Cash Management

Office Depot Makes Liquidity Defense

Having to report third-quarter losses, the new CFO reassures investors the retailer has many options for accessing cash.
Sarah JohnsonOctober 29, 2008

Two months into his job as CFO of Office Depot, Mike Newman is in defensive mode — like many of his peers with sales and stock prices swooning because of the financial crisis.

This morning, he joined CEO Steve Odland in trying to reassure investors during a conference call that the office-supply retailer has enough liquidity to survive the down market. “I feel comfortable that our capital structure will take us through this business cycle,” Newman said. At the same time, the company’s executives are reviewing all of its businesses to see how it can further cut costs, including the possibility that it will have to close some of its 1,275 stores.

Office Depot on Wednesday reported a third-quarter net loss of $6.7 million, or 2 cents per share. Last year at this time, the company had reported $117 million in profit for Q3 2007.

Odland discouraged analysts from drawing conclusions, based on its stock price, about the company’s cash availability. Office Depot’s stock has fluctuated from $7.86 in early September to $1.89 yesterday. “What you are seeing us do this morning is to assure and inform everybody of our liquidity situation,” he said. “If you believe [our] stock price, then you have to believe that we are at the end of liquidity, which is simply untrue.”

The executives attributed Office Depot’s poor numbers to problems among its customers — particularly small and medium-sized businesses that are facing their own liquidity problems, and don’t have the cash to spend on the more discretionary among their office supplies. Office Depot’s sales decreased 7 percent last quarter to $3.7 billion. Without getting specific, the executives said that so far, the fourth quarter seems to be reflecting the same trends that appeared in the last few weeks of Q3.

Nevertheless, while citing problems related to the financial problems at large financial institutions as they ripple through to nonfinancial companies of all sizes, Newman said he was “extremely excited” to meet the challenges of his new job. In late August, he replaced Patricia McKay as Office Depot’s finance chief. He was previously CFO at Platinum Research Organization, Radio Shack, and Intimate Brands.

He has started his first full quarter at Office Depot by undertaking a thorough review. This includes looking at ways the company can reduce capital spending and improve working capital. He’s also considering ways to free up more cash such as by further drawing down on its new $1.25 billion revolver and making sale and leaseback arrangements. The company is also considering cutting businesses that currently have negative cash flows, such as a 12-year venture in Japan.

Announced one month after Newman started, the credit facility has $1.15 billion left. Newman said he was “very pleased” with the company’s’ cash flow performance, considering the current market conditions. For Q3, the company’s cash flow from operations in the third quarter was $261 million and free cash flow was $190 million.

As for the other way to free up more cash — through store closings — the executives declined to estimate how many North American stores could go dark, saying they have just begun the process of reviewing whether such decisions, which would include breaking leases, would be worth it. The company had planned to open 40 stores next year and doesn’t plan to back out of those leases. However, the stores may not open for business, the executives said.

“We have to assume that 2009 will look a lot like the back part of 2008,” said Odland, who added that he was “extremely disappointed” in his company’s third-quarter financial results. “If that’s the case, it simply makes sense to close stores and maybe shrink our size a bit before growing again.” He repeatedly said he’s wary of making short-term decisisons at the risk of hurting his company’s potential to grow over time.