Office Depot 2002 Annual Report Download - page 27

Internet: As mentioned above, many Internet-based merchandisers
also compete with us. This competition is expected to increase in the
future as these companies proliferate and continue to expand their
operations. Many startup operations that are heavily focused on Internet
sales may be able to compete with us very effectively in the areas of
price and selection. While most of these companies cannot offer the
levels of service and stability of supply that we provide, they neverthe-
less may be formidable competitors, particularly for customers who are
willing to look for the absolute lowest price without regard to the other
attributes of our business model, including advice and service. In addi-
tion, certain manufacturers of computer hardware, software and periph-
erals, including certain of our suppliers, have expanded their own direct
marketing of products, particularly over the Internet. The number of these
direct sellers has increased in recent years. Even as we expand our own
Internet efforts, our ability to anticipate and adapt to the developing
Internet marketplace and the capabilities of our network infrastructure to
efficiently handle our rapidly expanding operations are of critical impor-
tance. Failure to execute well in any of these key areas could have a
material adverse effect on our future sales growth and profitability.
Execution of Expansion Plans: We plan to open approximately 40
stores in the United States and Canada and 11 to 16 stores in our Inter-
national Division during 2003. We consider our expansion program to
be an integral part of our plans to achieve anticipated operating results
in future years. Circumstances outside our control, such as adverse
weather conditions affecting construction schedules, unavailability of
acceptable sites or materials, labor disputes and similar issues could
impact anticipated store openings. At times in the past, our expansion
activities have been hampered by less than optimal selection of real
estate locations, resulting in some stores that have failed to meet their
planned financial results. Our future expansion plans also include open-
ing retail stores of different sizes (generally smaller) than our traditional
superstore models and using different store formats and layouts. We
cannot determine with certainty whether these newly sized or formatted
stores will be successful. The failure to expand by opening new stores as
planned and/or the failure to generate the anticipated sales growth in
markets where new stores are opened (including the opening of new
sizes and formats of stores) could have a material adverse effect on our
future sales growth and profitability.
Cannibalization of Sales in Existing Office Depot Stores: As we
expand the number of our stores in existing markets, sales of existing
stores may suffer from cannibalization (as customers of our existing
stores begin shopping at our new stores). Our new stores typically require
an extended period of time to reach the sales and profitability levels of
our existing stores. Moreover, the opening of new stores does not ensure
that those stores will ever be as profitable as existing stores, particularly
when new stores are opened in highly competitive markets or markets
in which other office supply superstores may have achieved “first mover”
advantage. Our comparable sales are affected by a number of factors,
including the opening of additional Office Depot stores; the expansion
of our contract stationer business in new and existing markets; compe-
tition from other office supply chains, mass merchandisers, warehouse
clubs, computer stores, other contract stationers and Internet-based
businesses; and regional, national and international economic conditions.
In addition, our profitability would be adversely affected if our competi-
tors were to attempt to capture market share by reducing prices. Any or
all of these circumstances could have a material adverse effect on our
anticipated future revenue and profitability models.
Costs of Remodeling and Re-Merchandising Stores: The remod-
eling and re-merchandising of our stores has contributed to increased
store expenses, and these costs are expected to continue impacting
store expenses throughout 2003 and beyond. While a necessary aspect
of maintaining a fresh and appealing 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 guaran-
tee 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 quar-
terly operating 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; an increase in activity by non-traditional
resellers of office supplies, technology or other products we sell, or
other events. Such quarterly fluctuations could have a material adverse
effect on our financial results and/or the price of our securities.
Office Depot, Inc. and Subsidiaries
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