Office Depot seeks to go public to fund expansion

Discount Store News, May 23, 1988 by Laura Liebeck

Office Depot Seeks to Go Public To Fund Expansion

BOCA RATON, Fla.- Office Depot, the 12-unit office products megastore based here, last month filed a preliminary prospectus with the Securities and Exchange Commission for an initial public offering that could fetch the 2-year-old specialty retailer between $25.2 million and $29.4 million.

The proceeds will be used to fund the company's future growth, as working capital and to pay off debt, according to the preliminary prospectus dated April 21, 1988.

The preliminary prospectus calls for the sale of 2.1 million shares of common stock, 1.7 million of which to be sold by the company and 400,000 are being sold by the selling stockholders, for between $12 and $14 per share.

Merrill Lynch Capital Markets is listed on the preliminary prospectus as the chief underwriter and Bear, Stearns & Co., the associate underwriter.

A final prospectus is expected by the end of May.

Merrill Lynch, lead underwriter, and Steve Dougherty, president of Office Depot, declined comment on the preliminary prospectus, as did others close to the company.

If Office Depot's attempt is successful, the office products megastore would be the first company in the burgeoning office supply specialty industry to turn to the public sector for capital. Its success or failure could affect how other megastore retailers are treated in similar bids.

Staples, the office products industry's first megastore, has announced that it hopes to go public next year.

No other megastore has made a similar announcement.

Office Depot reported in its prospectus that it intends to grow rapidly, opening about 14 new stores this year followed by 18 units in 1989.

The Florida-based specialty retailer currently operates 19,000-square-foot warehouse-type office supply stores in the states of Florida, Georgia, Texas and North Carolina. Each unit offers 6,500 sku's of general office supplies, business machines, office furniture and other related products at between 40 percent and 60 percent off retailer list prices.

The company reported that it plans to continue expanding in the Southeast and in the South Central states, according to the prospectus.

Last year, Office Depot's first full year of operation produced sales of $33.68 million and a net loss of $2.29 million, according to the prospectus. On a weekly basis, Office Depot reported sales averaged $129,000 in 1987 compared to $153,000 during the first quarter of 1988. During the first three months of this year, Office Depot posted sales of $21.76 million.

The preliminary prospectus, which is only a registration document and not a solicitation of sale, list 10 "risk factors" associated with Office Depot's prospectus, including limited operating history; a history of losses; intense competition; expansion plan commitments; dependence on key personnel; and insider control.

These insiders, the company's executive officers and directors who own 5 percent or more of Office Depot's outstanding common stock, "together with their affiliates, will continue to beneficially own approximately 63.7 percent of the outstanding common stock, and, therefore, will continue to be in a position to control the company," the prospectus asserted.

In addition, the prospectus reported that "for the foreseeable future" all earnings will be retained by the company to support its expansion.

According to the prospectus, $13 per share is used as the assumed public offering price, and Office Depot will receive approximately $20.18 million from the sale of the 1.7 million shares of common stock after estimated expenses in connection with the offering are satisfied.

Office Depot was founded in March 1986 by the late F. Patrick Sher, the former chairman and chief executive officer, Dougherty, president, and Jack Kopkin, executive vice president. All were formerly associated with Home-owner's Warehouse, the home improvement company that Sher sold to Service Merchandise in 1983 and renamed Mr. HOW Warehouse. The catalog showroom chain eventually sold off the Mr. HOW units to a variety of buyers, including Builders Square, the home center warehouse subsidiary of K mart Corp.

The first Office Depot store opened in October 1986.

After Sher died last October, he was succeeded by David Fuente, the current chairman and ceo.

Office Depot reported in the preliminary prospectus that from its inception through first quarter 1988, general office supplies constituted the largest portion of its sales, now 42 percent. Business machines, business supplies and computer accessories, are second, at 30.3 percent, a growing percentage, followed by office furniture, 17.7 percent. "Other" products comprise 10 percent of sales.

Gross margins have ranged from a low of 23.2 percent of sales to 24.9 percent during the most recent quarter.

Office Depot reported in the preliminary prospectus that it needs 12 to 13 weeks and about $400,000 to renovate, fixtures and equip a newly leased unit for an opening.

New stores are generally outfitted with about $1.2 million in inventory, $500,000 of which is financed by Office Depot and the rest on purchase terms offered by vendors. Preopening expenses, which cover salaries and supplies, primarily, average about $75,000 per store, the prospectus reported.