does come down in the first quarter versus the fourth quarter.

Kevin Peters

Yes. I think our peripheral business continues to be in transition, so we're going to continue to have pressure with that. I think some of the new product entrants that we're bringing in have a little bit longer cycle in terms of getting to market, so I think that's probably the primary pressure there.

Operator

The next question is from Colin McGranahan.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Company is Sanford Bernstein. First, just on the EBIT outlook for 2012 of $140 million to $150 million. Mike, I was hoping maybe you could walk us through that, either using kind of the waterfall approach that I think is really helpful when you're looking back or giving us a little bit of perspective on gross margin and expenses. Certainly a higher number than I would have expected.

Michael D. Newman

The $140 million to $150 million is higher than you would have expected?

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

I think so. And I think most people did, given the stock's reaction this morning.

Michael D. Newman

Okay. So just the balance off of a $122 million base in 2011, your question is that $140 million to $150 million, I want to make sure I get this right, is higher than what you would have expected.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Correct.

Michael D. Newman

Okay. Yes, well, the key for us is that we're still -- we're looking at the initiative benefits. We talked about the guidance in the initiative benefits being a number that, while not as great as 2011, is still very significant, and we're executing on that. We've demonstrated that we're executing on that. Our BSD business is flat in sales in Q4 and has shown a very nice trajectory. So when we look at what we have in terms of initiatives for next year and we look at where we think sales might be, even being conservatively, that's where we come out.

Neil R. Austrian

Colin, this is Neil. I guess what I'd say, as we've talked in the past, I think what we proved in 2011 is that with a fairly narrow focus and 4 or 5 key initiatives, we could really drive the business, which we did. We showed you what we did in the third quarter. Mike showed you what we did for the year. What we believe is there's still a lot of leg left in some of these initiatives that we're working on right today that we started in 2011. And while we've got a number of other things on the table in terms of driving the revenue base, the key to next year is going to be continuing the initiatives that we started in '11 and maxing that out.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Okay, that's helpful. Neil, while I've got you, one quick question for you. Just looking especially at the delivery business, which, I guess, had about flat sales x the 53rd week. If you take out the U.S. Communities impact, it looked like maybe it was even up a couple of percent. Last time I think we saw positive growth in there was maybe early 2007, but it looks like one of the big drivers of that was winning more business rather than seeing better trends on a per-customer basis. Can you talk a little bit about what you're seeing in the environment and whether you think that's helping drive your sales and how you're effectively winning business, especially the large accounts?

Neil R. Austrian

I'll let Kevin -- let me give you my impression, and then I'll let Kevin talk about that. I think first, it's still a highly competitive business. And there are certain accounts we choose to go after and others we don't, based on the profitability. I think what we've seen is that the retention rate we had from U.S. Communities far exceeded anything that any of you guys thought we would have kept because it’s over 87%. Secondly, what we found is that we can make a real difference in the SMB market by bringing back in-house, as Kevin said, our inside sales force, which we outsourced 3 or 4 years ago. And finally, I think it's just more attention to detail and sales coverage. We've added -- are adding over 100 salespeople in the field and I think from our standpoint, just focusing again, what's missing today and what would have really driven this business is the Public Sector business, which is down. What we've seen is large global accounts and our large accounts increasing. We're getting better penetration in the SMB business, but the Public Sector business still is extraordinarily soft, and that's holding the results back. Kevin?

Kevin Peters

I think you covered everything.

Operator

The next question is from Brad Thomas.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

KeyBanc Capital Markets. I wanted to follow up on some of the gross margin commentary. Neil, I think you mentioned this is 7 out of 8 consecutive quarters that you've been able to drive gross margin improvement. I was hoping if you could just talk about what inning you think we're in, in terms of recovering gross margins to where they've been historically. I think you're still tracking about 150 basis points below the peak level from the last 10 years. How much more ability is there to drive that higher without us seeing a real pickup in jobs?

Neil R. Austrian

Let me have Mike talk to that. I don't want to forecast gross margins at this point in the economic recovery we're in. But as you look at most of the initiatives that we started in 2011, a large percentage of those are gross margin drivers. And as you look at what Mike indicated going forward that we still believe we have in terms of those initiatives for 2012, you can start to back into a gross margin number. Mike?

Michael D. Newman

Yes, I'd just add to that. The initiatives we've demonstrated success on will continue to drive margins. I don't want to get into the game of forecasting how many bps it will be up. The other thing I'll point out is we continue to see growth in services. We see growth in Copy & Print. We see growth in Tech Depot. We're investing in some other areas that we think will drive growth, that will continue to mix up. So in addition to the initiatives driving sheer gross profit rate, we're getting a mix effect in the tech, even though the tech is a little lighter in peripherals than we like to see. That is helping us mix-wise as well. So our guidance for next year is that the initiatives will drive a lot of the growth to Colin's question, and margin expansion is certainly -- gross profit margin expansion is certainly a key element of that.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Great. And if I can follow up with Kevin on some of his comments. I think, Kevin, you mentioned that Direct import was up 200 basis points. As you look at the company's merchandising, could you talk a little bit more about brands for 2012 in terms of Direct import, the private label penetration and category management or any other merchandising initiatives that you have in place for this year?

Kevin Peters

Yes. I think that's the other leg of the stool in terms of gross margin improvement. I think if you look both at the Retail business as well as the BSD business, I think there's certainly continued room for improvement, not only on Direct imports but on further penetration of private brand as well. We've made progress over the last several quarters driving improvement in penetration in both of those categories. But I still think there's probably some legs left for improvement in -- almost by division, certainly, in the Contract business, some room for improvement in private brand penetration and in the Retail business, some continued room for penetration improvement in Direct importing. So I think we'll continue to go after that. I don't know that we necessarily feel like setting a target is the right thing to do, but I think we've got a ways to go yet in terms of improvement.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

And Kevin, there have been a couple of vendors that are in the process of consolidating. Is there anything that we should expect differently from the vendor community going forward with more consolidation?

Kevin Peters

Yes. I think other than aggregating spend, certainly, aggregating spend would certainly work to our advantage.

Operator

The next question is from Michael Lasser.

Michael Lasser - UBS Investment Bank, Research Division

It’s UBS. On the BSD segment, are you seeing the bulk of the gross margin improvement coming from new contracts rolling in, or is it the legacy business that's truing up at a higher rate, or is the contributions from the small and medium-sized business flowing in?

Kevin Peters

Yes, yes and not so much. I think margin improvement, really, in 3 areas, certainly less promotion activity in the Contract business. We've got slightly better product mix, less paper, ink and toner. And to your other point, we certainly got a slightly better customer mix. So I think those 3 things are the principal drivers of the margin improvement.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And then on the reinvestment of the savings from some of your business process improvement initiatives, are those already starting to generate incremental sales? And my curiosity is that do you have to continue to invest in order to drive that growth, or will they reach an inflection point where the investing will be done and you should see a really nice return on that?

Neil R. Austrian

I think in some of the areas we've started the reinvestment is declining on a month-to-month basis. In others, it's going to continue. And I'll give you one where we think it’ll continue is the in-store customer experience, where, from my standpoint, that's never going to end in terms of satisfying the customer, and that's got to get into the DNA of the company. So I think of the $45-plus million that Mike talked about, some portion of that, we're going to reinvest in 2012 as well in some of the marketing initiatives we've got, and other pieces such as professional fees that we've paid to get these initiatives kicked off have gone away.

Michael D. Newman

Just to add a little bit to that, if you look at that $45 million, about half of it is invested in initiatives that we were executing in '11. And to Neil's point, the in-store experience is the one that will live on. Now some of the things around pricing and promotions will tend -- will decline. But the other half of that $40-some million is the things we talked about. It's TAM insourcing. It's investment in International field sales. It's investment in e-commerce. And those things have longer tails that we expect to see benefits from going forward.

Michael Lasser - UBS Investment Bank, Research Division

Okay. One last question for me. On the new products that you're bringing into Retail, do you anticipate that those will be enough of a traffic driver such that they’ll offset the loss from entry-level laptops? Because it seems like losing out on that traffic, while it may not be profitable over time, traffic is a valuable commodity in Retail.

Kevin Peters

Traffic is definitely a valuable commodity in Retail, and I think we've been pretty thoughtful about where we pull product out of the assortment. So we're certainly not eliminating our laptop assortment. We spend a lot of time looking back at who's buying technology. And for those customers that are sticky customers with Office Depot, we're always going to make sure that we have a technology assortment that works for them. The other thing I would point out is just because we're taking a product out of Retail doesn't mean we're removing it from our assortment. So as we continue to find ways to enhance the experience online, a lot of the products that we'll pull out of the Retail assortment will, in fact, be available through our e-commerce channel for same-day shipping and next-day delivery. And I think with regard to the peripheral assortment, I think you'll see some changes. Again, I don't want to get into those details today. But I don't think you'll see more of the same. I think you'll see some different products from us going forward.

Operator

The next question is from Kate McShane.

Kate McShane - Citigroup Inc, Research Division

Citi Investment Research. My question is focused on the 40% decline in square footage achieved with some of your changes to your store mix in the fourth quarter. I just wondered if you could give a little bit more detail in terms of your success of that decline. Was it really from just the relocations, or were you able to successfully rent out space? And what is your strategy for 2012?

Kevin Peters

As we said before, Kate -- this is Kevin. As we said before, we have about 100 leases that come up for sale or for lease renewal each year. We use that as an opportunity because that's where our leverage is at the highest to negotiate a downsize and, if the market dynamics have changed, to work with new landlords on a relocation. And so I think the experience in the fourth quarter wasn't all that different from the experience we've had in preceding quarters in terms of either successfully downsizing in place or, where that's not possible, moving to a new location where the trade area is more favorable. And certainly, on a last resort basis, if we can't get a downsize, then at least negotiate a reduction in rent. So we're pleased with our performance. We don't win in every case. But I think our track record here over the last several quarters has been pretty positive in terms of occupancy cost reductions as well as downsizes.

Michael D. Newman

Kate, I'd add to that. We talked earlier about the $25 million in occupancy reductions for the year. Most of that is from this discussion that we just had. We're investing behind continuing that. We expect to see numbers going forward that are substantial and that we're keeping that as a focus inside the real estate organization.

Kate McShane - Citigroup Inc, Research Division

Okay, great. And then there was a comment during the prepared comments that you had seen some growth in some of the verticals in Europe, and I wondered if you could go into a little bit more detail with what exactly that means?

Steve Schmidt

Yes, Kate, Steve Schmidt. When we talk about growth within the European business, we're seeing growth in cleaning and breakroom supplies. We're seeing growth in Copy & Print Depot. So it's really from a product standpoint where we've seen the growth. In addition to that, as we look across the different markets in Europe, we are seeing some growth in the peripherals area also. So that's primarily where the growth is coming from.

Kate McShane - Citigroup Inc, Research Division

Okay. And my last question, with regards to North American Retail, I may have missed it in the comments, but have you stated how comps are trending so far in February?

Michael D. Newman

I think what we said in our prepared remarks that we thought the comps would roughly be where they were in Q4.

Operator

The next question is from David Gober.

David Gober - Morgan Stanley, Research Division

It’s Morgan Stanley. One high-level question for, I guess, Kevin, maybe Neil can chime in on this one as well, but you clearly saw an uptick sequentially in the North American business, and you noted some of the contract wins that you got in the delivery business. But there's been a decent amount of debate around how the improvement in the jobs picture is actually impacting the office supply business. And I was wondering if you could comment at all, maybe based on some of the geographic differences you see, in terms of whether or not jobs growth is really starting to impact the business and starting to benefit the overall environment in which you operate.

Kevin Peters

David, this is Kevin. I would say short answer is no, really. I mean, if you look at -- our Public Sector business is down, and certainly that's a function of white-collar workers. We talked earlier about -- even our existing business, on average, the spending is down in our existing business. And so where we're making headwind is winning new business. So I think we're well positioned when white-collar employment returns, but we're not seeing any real appreciable change in employment levels and therefore, in spending.

David Gober - Morgan Stanley, Research Division

Okay. And I guess a more detailed financial question for Mike on CapEx. Just curious where the incremental investments are going at this point and how you think about normalized CapEx longer term.

Michael D. Newman

Yes, I think if I step away, back away, we can continue to deliver the type of results that we had delivered in '11 that we're proposing in '12 without seeing CapEx go up significantly. We're taking CapEx in 2011 of $130 million up to about $160 million in our guidance. We're investing in a number of areas. We're investing in e-commerce. We're investing in an ERP system in Europe to take our many disparate systems and get them on the same platform, so we can still continue to drive synergies there. We're investing in the downsizes in the real estate department. Those are probably the 3 key areas that I would point out in 2012. But a number in the $150 million, $160 million range for 2012. We'll have to see what 2013 looks like, but we can execute this strategy while keeping CapEx below D&A.

Operator

The next question is from Dan Binder.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

It’s Dan Binder at Jefferies. My question was really around sort of the gross margin in this industry, kind of where it can go and why it will stay where it is or go higher. And really, it's sort of a longer-term question. And as you look at the increasing competition from online retailers, some of which are just big-box retailers doing more online through wholesalers, I'm just curious, do you think the gross margin gains that you've gotten recently need to be reinvested to be more aggressive on price? I recognize that some of those gains are due to less irrational promotions, but can you -- do you feel like you need to funnel them into more rational competitive activity?

Neil R. Austrian

This is Neil, then I'll let Kevin chat. I think that one of the reasons you may have seen our fourth quarter declining comps at Retail is because we're not irrational in terms of promotions. I think we've taken a very hard look at what wins and what doesn't win and whether or not the customer who comes in at retail on the cheap laptop or the $4.99 cost for paper in terms of a box of paper is a sticky customer that's going to return time and time again because they've built loyalty, our sense is that they have not done that, won't do that, and that's not the customer we're going after. As it relates to the overall gross margin question, I think Mike answered that, and I think I tried a minute ago to say that the initiatives we're working on have proven that it can drive gross margin in 2011, we think will continue in '12. The big investments that we're making, that Mike articulated in CapEx, are in e-commerce, and we think we're going to be one of the winners in e-commerce down the road. Kevin?

Kevin Peters

Yes, I think that's all true. I think the other thing, too, is we've spent a lot of time looking at price elasticity, and not every SKU is created equal. And I think there are clearly SKUs where sharp pricing or promotional pricing is going to be necessary, and I think there are SKUs, regardless of the channel, where it will be less important. I think the other area of gross margin improvement is around services. I think customers will continue to demand services. Most of those services need to be provided at a brick-and-mortar location. That's why we're investing in Copy & Print Depot and Tech Services inside our stores. So I think we'll continue to have to be smart about promotions, but to Neil's point, we're just not going to be irrational. We know that, that buys sales that aren't sticky and doesn't help us with gross profit.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Yes. I apologize if you didn't understand my question. I agree. I think irrational promotion is a good thing to get away from. I'm saying is that as you get these margin gains from exiting irrational promotions, it puts you in a better position to be more competitive on things that would be sticky or that would allow you to get more competitive. So I'm just -- I'm asking you, longer term, as you think about your margins and the gains that you're getting now, do you think you need or would desire to, at some point, to reinvest in that to get a better mix of customers and sales?

Kevin Peters

Yes. Short answer is yes. I think again, as we better understand the relationship between price and unit velocity and we think about the customers that we're targeting, certainly, there's an opportunity for us to invest promotional dollars to earn loyal, sticky customers, but we're just not going to invest promotional dollars for customers who shop our stores or shop online, and we never see them again.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And then my follow-up question was related to the inside sales force. Just curious early on what you're seeing in terms of quality metrics, if any, you can share with us relative to what they look like when it was outsourced?

Kevin Peters

Dan, quite frankly, it's early in the game. We made a number of hires in Q4. They largely went through training. We've finally got folks in seats in Q1. So hopefully, we'll be able to talk about that in coming quarters, but we absolutely know it's the right thing to do. We can't outsource the customer relationship. Bringing it back in-house was clearly a win for our customers, a win for Office Depot. We've been very fortunate to hire some extremely talented people in Austin, and we think not only will we seal up the leaky bucket in our SMB business, but that will be a great catalyst for growth for us.

Neil R. Austrian

And one of the metrics, Dan, that hits you right between the eyes was the metric of turnover that you had in the people working at the outside sales force, and when you get 100% kinds of turnover, you know you've made a mistake in outsourcing that.

Operator

The next question is from Mike Baker.

Michael Baker - Deutsche Bank AG, Research Division

Deutsche Bank. Just a real quick one because the call has gone long here. But I'm trying to sort of bridge the gap between your EBIT last year and what it could be this year. So if you did $122 million last year and it will be about $140 million to $150 million this year -- but you said you're going to get $150 million to $170 million in gross benefits and the reinvestments will be less than the $45 million last year, so there's still a big gap there. Is that the estimate for the impact of lower sales? And can you actually then therefore tell us what you think -- you gave us an estimate for first quarter sales decline but what's in the full year number?

Michael D. Newman

Yes. We're not being ambitious on sales. Without giving you a number, we're looking at probably a low-single digit sales number. Keep in mind that the 53rd week and foreign exchange are going to impact that as well, that's in there, but we're not looking at a huge sales recovery. We're maybe a scooch better than we were in 2011, but we're planning and running this business just like we did in '11. We're anticipating we're going to continue to get volume pressure. If we don't and there is a turn, that's great. But if we're in the same mode we're in, we're going to try to do just what we did in '11. We're going to grow earnings and EBIT through these initiatives and be smart about where we want to invest in e-comm and the sticky customers that Kevin talked about. So it's a very similar look to 2011 in 2012.

Neil R. Austrian

I think what I'd add just on top of that is I think we're positioning ourselves for the point when the economy does change, and when you do see sales increase, you're going to see a significant change to the EBIT line.

Michael Baker - Deutsche Bank AG, Research Division

Sure, that makes sense. I guess related to it, though, let me ask this. In Retail, so you made a strategic decision here to get out of some of these computers and peripherals. Is that the type of thing that will continue to impact the sales numbers? Clearly, it's having impact in the first quarter. Will that continue presumably through the fourth quarter until you cycle that change in strategy?

Kevin Peters

Yes. I think there'll be some headwind. I think the other thing is we just looked out onto the horizon. Clearly, as we downsize our boxes, we're going to move products that sit inside our boxes upstream into the e-commerce channel. So I think there'll be some sales shift that will naturally put some comp sale pressure on the stores, but the stores will clearly be more profitable not only from a gross margin standpoint but from an operating margin standpoint as we got lower rents as well.

Operator

The last question comes from Joe Feldman.

Joseph I. Feldman - Telsey Advisory Group LLC

I wanted just to ask you -- I know you addressed already the -- people have asked are you seeing a change in the customer. I guess -- am I reading too much into the mix of what you're selling? Some of the products -- like you talked about selling more core office supplies, you're selling more writing instruments, more kind of seating, literally chairs, and printers, is it too much to read into the fact that at least maybe there's not a lot of small business formation, but those that are out there are starting to spend a little bit more?

Kevin Peters

I'm not ready to say that yet. I'd love to be able to say that. I'd like to see some signs in our business that that's the case. But the core office products for our business performed well in the fourth quarter. I would have liked to see them perform even better. The fact that they didn't suggest to me that there isn't any kind of increase in spending yet.

Joseph I. Feldman - Telsey Advisory Group LLC

Got it. And then if I could just follow up with one other sort of separate question but as far as getting the store base rightsized and -- where are you -- I guess I may have missed it. If you could just explain where you are in that process, how much of the store base really needs to be rightsized? How many you feel you've done? What kind of productivity gains you might be seeing out of those and maybe the smaller format stores that have just opened? Any color you can add there would be great.

Kevin Peters

I think what we've said in the past, as you know, we've got a fleet of stores that are about 23,000 square foot on average. They need to be smaller. We've got 2 footprints that we're principally using going forward. One’s a 15,000-square foot footprint. The other is a 5,000-square foot footprint. We've got about 8 of the 5,000-square foot stores. They've been successful in retaining about 90% of the sales. They have higher margin given the mix of private branded products. They've also got a full suite of services like Copy & Print Depot and Tech Depot Services. So I think as we go through the 100 or so leases that come up each year for renewal, our objective is to get the stores downsized into one of these 2 smaller footprints, which we think not only will lower our occupancy costs, it will put some top line comp pressure because we'll just carry fewer SKUs inside the box, but they'll be more profitable.

Operator

There is one final question from Anthony Chukumba.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

BB&T Capital Markets. A little bit of a follow-up from Joe's question on the 5,000-square foot stores. Just so I understand, the 5,000-square foot store is retaining 90% of the sales of a 23,000-square foot store? I mean, is that correct? I just want to make sure that I had that straight.

Kevin Peters

Yes, correct.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Okay. Wow, that's impressive. And then just one last question. This is, once again, just a little bit of clarification. When we talked about North American Retail, you mentioned that comps were negatively impacted by, I just want to make sure I had this right, 300 basis points by the rationalization of the technology product assortment. But then you also -- I thought you also might have said that comps otherwise would have been positive. So I'm just a, trying to make sure I got those numbers right, and then b, trying to bridge the gap because your comps were down 500 basis points in Q4. So I just want to make sure -- just want to clarify that.

Kevin Peters

So it was tech and peripherals together that put the incremental pressure on the comp sales. And specifically, as it relates to Black Friday. Black Friday was certainly -- the strategy we had on Black Friday was to offer great deals. But we comped negatively on Black Friday, and we did it intentionally because we drove higher levels of profitability. So tech and peripherals together created that headwind. If we isolated those and pulled them out of the assortment and just simply looked at the supplies category and furniture, Copy & Print Depot, Tech Depot Services, we would have comped positively. That's what we said.

Michael D. Newman

One brief comment on the retention, the 5,000-square foot stores, the typical candidates for that are lower-volume stores. So that's where we retained 90%. I don't want to infer that if we move the $6 million, $7 million store to a 5,000-square foot format, we would retain 90%.

Kevin Peters

We wouldn’t do it [indiscernible] in a 15,000 square foot.

Michael D. Newman

Exactly right.

Operator

I'm not showing any further questions.

Brian Turcotte

Great. Well, thanks for participating this morning. And this is Brian. Feel free to call me if you have more questions today. Thanks a lot.

Operator

That concludes today's conference. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Office Depot's CEO Discusses Q4 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts