UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended      June 25, 2005     

or

For the transition period from ________________ to ________________

Commission file number       1-10948      

Office Depot, Inc.

(561) 438-4800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x            No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x            No o

The number of shares outstanding of the registrant’s common stock, as of the latest practicable date: At July 15, 2005 there were 316,352,851 outstanding shares of Office Depot, Inc. Common Stock, $0.01 par value.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

This report should be read in conjunction with the Notes to Condensed Consolidated Financial Statements (“Notes”) herein and the Notes to Consolidated Financial Statements in the Office Depot, Inc. Form 10-K filed March 10, 2005 (the “2004 Form 10-K”).

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OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements in the 2004 Form 10-K.

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OFFICE DEPOT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements in the 2004 Form 10-K.

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OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Basis of Presentation

Office Depot, Inc., including consolidated subsidiaries, is a global supplier of office products and services. Fiscal years are based on a 52- or 53-week period ending on the last Saturday in December. The condensed consolidated balance sheet at December 25, 2004 has been derived from audited financial statements at that date. The condensed interim financial statements as of June 25, 2005 and for the 13-week and 26-week periods ending June 25, 2005 (also referred to as “the second quarter of 2005” and “the first half of 2005”) and June 26, 2004 (also referred to as “the second quarter of 2004” and “the first half of 2004”) are unaudited. However, in our opinion, these financial statements reflect all adjustments (consisting only of normal, recurring items) necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented.

These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of Office Depot, Inc. and its financial statements, we recommend reading these condensed interim financial statements in conjunction with the audited financial statements for the year ended December 25, 2004, which are included in our 2004 Annual Report on Form 10-K, filed with the U. S. Securities and Exchange Commission (the “SEC”).

New Accounting Pronouncement

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“FAS 123(R)”). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees. Currently, companies are required to calculate the estimated fair value of these share-based payments and can elect to either include the estimated cost in earnings or disclose the pro forma effect in the footnotes to their financial statements. We have chosen to disclose the pro forma effect. The fair value concepts were not changed significantly in FAS 123(R); however, in adopting this Standard, companies must choose among alternative valuation models and amortization assumptions. The valuation model and amortization assumption we have used continues to be available, but we have not yet completed our assessment of the alternatives.

In April 2005, the SEC announced a deferral of the effective date of FAS 123(R) for calendar year companies until the beginning of 2006. See Note D for pro forma disclosure.

Note B – Restatement of Financial Statements

At the end of fiscal year 2004, we reviewed our lease accounting practices and made certain modifications to comply with generally accepted accounting principles, as clarified in a general letter issued by the SEC in February 2005. We extended certain initial lease terms to include periods where renewal was reasonably assured of being exercised, revised our determination of lease inception to include an earlier period of pre-opening “rent holidays,” and reclassified tenant allowances from an offset of assets and depreciation and amortization expense to a deferred credit and a reduction of rent expense. We also restated prior periods. The restatement of second quarter and first half of 2004 results reduced net earnings by $0.7 million and $1.3 million, respectively. Store and warehouse operating and selling expenses increased by $1.2 million and $2.3 million for the same periods, primarily from the reclassification of tenant allowance credits. Rent expense, included as a component of gross profit, decreased $0.2 million and $0.3 million, reflecting additional rent expense, more than offset by the tenant allowance credits. Tenant allowances of $1.1 million for the first half of 2004 have also been restated from a reduction of capital expenditures to an increase in cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows for 2004.

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Note C – Business Review

During the second quarter of 2005, we launched a review of our assets and businesses, with the intent of improving long-term performance. All business units, including corporate staff groups, are reviewing existing operating assets, commitments and programs to assess their appropriateness and usefulness as we move to improve our competitive position. This is a wide-ranging review and will include assessment of the effectiveness of both recent and long-standing investments, as well as the ability of existing assets to generate desired returns. Business unit recommendations will be reviewed by senior management and management’s recommendations will be subject to approval by the board of directors. The outcome of this process cannot be predicted at this time, but it may result in a material charge being recorded during the third quarter of 2005 and additional impacts in future periods. In addition to this review, business units are focused on ways to improve efficiency and streamline operations over a multi-year horizon.

Note D – Accounting for Stock-Based Compensation

We account for our stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Had costs for these plans been determined using the fair value accounting method as prescribed in Statement of Financial Accounting Standards (“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended, we would have recognized additional compensation expense as indicated in the pro forma information below.

When we adopt FAS 123(R), currently scheduled for the beginning of 2006, we will include the expense associated with share-based payments issued to employees in our Condensed Consolidated Statements of Earnings. We have not yet completed our assessment of which valuation model or transition option to select. However, the 2005 long-term incentive awards issued to employees in February reduced the number of stock options granted, compared to 2004, and increased the number of restricted stock awards. The amortization of these restricted stock awards has been included in the results of operations since the grant date.

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Note E – Comprehensive Income

Comprehensive income represents all non-owner changes in stockholders’ equity and consists of the following:

Note F – Earnings Per Share (“EPS”)

The information required to compute basic and diluted EPS is as follows:

Options to purchase approximately 3.5 million shares of common stock were not included in our computation of diluted earnings per share for the second quarter of 2005 because their weighted average effect would have been anti-dilutive.

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Note G – Division Information

The following is a summary of our significant accounts and balances by reportable segment (or “Division”), reconciled to consolidated totals. Division name changes below have been adopted to conform to internal company usage; no changes have been made to the composition of operations or balances.

A reconciliation of the measure of division operating profit to consolidated earnings before income taxes is as follows:

We have been reviewing the composition of general and administrative (“G&A”) expenses and assessing the costs and benefits of additional allocations to the operating divisions for internal analyses and business performance assessments. As a result of this analysis, we plan to allocate all G&A and other operating expenses to the operating segments and to redistribute certain other amounts based on refined allocation methodologies. We believe this change will result in a more meaningful presentation of our segment results. The redistribution is likely to impact business unit allocations of vendor program and advertising, as well as certain corporate G&A accounts. This methodology is being refined for internal reporting and is likely to be used for both internal and external reporting by the end of the year. Prior periods will be reclassified for useful comparisons once we begin to report in this manner.

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Total assets and goodwill by division are as follows:

The change in goodwill for the first half of 2005 results from changes in foreign currency rates.

Note H – Pension Disclosures

The components of net periodic pension cost for our two foreign defined benefit plans are as follows:

For the quarter and year-to-date periods ended June 25, 2005, we have contributed $2.8 million and $3.7 million, respectively, to our foreign pension plans. No significant changes are currently anticipated in our 2005 annual contributions compared to 2004.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Office Depot, Inc., together with our subsidiaries, is a global supplier of office products and services. We sell to businesses of all sizes and consumers through our three reportable segments (or “Divisions”): North American Retail Division, North American Business Services Division, and International Division. Division name changes below have been adopted to conform to internal company usage; no changes have been made to the composition of operations or balances.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We recommend that you read this MD&A in conjunction with our condensed consolidated financial statements and the notes to those statements included in Item 1 of this Quarterly Report on Form 10-Q, as well as our 2004 Annual Report on Form 10-K, filed with the U. S. Securities and Exchange Commission.

This MD&A contains significant amounts of forward-looking information. Without limiting the generality of the preceding sentence, when we use the words “believe,” “estimate,” “plan,” “expect,” “intend,” “likely,” “anticipate,” “continue,” “may,” “project,” “probably,” “should” and similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking statements. Our Cautionary Statements, which you will find immediately following this MD&A and following the MD&A in our 2004 Annual Report on Form 10-K, apply to these forward-looking statements, and all forward-looking statements should be considered in light of those Cautionary Statements.

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RESULTS OF OPERATIONS

OVERVIEW

The company-wide 6% increase in sales for the quarter, combined with a steady gross profit percentage contributed to a 24% increase in diluted earnings per share for the second quarter of 2005 compared to the same period in 2004. The sales leverage and operating efficiencies in North America also resulted in declining expense ratios. Results in Europe continue to be a challenge, in part from difficult economic conditions. We continue to focus on improving the results from our International Division.

During the second quarter of 2005, we launched a review of our assets and businesses, with the intent of improving long-term performance. All business units, including corporate staff groups, are reviewing existing operating assets, commitments and programs to assess their appropriateness and usefulness as we move to improve our competitive position. This is a wide-ranging review and will include assessment of the effectiveness of both recent and long-standing investments, as well as the ability of existing assets to generate desired returns. Business unit recommendations will be reviewed by senior management and management’s recommendations will be subject to approval by the board of directors. This process is currently under way and the outcome cannot be predicted at this time, but it may result in a material charge being recorded during the third quarter of 2005 and additional impacts in future fiscal periods, depending upon the outcome of the business review. In addition to this review, business units are focused on ways to improve efficiency and streamline operations over a multi-year horizon.

Overall

The Overall table above provides a subtotal for division operating profit. We use this measure of performance to assess the operations of each business unit; and we believe it is useful to investors because it reflects each division’s direct activity. Historically, we have not allocated our general and administrative expenses to our divisions. We are currently reviewing that policy and plan to modify this presentation by the end of the year. See General and Administrative Expenses below for additional discussion. Other companies may charge more or less general and

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administrative expenses to their divisions, and our results therefore may not be comparable to similarly titled measures used by some other entities. Our measure of division operating profit should not be considered as an alternative to operating income or net earnings determined in accordance with accounting principles generally accepted in the United States of America.

North American Retail Division

Total North American Retail Division sales increased 8% in the second quarter and 7% in the first half of 2005. Comparable store sales in the 890 retail store locations in the U.S. and Canada that have been open for more than one year increased 3% in the second quarter and 2% for the first half of 2005. Comparable average transaction size increased, but comparable transaction counts decreased for both the second quarter and the first half of 2005.

Gross profit as a percent of sales increased during the second quarter and the first half compared to the same periods last year as a result of broad based product category gross margin improvement and vendor program support partially offset by increased sales from lower margin technology products.

Operating and selling expenses as a percent of sales benefited from increased sales leverage. Payroll and related costs as a percent of sales decreased. The cost of adding stores during the period, net of labor efficiencies put in place during 2004, was absorbed by the higher volume. Division operating profit increased 41% in the second quarter and 26% in the first half of 2005 compared to the same periods in 2004.

During the second quarter, we opened 17 new retail stores, closed one store and relocated four stores, bringing to 46 the number of new retail stores opened in the first half of 2005, and the total stores operated throughout the U. S. and Canada to 1,011. North American Retail also sells through non-traditional locations. The number of non-traditional locations totaled 15 for the second quarter of 2005 and 17 at the end of the same period in 2004.

North American Business Services Division

North American Business Services Division sales increased 7% for the second quarter and 5% in the first half of 2005. Sales in the contract channel increased 11%, reflecting growth across all customer groups, primarily in large customer and national accounts, in part from an increase in the sales force. Increased sales in the Office Depot commercial channel were offset by decreases in the Viking commercial channel.

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Gross profit as a percent of sales decreased in the second quarter and first half of 2005 compared to the same periods in 2004, reflecting promotional activity and a higher sales mix of technology products, partially offset by higher vendor program amounts and lower inventory shrink.

Store and warehouse operating and selling expenses as a percent of sales decreased in the second quarter and first half of 2005. The cost of added sales staff was more than offset by other salary reductions and warehouse efficiencies. Also included in the second quarter results are $4.5 million of costs related to the call center optimization effort announced in the fourth quarter of 2004. This outsourcing activity is expected to be complete by the third quarter of 2005. Division operating profit increased 20% in the second quarter and 12% in the first half of 2005 compared to the same periods in 2004.

International Division

Sales in the International Division increased 3% (but decreased 1% in local currencies, with favorable foreign exchange rates accounting for the overall increase) in the second quarter and were flat (a decrease of 4% in local currencies) in the first half of 2005 compared to the same periods in 2004. The change in exchange rates from the corresponding periods of the prior year increased sales reported in U.S. dollars by $32 million for the quarter and $73 million for the first half of the year. Overall soft economic and business conditions in Europe have contributed to our sales declines in both the contract and catalog channels.

Gross profit as a percentage of sales decreased in both the second quarter and first half of 2005 compared to the same period last year because of continued pricing pressure in key product categories and increased competitive activity.

Selling and warehouse expenses, as a percent of sales, increased in both the second quarter and the first half of 2005 compared to the same periods of the prior year. The 2004 periods included benefits from the favorable settlement of claims related to our distribution network in Europe. Advertising expenses declined while payroll and delivery costs increased. Division operating profit declined 20% (a decline of 23% in local currencies) in the second quarter and declined 24% (a decline of 27% in local currencies) compared to the same periods in 2004. International division operating profit was positively impacted by foreign exchange rates during the second quarter and first half by $3 million and $7 million, respectively, when translated into U.S. dollars.

Corporate and Other

Income and expenses not allocated to our business divisions consist of general and administrative expenses, interest income and expense, income taxes and inter-division transactions.

Other Operating Expenses: For the second quarter and first half of 2005, new store pre-opening expenses totaled $4.1 million and $9.9 million. This reflects the addition of 46 new stores and five relocations in North American Retail during the first half of 2005, compared to four new stores and three relocations in the first half of 2004. Prior year results also include costs related to the integration of the Guilbert, S.A. business for both periods.

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General and Administrative Expenses: As a percentage of sales, general and administrative (“G&A”) expenses decreased in the second quarter of 2005 to 4.6% compared to 4.8% for the same period last year. The decrease reflects leverage from increased sales, as well as a gain on disposal of property previously used in G&A activities.

We have been reviewing the composition of G&A expenses and assessing the costs and benefits of additional allocations to the operating divisions for internal analyses and business performance assessment. As a result of this analysis, we plan to begin to allocate all G&A and other operating expenses to the operating segments and to redistribute certain other amounts based on refined allocation methodologies. We believe this change will result in a more meaningful presentation of our segment results. The redistribution is likely to impact business unit allocations of vendor program and advertising, as well as certain corporate G&A accounts. This methodology is being refined for internal reporting and is likely to be used for both internal and external reporting by the end of the year. Prior periods will be reclassified for useful comparisons once we begin to report in this manner.

Interest Expense: The decrease in interest expense in 2005 compared to the first half of 2004 reflects the impact of the early redemption of $250 million of senior subordinated notes in December 2004.

Income taxes: The effective income tax rate for the second quarter of 2005 declined to 29% from 30% for the same period in the prior year. The net change reflects a favorable adjustment to an accrual for an uncertain tax position and a reduction in accrued taxes on the expected repatriation of foreign earnings from a clarification to the relevant tax rules, partially offset by the impact of a higher mix of domestic income taxed at higher effective rates. During the fourth quarter of 2004 we estimated we would repatriate at least $200 million of foreign earnings during 2005 and provided deferred taxes on that amount. We have not yet completed our assessment of the amount to be repatriated for the full year 2005, but any change in that amount will result in a corresponding change in income tax expense at the time the assessment is completed.

Our effective income tax rate for the remainder of 2005 will likely be affected by the resolution of certain open items. Legislation is pending in the United Kingdom that could limit the amount of our current and future deductions. Because the legislation is not yet final, we cannot accurately estimate the potential impact, but some increase in our effective tax rate from this legislation is likely, although other factors may mitigate the impact of this change. Also, we have certain audit periods under examination with taxing authorities. We are in the final stages of two such examinations, and the resolution of open items could impact our provision for income taxes when finalized. We expect to resolve one or both of these examinations before the end of 2005.

LIQUIDITY AND CAPITAL RESOURCES

During the first half of 2005, cash provided by operating activities was $86.4 million compared to $308.8 million during the same period last year. This change primarily reflects an increase in settlement of accounts payable during the first half of 2005 compared to the same period last year. Inventory declined in the first half of 2005, but by less than the comparable period in the prior year. We have added stores, built our inventory assortments and reduced out of stock positions. Additionally, cash was used in 2005 to settle certain tax payments that were deferred by the government for businesses affected by hurricanes in 2004.

Cash used in investing activities was $175.0 million in the second half of 2005 compared to $213.9 million in the same period last year. The use of cash in 2005 reflects capital expenditures from the opening of 46 new office supply stores and five relocations in North America and purchases of short-term investments, partially offset by the net liquidation of a short-term investment. Investing activities in 2004 include opening four new stores, the relocation of three stores, payments on the purchase of former Kids “R” Us stores, purchases of short-term investments and the purchase of land for a corporate facility. That project was subsequently cancelled and the land has been sold. Proceeds from the sale are expected in the fourth quarter of 2005, as the Company agreed to accept an interest-bearing promissory note at the time of the sale of the land in lieu of immediate payment.

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Cash used in financing activities was $43.8 million in the first half of 2005 compared to cash provided of $24.7 million during the same period in 2004. Open market purchases of our common stock totaled $90.6 million and payments on long-term borrowings totaled $32.8 million. This was partially offset by proceeds from issuance of common stock under our employee related plans of $79.6 million.

At June 25, 2005, we had approximately $603.6 million of available credit under our revolving credit facility and letters of credit outstanding totaling $76.2 million.

CRITICAL ACCOUNTING POLICIES

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2004 Annual Report on Form 10-K, filed on March 10, 2005, in the Notes to the Consolidated Financial Statements, Note A, and the Critical Accounting Policies section.

New Accounting Pronouncement

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“FAS 123(R)”). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees. Currently, companies are required to calculate the estimated fair value of these share-based payments and can elect to either include the estimated cost in earnings or disclose the pro forma effect in the footnotes to their financial statements. We have chosen to disclose the pro forma effect. The fair value concepts were not changed significantly in FAS 123(R); however, in adopting this Standard, companies must choose among alternative valuation models and amortization assumptions. The valuation model and amortization assumption we have used continues to be available, but we have not yet completed our assessment of the alternatives.

In April 2005, the U.S. Securities and Exchange Commission announced a deferral of the effective date of FAS 123(R) for calendar year companies until the beginning of 2006. See Note D for pro forma disclosure.

CAUTIONARY STATEMENTS for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

In December 1995, the Private Securities Litigation Reform Act of 1995 (the “Act”) was enacted by the United States Congress. The Act, as amended, contains certain amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934. These amendments provide protection from liability in private lawsuits for “forward-looking” statements made by public companies. We want to take advantage of the “safe harbor” provisions of the Act. In doing so, we have disclosed these forward-looking statements by informing you in specific cautionary statements of the circumstances which may cause the information in these statements not to transpire as expected.

This Quarterly Report on Form 10-Q contains both historical information and other information that you may use to infer future performance. Examples of historical information include our quarterly financial statements and the commentary on past performance contained in our MD&A. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that, with the exception of information that is clearly historical, all the information contained in this Quarterly Report on Form 10-Q should be considered to be “forward-looking statements” as referred to in the Act. Without limiting the generality of the preceding sentence, any time we use the words “estimate,” “plan,” “probably,” “should,” “may,” “project,” “intend,”, “likely,” “expect,” “believe,” “anticipate,” “continue,” and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature.

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Forward-looking information involves risks and uncertainties, including certain matters that we discuss in more detail below and in our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission. This information is based on various factors and important assumptions about future events that may or may not actually come true. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements in this Quarterly Report. In particular, the factors we discuss in our 2004 Annual Report on Form 10-K could affect our actual results and could cause our actual results during the remainder of 2005 and in future years to differ materially from those expressed in any forward-looking statement made by us in this Quarterly Report on Form 10-Q. Those Cautionary Statements contained in our 2004 Annual Report on Form 10-K are incorporated herein by this reference to them.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risks

At June 25, 2005, there had not been any material change in the interest rate risk information disclosed in the “Market Sensitive Risks and Positions” subsection of the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of our 2004 Annual Report on Form 10-K.

Foreign Exchange Rate Risks

At June 25, 2005, there had not been any material change in any of the foreign exchange risk information disclosed in the “Market Sensitive Risks and Positions” subsection of the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of our 2004 Annual Report on Form 10-K.

Item 4. CONTROLS AND PROCEDURES

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are involved in litigation arising in the normal course of our business. While, from time to time, claims are asserted that make demands for large sums of money (including, from time to time, actions which are asserted to be maintainable as class action suits), we do not believe that any of these matters, either individually or in the aggregate, will materially affect our financial position or the results of our operations.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information with respect to company purchases made of Office Depot, Inc. common stock during the second quarter of the 2005 fiscal year:

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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s annual meeting of stockholders was held on May 13, 2005. Of the total number of common shares outstanding on March 10, 2005, a total of 271,197,961 were represented in person or by proxy. Results of votes with respect to proposals submitted at that meeting are as follows:

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Item 6. EXHIBITS

Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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