UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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 registrant had 312,413,560 shares of common stock outstanding as of October 14, 2004.

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Table of Contents

PART I. FINANCIAL INFORMATION

Item 1 FINANCIAL STATEMENTS

OFFICE DEPOT, INC.

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 February 26, 2004 (the “2003 Form 10-K”).

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OFFICE DEPOT, INC.

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements in the 2003 Form 10-K.

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OFFICE DEPOT, INC.

This report should be read in conjunction with the Notes herein and the Notes to Consolidated Financial Statements in the 2003 Form 10-K.

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OFFICE DEPOT, INC.

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 September 25, 2004 and for the 13- and 39-week periods ending September 25, 2004 (also referred to as “the third quarter of 2004” and “year-to-date 2004,” respectively) and September 27, 2003 (also referred to as “the third quarter of 2003” and “year-to-date 2003,” respectively) 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 based upon resolution of sale-date estimates.

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

On June 2, 2003, the Company acquired all of the common stock of Guilbert S.A. (“Guilbert”), a corporate group that represented one of the largest contract stationers in Europe. The activities of Guilbert have been reflected in the financial statements since the date of acquisition.

Note B – Accounting for Stock-Based Compensation

The Company accounts for its 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 Standard (“FAS”) No. 123, Accounting for Stock-Based Compensation, as amended, the Company would have recognized additional compensation expense as indicated in the pro forma information below.

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Note C – Comprehensive Income

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

Note D – Asset Group Purchase

In March 2004, the Company reached an agreement with Toys “R” Us, Inc. to acquire 124 of their former Kids “R” Us stores for $197 million in cash plus the assumption of lease obligations. Also in March, the Company reached an agreement with PETCO Animal Supplies, Inc. under which PETCO agreed to acquire from the Company 20 of the former Kids “R” Us stores for approximately $45 million in cash plus the assumption of related lease obligations. Through the end of the third quarter 2004, the Company has closed on the purchase of 82 stores and 19 stores have been removed from the transaction through price adjustments and mutual agreement. Of the total stores to be acquired (currently 105, after the agreed-upon removals), the Company plans to convert approximately 50 of these stores to Office Depot retail stores and intends to sell or sublet the remaining stores. By the end of September, 17 stores had been transferred to third-party buyers. The remaining portion of this purchase is expected to close in phases by the end of 2004.

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Note E – Earnings Per Share (“EPS”)

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

Options to purchase approximately 18.5 million shares of common stock were not included in our computation of diluted earnings per share for the third 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. The International Group referred to below was formerly referred to as the International Division; no changes have been made to operations or balances.

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

Total assets and goodwill by segment are as follows:

The reduction in goodwill assigned to the International Group reflects a net decrease in Guilbert-related integration balances, primarily from completion or adjustments to plans and values estimated in initial purchase accounting balances. Changes in currency exchange rates also affected the balances assigned to the International Group and North American Retail Division.

Note G – Pension Disclosures

The Company assumed two defined benefit pension plans in connection with the acquisition of Guilbert in June 2003. Actuarial information for these plans was not available until the fourth quarter of 2003. Pension-related disclosures for 2004 are as follows:

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Note H – Share Repurchase Programs

In 2001, the Company’s board of directors authorized a $50 million annual common stock repurchase program that remains in effect until cancelled by the board. Through September 25, 2004, approximately 2.1 million shares have been purchased in open market transactions under the 2004 program for approximately $35.3 million. In September 2004, the board of directors authorized the Company to repurchase an additional $500 million of common stock over the next 12 to 24 months. The unused balance of approximately $14.7 million under the 2004 annual repurchase program remains available; however, the $50 million annual purchases that would be available under that program in each of 2005 and 2006 are included in the $500 million program.

Note I – Subsequent Event

On October 4, 2004, the Company announced the resignation of then-Chairman and Chief Executive Officer, Bruce Nelson, and the appointment of interim Chairman and CEO, Neil Austrian. Mr. Austrian has been a member of the Office Depot board of directors since 1998. Additionally, Mr. Austrian was a member of the board of Viking Office Products, Inc. from 1988 to the date of its merger with Office Depot. A search is being conducted for a permanent CEO to replace Mr. Austrian, although Mr. Austrian has committed to continuing as Chairman and CEO until the search process is concluded. The Company has previously announced it expects the search process to take from three to six months. Separation-related expenses payable to Mr. Nelson under his employment agreement will be included in the fourth quarter results of operations.

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

GENERAL

Office Depot, Inc., together with our subsidiaries (collectively, the “Company”), 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 and International Group. Our International Group previously was referred to as the International Division; no changes have been made to 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 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 a significant amount of forward-looking information. Without limitation, when we use the words “estimate,” “plan,” “probably,” “should,” “may,” “project,” “intend,” “expect,” “believe,” “anticipate,” “continue,” and similar expressions in this Quarterly Report on Form 10-Q, we are identifying forward-looking statements. Our Cautionary Statements, which you will find 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

OVERVIEW

In a September 2004 news release, we announced that we expected earnings for the third quarter and full year to fall below the consensus expectations of analysts familiar with the Company. Diluted earnings per share for the third quarter were $0.28, or $0.01 above the revised consensus expectations. Diluted earnings per share for the nine months ended September were $0.90. North American Retail Division comparable store sales, while up 1% for the quarter, were below our expectations and the 3% increase seen in each of the first two quarters of 2004. Segment gross profit benefited from higher margins on a broad range of products, offset by a mix shift to technology products. Operating expenses as a percent of sales declined. The Business Services Group increased sales for the quarter, but Viking catalog sales continued to lag expectations. Segment operating profit increased, largely driven by supply chain efficiencies. The International Group had positive impacts from translating sales at weaker U.S. dollar exchange rates, but local currency sales were down in the countries that are the largest