• Gross profit totaled $910 million in the first quarter of 2009, down 22.1% from the same period in 2008. This comparison primarily reflects the flow through from our sales volume decline and increased property costs, partially offset by lower charges for shrink and inventory valuation.

• As part of our previously announced strategic reviews, we recorded $120 million of charges in the first quarter of 2009 and $11 million of charges in the first quarter of 2008 (the "Charges"). Implementation of activities during the first quarter of 2009 resulted in charges primarily for lease accruals, severance expenses and inventory write downs related to facilities that closed during the period.

• Total operating expenses were down 9% from the first quarter of 2008. This decrease primarily reflects lower payroll and advertising expenses as well as reductions in distribution costs and professional and legal fees. These decreases were significantly offset by the increase in Charges from the first quarter of 2008 to the first quarter of 2009.

• We reported a net loss attributable to Office Depot, Inc. of $55 million for the first quarter of 2009 compared to net earnings attributable to Office Depot, Inc. of $69 million in the same quarter of the prior year, and we reported a diluted loss attributable to Office Depot per share of $0.20 in the first quarter of 2009 versus diluted earnings attributable to Office Depot per share ("EPS") of $0.25 in the same period a year ago. After-tax Charges negatively impacted EPS by $0.30 in the first quarter of 2009 and $0.04 in the first quarter of 2008.

Charges and Division Results
Charges
During the fourth quarter of 2008, we performed an internal review of assets and processes with the goal of positioning the company to respond to the continued degradation in the global economy and to position the company for its eventual improvement. The results of that internal review led to decisions to close stores, close certain distribution facilities, exit certain businesses and write off certain assets that were not seen as providing sufficient future benefit. Expenses associated with future activities will be recognized as the individual plans are implemented and the related accounting recognition criteria are met. We currently estimate recognizing $110 million of Charges during the remainder of 2009, for a 2009 total of $230 million. As with any estimate, the timing and amounts may change when projects are implemented and such changes may be significant. Also, changes in foreign currency exchange rates will have an impact on amounts reported in U.S. dollars related to foreign operations. Charges recognized in the first quarter of 2008 related to a previous business review program.
Our measurement of Division operating profit excludes the Charges because they are evaluated internally at the corporate level. The Charges recognized during the first quarter of 2009 and 2008 are included in the following lines in our Condensed Consolidated Statement of Operations.

                                                               First Quarter
       (In millions)                                          2009        2008

       Cost of goods sold and occupancy costs               $     10      $   -
       Store and warehouse operating and selling expenses         96          8
       General and administrative expenses                        14          3

       Total Charges                                        $    120      $  11

Other
The portion of General and Administrative ("G&A") expenses considered directly or closely related to unit activity is included in the measurement of Division operating profit. Other companies may charge more or less G&A 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.
We have prepared our financial statements in each period based on information available at the time, however, changes in estimates may impact our financial statements in future periods. For additional information on our accounting estimates, see Critical Accounting Policies in our 2008 Form 10-K. North American Retail Division

                                                  First Quarter
                 (Dollars in millions)         2009          2008

                 Sales                       $ 1,436.4     $ 1,713.5
                 % change                        (16)%          (7)%

                 Division operating profit   $    81.3     $    82.5
                 % of sales                       5.7%          4.8%

First quarter sales in the North American Retail Division were $1.4 billion, down 16% from the prior year. Comparable store sales in the 1,138 stores in the U.S. and Canada that have been open for more than one year decreased 17% versus the first quarter of 2008. While transaction counts were down compared to last year, average order value was the greater contributor to our sales decline. This decrease in sales was driven by macroeconomic factors as consumers and small business customers reduced their spending, especially on large ticket items like furniture and computers, and our deliberate decision to be less aggressive with advertising promotions in certain categories. Within each of our three major product categories of supplies, technology and furniture, we experienced a sales decline compared to the first quarter of 2008. The greatest percentage declines were in furniture and technology, and our best performing categories, although still negative, continued to be ink, toner, paper and Design, Print and Ship services. Our stores in Florida and California continued to negatively impact our results, as our small business customers in these two markets continue to be impacted by weak economic conditions, high unemployment levels and limited access to liquidity. Combined, our stores in these two states represented approximately one-third of our comparable store sales decline in the first quarter.
The North American Retail Division reported an operating profit of approximately $81 million in the first quarter of 2009, compared to $82 million in the same period of the prior year. This measure of operating performance is consistent with the internal reporting of results used to manage the business and allocate resources but does not include charges associated with the strategic decisions made as part of the internal review initiated during the fourth quarter of 2008. Please see Charges discussion in the MD&A Overview section above. Improvement in product margins resulted in an increase in operating profit of approximately $27 million. This improvement primarily related to changes in product mix as core supplies and key services contributed a larger portion of our sales compared to the first quarter of 2008. We also experienced improved rates in most product categories. Additionally, we recognized lower charges for shrink and inventory valuation in the first quarter of 2009. This reduction, which resulted from our efforts to lower our inventory, minimize clearance and reduce shrink exposure, resulted in a $15 million increase to operating profit compared to the first quarter of 2008. We also had a $15 million comparative benefit by closing the 112 stores identified as part of the strategic review we initiated in the fourth quarter of 2008. Expense management throughout the Division, including lower advertising and pre-opening expenses, resulted in a $13 million improvement in operating profit compared to the first quarter of 2008. On the negative side, operating profit decreased by approximately $71 million as a result of the flow through impact from our sales volume decline.
At the end of the first quarter of 2009, Office Depot operated 1,160 office products stores throughout the U.S. and Canada. We closed 107 stores during the period, 106 of which were closed as part of the strategic review initiated in the fourth quarter of 2008. We did not open any stores in the first quarter of 2009. We plan to open 12 or fewer new stores over the remainder of 2009. Our per store inventory at the end of the first quarter of 2009 was approximately $635,000, down 27% from the end of the first quarter of 2008. Average inventory per store in the first quarter of 2009 was $657,000, down 31% from the same period last year. These declines are a result of improved inventory management and our reduced exposure to higher dollar value inventory items.
As we look at the second quarter, which is historically our weakest sales quarter of the year, we expect operating profit to be negative as we de-leverage on these lower sales levels.

North American Business Solutions Division

                                                  First Quarter
                  (Dollars in millions)        2009         2008

                  Sales                       $ 914.1     $ 1,104.0
                  % change                      (17)%          (5)%

                  Division operating profit   $  33.1     $    59.6
                  % of sales                     3.6%          5.4%

First quarter sales in the North American Business Solutions Division were $914 million, down 17% compared to the first quarter of 2008. This decline was principally driven by a decrease in the number of transactions, which resulted from continued significant spending decreases by our customers. Sales to both our small to medium-sized business customers and our large, national account customers continued to decline in the first quarter. On a product category basis, the Division continued to see weakness in furniture, technology and peripherals, as customers delayed their purchases of durables in favor of consumables. The sales decline in our business in Florida and California continued to exceed the overall rate of decline for the entire business in the first quarter of 2009. These two states continue to represent about 30% of Division revenue and about one-third of the revenue decline from the first quarter of 2008.
The North American Business Solutions Division reported an operating profit of approximately $33 million in the first quarter of 2009, compared to $60 million in the same period of the prior year. Approximately $13 million of the decline resulted from lower product margins, reflecting a less profitable mix, cost increases that could not be passed on to our customers and increased promotions in our direct business. These negative impacts on product margins were partially offset by increased vendor program funds compared to the first quarter of 2008. Approximately $36 million of the operating profit decline relates to the flow through impact of lower sales levels. Partially offsetting this decline were positive impacts of approximately $22 million, including reduced selling and general and administrative expenses.
As we look at the second quarter, we do not expect a material change in our customers' spending patterns. We will continue to focus on maintaining and expanding our customer base while effectively managing capital and operating costs.
International Division

                                                      First Quarter
               (Dollars in millions)               2009         2008

               Sales                              $ 874.7     $ 1,144.5
               % change                             (24)%            6%
               % change in local currency sales      (9)%          (4)%

               Division operating profit          $  18.5     $    60.2
               % of sales                            2.1%          5.3%

The International Division reported first quarter sales of $875 million, a decrease of 24% in U.S. dollars. Local currency sales decreased 9%, with nearly all countries in which we operate reporting sales declines compared to the first quarter of 2008. The U.K., France, and the Netherlands all reported double-digit declines in local currency sales and combined, accounted for approximately three-quarters of the overall decrease in revenue. Similar to North America, conditions internationally remain difficult as business investment and office supply expenditures continue to be reduced in the face of weakening demand as our customers face worsening cash flows, tight credit conditions, deteriorating profitability, and serious concerns and uncertainties about the potential depth and duration of the global recession. Sales in the direct business declined 12% in local currency, because of continued softness in big ticket items such as furniture and technology, increased competitiveness within the channel, and a general decline in the frequency and size of purchases as customers limit their purchases to business essentials. Sales in the contract business were down 8% in local currency. This decline is mostly attributable to larger businesses reducing their non-essential expenditures, as well as limiting purchases of office supplies to primarily their core lists, which typically offer office products with lower margins. International retail sales were flat compared to the first quarter of 2008.

The International Division reported an operating profit of approximately $19 million in the first quarter of 2009, compared to $60 million in the same period of the prior year. This measure of operating performance is consistent with the internal reporting of results used to manage the business and allocate resources but does not include charges associated with the strategic decisions made as part of the internal review initiated during the fourth quarter of 2008. Please see Charges discussion in the MD&A Overview section above.
Approximately $42 million of the decrease in operating profit resulted from the flow through impact of lower sales levels. Additionally, an increase in promotional activity and cost increases that could not fully be passed on to our customers negatively impacted operating profit by approximately $13 million. Changes in foreign exchange rates driven by a stronger U.S. dollar unfavorably impacted operating profit by $7 million compared to the first quarter of 2008. Partially offsetting these negative factors was improvement in our operating expenses as we reduced selling and distribution costs by approximately $21 million.
As we look at the second quarter, we do not expect a significant change in the economic situation in our broad international markets. We expect to see declines in local currency sales and lower operating profit when compared to the prior year.
Corporate and Other
General and Administrative Expenses: Total G&A decreased from $199 million in the first quarter of 2008 to $176 million in the first quarter of 2009. As noted above, the portion of G&A expenses considered directly or closely related to unit activity is included in the measurement of Division operating profit above. The remainder of the total G&A expenses are considered corporate expenses. A breakdown of G&A is provided in the following table:

                                            First Quarter
                         (In millions)    2009        2008

                         Division G&A    $  89.2     $ 107.1
                         Corporate G&A      87.2        91.5

                         Total G&A       $ 176.4     $ 198.6

The decrease in Division G&A was primarily driven by the impact of changes in foreign exchange rates and cost reduction initiatives. Corporate G&A includes Charges of $14 million in the first quarter of 2009 and $3 million in the first quarter of 2008. After considering the impact of Charges recognized in the period, corporate G&A fell by approximately $15 million during the first quarter of 2009 compared to the same period of 2008 primarily reflecting lower payroll costs and reduced legal and professional fees.
During 2006, we sold our former corporate campus and leased the facility back as construction of a new facility was being completed. The amortization of the deferred gain on the sale recognized during the first quarter of 2008 largely offset the rent expense incurred during the period.
Other income (expense): The increase in net interest costs was driven by increased interest expense, which resulted primarily from the amortization of debt issuance costs related to our asset based credit facility and the interest expense recognized on the capital lease associated with our new corporate campus. We also experienced higher levels of outstanding letters of credit compared to the first quarter of 2008.

The decrease in net miscellaneous income (expense) in the first quarter reflects the comparison to a $5 million gain recognized in 2008 from the sale of a non-operating asset, additional foreign currency losses in the first quarter of 2009 and lower equity in earnings from our joint venture in Mexico, Office Depot de Mexico, which resulted primarily from changes in foreign currency exchange rates.
Other - Income Taxes: Our effective tax rate was 31.5% and 31.1% for the first quarters of 2009 and 2008, respectively. The effective tax rate may change due to shifts in domestic and international income and other factors. We anticipate our full year base operating rate to be approximately 31% to 32%. However, the effective tax rate in future periods can be affected by variability in our mix of income, the tax rates in various jurisdictions, changes in the rules related to accounting for income taxes, outcomes from tax audits that regularly are in process and our assessment of the need for accruals for uncertain tax positions. Additionally, should the company's results in the U.S. and certain international jurisdictions deteriorate throughout 2009, a valuation allowance may be required on approximately $390 million of existing deferred tax assets and the future tax benefits would be significantly reduced or eliminated for some time. Further, certain of the restructuring activities associated with our strategic review could result in an increase in tax expense, depending on the ultimate structures put in place. Should either of these materialize, the company currently does not believe this additional tax expense would have a cash tax impact in the current fiscal year.
The company periodically seeks to limit future tax expense by entering into tax ruling agreements with international jurisdictions. It is possible that the company may have to concede significant tax attributes in the negotiating process which may increase tax expense. Such a concession should not have a near-term cash tax impact.
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 2009, we had approximately $176 million of cash and cash equivalents and $630 million available under our asset based revolving credit facility based on the March borrowing base certificate. The current and anticipated future challenging economic conditions impact the market for short-term liquidity, but we consider our resources adequate to satisfy our cash needs at least over the next twelve months. We anticipate that market conditions will continue to be challenging through 2009, and in response, we are focused on maximizing cash flow. We have made strong progress towards reducing inventory levels and remain focused on collecting our accounts receivable balances. During the first quarter of 2009, we entered into sale-leaseback transactions and sales of certain assets, and we continue to look at ways to enhance our liquidity position. Our asset based revolving credit facility is also available to support working capital needs. Based on our current assessment of 2009 cash flow, we believe we have sufficient liquidity to withstand the continuation of difficult economic conditions; however, we may consider additional financing alternatives, depending on market and business conditions.
At March 28, 2009, we were not drawn on our asset based revolving credit facility (the "Facility"). There were letters of credit outstanding under the Facility totaling approximately $160 million. An additional $1 million of letters of credit were outstanding under separate agreements. Average borrowings under the Facility from December 27, 2008 to March 28, 2009 were approximately $240 million at an average interest rate of 4.17%.
During the first quarter of 2009, cash provided by operating activities totaled $98 million compared to $127 million during the same period last year. This decrease primarily reflects a reduction in business performance of approximately $124 million. Depreciation and amortization decreased by $10 million quarter over quarter as a result of the impairment of fixed and intangible assets we recorded in the fourth quarter of 2008. Changes in net working capital and other components resulted in a $75 million source of cash in the first quarter of 2009, compared to a $33 million use of cash in the first quarter of 2008. This improvement was driven by our continued focus on controlling our inventory levels and collecting accounts receivable balances. Additionally, this caption includes a $14 million dividend received from our joint venture in Mexico as well as the impact of non-cash Charges and increases in accruals for severance and lease obligations recognized during the first quarter of 2009. Working capital is influenced by a number of factors including the flow of goods, credit terms, timing of promotions, vendor production planning, new product introductions and working capital management. For our accounting policy on cash management, see Note A of the Notes to Condensed Consolidated Financial Statements.

Cash provided by investing activities was $67 million in the first quarter of 2009, compared to a use of $80 million in the same period last year. The cash inflow for the first quarter of 2009 reflects $98 million of proceeds from several sale and sale-leaseback transactions related to the strategic review and our efforts to enhance our liquidity. One transaction was the sale of an asset previously classified as a capital lease. Payments to satisfy the existing capital lease obligation are included in the financing section.
Capital expenditures totaled approximately $31 million in the first quarter of 2009, compared to $106 million in the first quarter of 2008. The decrease primarily reflects a reduction in store openings and remodels as well as a decrease in spending related to our information systems and distribution networks. Investing activities in the first quarter of 2008 included $106 million of capital expenditures for new store openings in North America, as well as distribution network infrastructure costs and investments in information technology. During the first quarter of 2008, we sold certain non-operating assets, realizing a gain of approximately $5 million. Additionally, $18 million of cash that had been held in a restricted account at the end of 2007 was released during the quarter. We anticipate capital expenditures for the full year 2009 to be approximately $125 million. We believe our cash on hand, cash from operations, anticipated liquidity actions and our existing credit facility will be sufficient to satisfy our anticipated capital expenditures. Cash used in financing activities was approximately $140 million in the first quarter of 2009, compared to $92 million during the same period in 2008. During the first quarter of 2009, we made payments of $139 million on our asset based credit facility, capital lease payments of $29 million and incurred approximately $19 million in debt as a result of a land sale and leaseback that was treated as a financing transaction, as well as approximately $9 million of other short-term borrowings. Cash used in financing activities in the first quarter of 2008 also primarily reflects debt repayments.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires management to make judgments and estimates. Some accounting policies have a significant impact on amounts reported in these financial statements. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2008 Form 10-K, filed on February 24, 2009, in the Notes to the Consolidated Financial Statements, Note A, and the Critical Accounting Policies section.
Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risks
At March 28, 2009, there had not been a material change in the interest rate risk information disclosed in the "Market Sensitive Risks and Positions" subsection of the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of our 2008 Form 10-K.

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