Office Depot is truly an outstanding company—a fact that’s clearly evidenced by our status as the largest supplier of office products and services in the world. Despite our Company’s well-deserved market position, in 2000, we posted disappointing sales performance in our North American Retail stores. Our management team is intently focused on restoring this segment of our Company to a healthy growth rate, generating greater value for shareholders and making Office Depot a more compelling place to invest in 2001. During 2000, we took several steps to help us accomplish these goals.

To guide our Company toward improved performance, we realigned our leadership structure to create a more cohesive and more coordinated management team—and one that is directly accountable to our most senior management. As a result, we feel that we now have the right people focused on the right issues, and we have them operating in a logical and streamlined framework that demands greater accountability for the areas that are crucial to our success. During 2000, we also undertook a thorough and comprehensive analysis of our stores, markets and warehouse operations to identify ways to improve efficiencies, drive sales and leverage our cost structure, while enhancing Office Depot’s total customer experience. This review focused on our customers, the realities of the industry, the competitive landscape and the capabilities of our organization. The findings of our analysis were clear: Our business model is an excellent one, but we must narrow our focus to pursuing fewer objectives in a more efficient manner in order to deliver improved earnings. We have identified our core customers, and we want to deliver to those customers the products and services they need in order to solve their business problems and to be successful.

A key outcome of our comprehensive business review completed last Fall is that Office Depot has become “smarter” about how to plan and achieve our growth. For example, we adopted a more selective and analytical approach to our real estate strategy that called for us to withdraw from four U.S. metropolitan markets, close 70 under-performing retail stores in the U.S. and Canada and close six Office Depot Express stores in France. We have decided to remodel a number of existing stores, scale back the number of planned new store openings and trim the average square footage of our new North American stores to a more efficient size of 20,000 square feet. Moreover, we have begun to conduct more intensive market reviews on each new store site that we select to determine a more precise evaluation of the profit potential and return on investment we should expect to realize in each location.

We have also examined ways to bring our costs better into line and to leverage our cost structure more effectively. We are carefully managing warehouse capacity and complexity and relocating warehouses in Atlanta and Baltimore. We are preparing to utilize third party wholesalers to offset the planned SKU reductions in our warehouses, while providing improved service levels and better “in stock” positions on products that customers buy most frequently. We are investing in new technologies to improve the quality and efficiency of our U.S. warehouses. We are also engaged in warehouse consolidation and integration activities that should improve productivity, eliminate redundancies and cut labor expenses.