UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

                                                                (Mark One)

For the quarterly period ended            March 27, 2004

or

o     Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the transition period from ____________________ to __________________

Commission file number 1-10948

(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 registrant had 312,872,071 shares of common stock outstanding as of April 15, 2004.

PART I. FINANCIAL INFORMATION

Item 1 FINANCIAL STATEMENTS

OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)

The accompanying notes are an integral part of these statements.

2

OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)

The accompanying notes are an integral part of these statements.

3

OFFICE DEPOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

The accompanying notes are an integral part of these statements.

4

OFFICE DEPOT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note A – Basis of Presentation

Office Depot, Inc., including consolidated subsidiaries (the “Company”), 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 27, 2003 has been derived from audited financial statements at that date. The condensed interim financial statements as of March 27, 2004 and for the 13-week periods ending March 27, 2004 (also referred to as “the first quarter of 2004”) and March 29, 2003 (also referred to as “the first quarter of 2003”) 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. Certain prior year amounts have been reclassified to conform to the current year’s presentation.

These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of the Company and its financial statements, we recommend reading these condensed interim financial statements in conjunction with the Company’s audited financial statements for the year ended December 27, 2003, which are included in our 2003 Annual Report on Form 10-K, filed on February 26, 2004.

In January 2003, the Company sold its Australian business and reported the after-tax gain of $1.2 million as discontinued operations. This gain was subsequently reduced to $0.2 million during 2003 for resolution of sale-date estimates.

At the start of fiscal year 2003, we adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. The adoption of the accounting change at the beginning of the year resulted in a $25.9 million after-tax charge, or $0.08 per share, reflecting the cumulative effect of adoption.

Note B – Accounting for Stock-Based Compensation

The Company accounts for its stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The pro forma information below is based on provisions of Statement of Financial Accounting Standard (“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure.

5

Note C – Comprehensive Income

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

Note D – Asset Purchase

On March 3, 2004, the Company announced an agreement with Toys “R” Us, Inc. under which the Company will acquire 124 of the former Kids “R” Us stores for $197 million in cash plus the assumption of lease payments and other obligations. The transaction includes properties owned by Toys “R” Us, Inc. as well as stores with ground or operating leases and is expected to close in phases over the next several months, beginning in May 2004.

The Company plans to convert 50 to 60 of these stores to Office Depot retail stores and intends to sell the remaining properties. On March 23, 2004, the Company reached an agreement with PETCO Animal Supplies, Inc. under which PETCO will acquire 20 locations for approximately $45 million in cash plus the assumption of lease obligations on leased properties.

6

Note E – Earnings Per Share (“EPS”)

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

Options to purchase approximately 12.2 million shares of common stock were not included in our computation of diluted earnings per share for the first quarter of 2004 because their weighted average effect would have been anti-dilutive.

Note F – Segment Information

The following is a summary of our significant accounts and balances by segment, reconciled to consolidated totals:

7

A reconciliation of the measure of segment operating profit to consolidated earnings from continuing operations before income taxes and cumulative effect of accounting change is as follows:

We have been reviewing the composition of general and administrative expenses and assessing the costs and benefits of additional allocations to the operating units. We have not yet concluded this analysis.

Note G – Pension Disclosures

The Company assumed two defined benefit pension plans in connection with the acquisition of Guilbert in 2003. Net period pension costs for the first quarter of 2004 for these plans was approximately $2.7 million and include service costs of $2.2 million and interest costs of $2.1 million, offset by expected return on plan assets of $1.6 million. Approximately $1.6 million was funded during the first quarter.

8

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 consumers and businesses of all sizes through our three business segments: North American Retail Division, Business Services Group (“BSG”), and International Division.

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 included in Item 1 of this Quarterly Report on Form 10-Q, as well as our 2003 Annual Report on Form 10-K.

This MD&A contains significant amounts of forward-looking information. Without limitation, when we use the words “believe,” “estimate,” “plan,” “expect,” “intend,” “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 2003 Annual Report on Form 10-K, apply to these forward-looking statements.

RESULTS OF OPERATIONS

Results for the first quarter of 2004 reflect a return to positive comparable sales in our North American Retail Division for the first time in 16 quarters. Based upon our initiatives to date and our planned merchandising strategies, we expect positive comps to continue throughout 2004. The first quarter comparison to last year was also affected by the addition of Guilbert operations from last year’s acquisition completed in the second quarter and positive foreign currency effects. Overall, improvements in gross margins reflect the increased contribution from International operations which have higher margins partially offset by growth in lower-margin technology sales in the U.S..

At the start of fiscal year 2003, we adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. The adoption of the accounting change at the beginning of the year resulted in a $25.9 million after-tax charge, or $0.08 per share, reflecting the cumulative effect of adoption.

Overall

9

The table above provides a subtotal for segment 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 segment’s direct activity. Our general and administrative expenses primarily consist of personnel and related costs associated with global support functions. Because these functions support all segments of our business, we do not consider these costs in determining our segment profitability. We have been reviewing the composition of these costs and analyzing the costs and benefits of additional allocations to the operating units. We have not yet concluded this analysis. Other companies may charge more or less general and administrative expenses to their segments, and our results therefore may not be comparable to similarly titled measures used by other entities. Our measure of segment 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 sales increased 5% and comparable store sales in the 859 store locations in the U.S. and Canada that have been open for more than one year increased 3% in the first quarter of 2004. The increase in comparable sales was primarily attributable to increased sales of technology products, a direct result of various technology merchandising initiatives launched in the fourth quarter of 2003. Comparable sales of core office supplies and ink and toner also increased during the period, but at a lower rate. Additionally, recent initiatives to increase furniture sales resulted in positive comparable sales of furniture, but offsetting declines in other product groups pushed the overall furniture and other category slightly negative. The number of comparable transactions decreased in our retail stores while average transaction size increased.

Gross profit benefited from top line sales growth as compared to the first quarter of 2003. Increases in sales of technology products, which generally have lower margins, adversely affected gross profit as a percentage of sales during the quarter. Gross margin percentages in core office supply categories increased on a year-over-year basis.

Store payroll expenses experienced significant leverage from increased sales. However, these savings were more than offset by planned higher advertising expenses compared to the same period in the prior year as well as costs associated with the planned closure of three stores.

During the first quarter, the Company opened three new retail stores, closed three stores, and relocated three stores, bringing the total stores operated throughout the United States and Canada to 900. The North American Retail Division also sells through non-traditional locations such as military bases and grocery store locations. The number of non-traditional locations totaled 20 for the first quarter of 2004 and 7 for the same period in 2003.

10

The Company announced plans to acquire and open approximately 50 to 60 locations from Toys “R” Us. This purchase will be completed in phases, beginning in May 2004. Including the locations relating to this acquisition, the Company plans to open a total of 80 to 100 new stores during 2004, with openings to be concentrated in the second half of the year.

Business Services Group

Overall Business Services Group sales for the first quarter of 2004 were essentially flat compared to the prior period. BSG sales in the first quarter of 2004 include a 3% growth in the contract business, driven by growth in the large customer segment, offset by lower catalog sales. Within contract and commercial, domestic e-commerce sales grew 11% for the period. Sales of supplies and furniture increased slightly, while sales of technology decreased.

Both gross profit and total store and warehouse operating and selling expenses were essentially unchanged in the first quarter of 2004 compared to the prior period. Store and warehouse operating and selling expenses in the first quarter of 2004 reflect higher selling expenses offset by warehouse cost efficiencies and transportation optimization efforts.

International Division