UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 26, 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 þ            No o

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

The number of shares outstanding of the registrant’s common stock, as of the latest practicable date: At April 15, 2005 there were 315,844,228 outstanding shares of Office Depot, Inc. Common Stock, $0.01 par value.

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Table of Contents

PART I. FINANCIAL INFORMATION

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

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
(In thousands, except per share amounts)
(Unaudited)

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
(In thousands)
(Unaudited)

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
(Unaudited)

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 March 26, 2005 and for the 13-week periods ending March 26, 2005 (also referred to as “the first quarter of 2005”) and March 27, 2004 (also referred to as “the first quarter 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 Securities and Exchange Commission.

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.

On April 14, 2005 the U.S. Securities and Exchange Commission (the “SEC”) announced a deferral of the effective date of FAS 123(R) for calendar year companies until the beginning of 2006.

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 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 first quarter 2004 results reduced net earnings by $0.7 million. Store and warehouse operating and selling expenses increased by $1.1 million, primarily from the reclassification of tenant allowance credits. Rent expense, included as a component of gross profit, decreased $0.1 million, reflecting additional rent expense, partially offset by the tenant allowance credit. Tenant allowances of $0.8 million 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 – 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.

Pro forma compensation expense under FAS 123 for the first quarter of 2005 includes the impact of actual forfeitures in excess of expected levels, in part from staff reductions announced in the fourth quarter of 2004. Additionally, the tax benefit from disqualifying dispositions was higher in 2005 than 2004.

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.

Note D – Comprehensive Income

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

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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 4.0 million shares of common stock were not included in our computation of diluted earnings per share for the first quarter of 2005 because their weighted average effect would have been anti-dilutive. The 2005 long-term incentive awards to employees included 1.9 million shares of performance- and market-based restricted stock that are not included in the weighted average share calculation until the underlying performance measures are met.

Note F – 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.

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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 expenses and assessing the costs and benefits of additional allocations to the operating divisions. As a result of this analysis, we plan to reclassify certain amounts previously presented as general and administrative expenses into operating and selling expenses and other line items, possibly beginning in the third quarter of 2005. These reclassifications will affect measures of division profitability and prior periods will be reclassified for meaningful comparisons.

Total assets and goodwill by division are as follows:

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

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Note G – Pension Disclosures

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

For the quarter ended March 26, 2005, we have contributed $1.0 million to our foreign pension plans. No significant changes are currently anticipated in our 2005 annual contributions compared to 2004.

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 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 Securities and Exchange Commission.

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 2004 Annual Report on Form 10-K, apply to these forward-looking statements.

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RESULTS OF OPERATIONS

OVERVIEW

We have made progress on a number of fronts during the first quarter of 2005:

	•	Our overall sales were up, led by an increase in the North American Retail Division from increased comparable sales and new store openings;
	•	Our continued focus on cost control and the efficiency initiatives put in place during 2004 have had a positive effect on our first quarter results, both in the operating divisions and general and administrative expenses;
	•	Interest costs are down, reflecting the redemption of high-cost debt in the fourth quarter of 2004; and
	•	Steve Odland joined the company as Chief Executive Officer and Chairman, Board of Directors, effective March 11th.

However, the first quarter 2005 results were adversely affected by several factors:

	•	International operations fell below our expectations in both sales and profitability;
	•	We experienced gross margin pressure from higher costs in the supplies category and from our increased promotional activity;
	•	The first quarter results include recognition of costs as incurred related to our domestic call center consolidation and international warehouse relocations. Both initiatives were announced last year.

Diluted earnings per share were $0.37 per share in the first quarter of both 2005 and 2004.

Looking forward, we will continue to focus on our initiatives of growing the business and reducing costs.

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 have recently reviewed that policy and plan to modify this presentation, possibly beginning in the third quarter of 2005. Other companies may charge more or less general and 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.

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North American Retail Division