The ODP Corporation (ODP) Q1 Earnings Top Estimates,Sales Down

The ODP Corporation ODP posted first-quarter 2021 results, with the top line missing the Zacks Consensus Estimate and the bottom line surpassing the same. Moreover, the company’s top line declined year on year. Performance during the quarter was adversely impacted by operational disruptions caused by the COVID-19 pandemic. In fact, sales fell across all the three business units.

Despite a challenging operating environment, the company continued to execute cost-efficiency measures, which supported free cash flow results. Moreover, the company is gaining from its strong omni-channel offerings. In a separate release, the company informed about its plans to boost shareholders’ value through a spinoff of its B2B businesses. The separation plans are likely to have boosted investors’ optimism in the stock, as shares increased 8.8% during the trading session on May 5.

Let’s Introspect

This provider of business services and supplies, products and digital workplace technology solutions posted adjusted earnings of $1.21 per share, which surpassed the Zacks Consensus Estimate of $1.02. The bottom line remained flat year on year.

The ODP Corporation’s total sales of $2,366 million came below the consensus mark of $2,411 million and declined 13% year over year. Top-line performance was mainly affected by fewer retail stores in service and reduced sales driven by adversities emerging from the COVID-19 pandemic.

Moreover, product sales during the quarter were down 12% year on year to $2,051 million. Service revenues declined 19% to $315 million as a result of lower comparable sales at the CompuCom unit as well as reduced sales of services across the Business Solutions Division and Retail Division.

Adjusted operating income amounted to $91 million, down from $108 million reported in the year-ago quarter, including the impacts stemming from the pandemic. Moreover, adjusted operating margin contracted 20 basis points (bps) to 3.8%. Adjusted EBITDA of $138 million fell from $157 million in the prior-year quarter.

The ODP Corporation Price, Consensus and EPS Surprise

The ODP Corporation price-consensus-eps-surprise-chart | The ODP Corporation Quote

Segment Performance

The Business Solutions Division’s sales declined 16% year over year to $1,127 million, thanks to the coronavirus pandemic that adversely impacted the company’s contract channel sales as business operations were interrupted and schools remained shut. Nonetheless, the company witnessed demand rise of 3% in e-commerce channel. Adjacency categories — including cleaning and breakroom, personal protective equipment, technology, furniture, and copy and print — contributed 44% to overall Business Solutions Division sales.

Segment operating income came in at $17 million, down from $40 million reported in the year-ago period, while operating margin shrunk 150 bps to 1.5%. Management informed that reduced sales volume owing to the pandemic and product mix impacted the metric. This was partly mitigated by cost efficiency measures.

In the reported quarter, the Retail Division’s sales fell 10% to $1,039 million due to the planned shutdown of underperforming outlets. The company had 149 lesser retail outlets at the end of the quarter under review on a year-over-year basis. However, this was partly offset by higher sales per shopper and growth in demand for certain adjacency products. Moreover, the company witnessed a 35% jump in the buy-online, pick-up-in-store offerings.

Impressively, segment operating income of $100 million surged 15% from the prior-year quarter’s number, while operating margin expanded 210 basis points to 9.6%. This upside was primarily fueled by lower operating lease costs, reduced SG&A expenses owing to cost-containment efforts as well as improvements in distribution and inventory management costs.

Total store count at the division was 1,146 at the quarter end. During the reported quarter, the company shuttered 8 outlets.

The CompuCom Division generated sales of $196 million in the quarter, down 17% year over year, thanks to lower services volumes due to the pandemic. Moreover, the segment’s performance was adversely impacted by lower billed service revenues due to the malware incident.

The segment reported operating loss of $1 million compared with operating income of $3 million in the year-ago period.

Plans to Split Business Operations & Other Developments

The company announced its plans to split itself into two independent publicly traded companies. Markedly, the company will be spinning off its Business Solutions Division contract unit, Grand & Toy and independent regional office-supply distribution operations. This tax-free spinoff will create the entity — “NewCo”.

NewCo will own the B2B digital platform technology business, including BuyerQuest, as well as global sourcing office and other sourcing, supply chain and logistics assets. The separation is expected to be completed during the first half of 2022. Management believes that the separation is likely to improve strategic focus and help create the long-term value for its shareholders.

In accordance with the plans to split operations, The ODP Corporation will be retaining its retail consumer and small-business products and services

We note that The ODP Corporation, which currently carries a Zacks Rank #3 (Hold), has been striving to expand into higher value industry segments. As part of this strategy, it has made notable progress on its B2B pivot and digital transformation initiatives. Progressing along these lines, the company’s digital platform integrated BuyerQuest — a leader in cloud-based enterprise Procure-to-Pay (P2P) software. The company also extended its collaboration with Microsoft. Apart from these, management informed that the sale proceeds for CompuCom is on track.

Other Financial Details

The ODP Corporation ended the quarter with total available liquidity of about $1.7 billion, comprising $753 million in cash and cash equivalents as well as $946 million of available credit under the Third Amended Credit Agreement. As of Mar 27, 2021, total debt was $367 million.

For the quarter, cash provided by operating activities was $86 million. Also, management incurred capital expenditure of $13 million in the quarter. Adjusted free cash flow amounted to $79 million in the quarter under review.

Additionally the company announced a new share repurchase program worth $300 million. The new program is available through Jun 30, 2022. This replaces the current share repurchase program that was temporarily suspended during the onset of the pandemic.

We note that shares of the company have fallen 2.8% in the past three month against the industry’s growth of 3.6%.

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