Office Depot 2001 Annual Report Download - page 33

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and regional, national and international economic conditions. In addition,
our profitability would be adversely affected if our competitors were to
attempt to capture market share by reducing prices.
Costs of Remodeling and Re-merchandising Stores: The remodeling and
re-merchandising of our stores has contributed to increased store expenses,
and these costs are expected to continue impacting store expenses throughout
2002 and beyond. While a necessary aspect of maintaining a fresh and appeal-
ing image to our customers, the expenses associated with such activities could
result in a significant impact on our net income in the future. In addition,
there is no guarantee that these changes will generate any of the benefits that
we have anticipated. Furthermore, our growth, through both store openings
and acquisitions, will continue to require the expansion and upgrading of our
informational, operational and financial systems, as well as necessitate the
hiring of new managers at the store and supervisory level.
Historical Fluctuations in Performance: Fluctuations in our quarterly oper-
ating results have occurred in the past and may occur in the future. A variety
of factors could contribute to this quarter-to-quarter variability, including
new store openings which require an outlay of pre-opening expenses, generate
lower initial profit margins and cannibalize existing stores; timing of warehouse
integration; competitors’ pricing; changes in our product mix; fluctuations in
advertising and promotional expenses; the effects of seasonality; acquisitions
of contract stationers; competitive store openings or other events.
Viking Merger and Integration: On August 26, 1998, we merged with Viking.
Costs related to the integration of Viking’s warehouse facilities with our
delivery network will increase our warehouse expenses in 2002 and beyond.
Moreover, integrating the operations and management of Office Depot and
Viking has been, and continues to be, a complex process. There can be no
assurance that this integration process will be completed as rapidly as we
anticipate or that, even if achieved as anticipated, it will result in all of the
anticipated synergies and other benefits we expect to realize. The integration
of the two companies continues to require significant management attention,
which may temporarily distract us from other matters. Our inability to success-
fully complete the integration of the operations of Office Depot and Viking
could have a material adverse effect on our future sales growth and profitability.
International Activity: We have operations in a number of international mar-
kets. We intend to enter additional international markets as attractive oppor-
tunities arise. Each entry could take the form of a start-up, acquisition of
stock or assets or a joint venture or licensing arrangement. In addition to the
risks described above (in our domestic operations), internationally we face
such risks as foreign currency fluctuations, unstable political and economic
conditions, and, because some of our foreign operations are not wholly-
owned, compromised operating control in certain countries. Recent world
events have served to underscore even further the risks and uncertainties of
operating in other parts of the world. Risks of civil unrest, war and economic
crisis in portions of the world outside North America in which we operate
represent a more significant factor than may have been the case in the past.
Also, we have experienced significant fluctuations in foreign currency exchange
rates in 2001, which have resulted in lower than anticipated sales and earn-
ings in our International Division. Our results may continue to be adversely
affected by these fluctuations in the future. In addition, we do not have a
large group of managers experienced in international operations and will need
to recruit additional management resources to successfully compete in many
foreign markets. All of these risks could have a material adverse effect on our
financial position or our results from operations. Moreover, as we increase the
relative percentage of our business that is operated globally, we also increase
the impact these factors have on our future operating results. Our start-up
operation in Japan, in particular, has proven to be unprofitable to date and,
in fact, has generated losses that have materially affected our financial results
in the past and are expected to do so for some time in the future. Because of
differing commercial practices, laws and other factors, our ability to use the
Internet and e-commerce to substantially increase sales in international loca-
tions may not progress at the same rate as in North America.
Euro: On January 1, 1999, 11 of the 15 member countries of the European
Economic and Monetary Union established fixed conversion rates between
their existing currencies and their new common currency (the “euro”). On
July 1, 2002, new euro-denominated bills and coins will become the sole legal
currency in those countries, and all former currencies will be withdrawn
from circulation. Since the introduction of the euro, we have been evaluating
the business implications of modifying our systems to properly recognize and
handle conversion to the euro. Based on that evaluation, we need to make
multiple changes and modifications to our current systems before July 1, 2002.
We expect to complete our system modifications in advance of the deadline,
and we do not expect our conversion to the euro to have a material effect on
our financial position or the results of our operations. However, we may not
complete the system changes by the targeted date, preventing us from accept-
ing orders or collecting receivables from our customers or from paying our
vendors. This could have an adverse impact on our business and our future
operating results.
Contract and Commercial: We compete with a number of contract stationers,
mail order and Internet operators and retailers who supply office products
and services to large and small businesses, both nationally and internationally.
In order to achieve and maintain expected profitability levels, we must con-
tinue to grow this segment of the business while maintaining the service levels
and aggressive pricing necessary to retain existing customers. There can be no
assurance we will be able to continue to expand our contract and commercial
business while retaining our base of existing customers, and any failure to do
so could have a material adverse effect on our profitability. We are also working