"We're taking CapEx in 2011 of $130 million up to about $160 million in our guidance [for 2012]," said Office Depot CFO Michael Newman during a recent conference call discussing the retailer's Q4 and full-year financial results. "We're investing in e-commerce, and in an ERP system in Europe to take our many disparate systems and get them on the same platform, so we can still continue to drive synergies there."
Office Depot executives have previously discussed the advantages of operating smaller brick-and-mortar locations. "We've got a fleet of stores that are about 23,000 square feet on average. They need to be smaller," said president for North America Kevin Peters during this call, which took place late last month.
The retailer has two smaller store footprints that it plans to use going forward: one at 15,000 square feet, another at 5,000 square feet. Office Depot already has eight of the 5,000-square-foot stores and has been happy with their performance.
"They've been successful in retaining about 90% of the sales" of larger-size stores, said Peters. "They have higher margin given the mix of private branded products. They've also got a full suite of services like Copy & Print Depot and Tech Depot Services. So I think as we go through the 100 or so leases that come up each year for renewal, our objective is to get the stores downsized into one of these two smaller footprints.
"We think this will not only lower our occupancy costs, it will put some top line comp pressure because we'll just carry fewer SKUs inside the box, but they'll be more profitable," he added. The retailer also sees an opportunity for gross margin improvements in services: "I think customers will continue to demand services. Most of those services need to be provided at a brick-and-mortar location," Peters noted.
Office Depot's SKU rationalization is focusing on computer peripherals and lower-priced laptops, reflecting its goal of improving margins and focusing on higher-value customers. Continuing a process begun in the second half of fiscal 2011, the retailer plans to "repackage a lot of that peripheral product into kind of value-based bundles, sell down that inventory and reduce the long tail in the peripheral category," said Peters. "And as we've talked about before, we're also going to exit out of the low-priced, low-end laptop business because quite frankly, you've got to buy those customers, and they're not 'sticky.'"
Peters stressed, however, that just because a product would not be stocked in a smaller-size Office Depot store, that didn't mean it was being dropped from the retailer's assortment. "As we continue to find ways to enhance the experience online, a lot of the products that we'll pull out of the retail assortment will, in fact, be available through our e-commerce channel for same-day shipping and next-day delivery," said Peters.
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