Office Depot (ODP) Beats Q1 Earnings Estimates, Stock Up

Office Depot, Inc. ODP reported better-than-expected earnings for the third consecutive quarter, when the company came out with first-quarter 2017 numbers. This followed strategic measures the office supplies retailer has undertaken to bring itself back onto its growth trajectory following the ruling out of its merger with Staples, Inc. SPLS.

Following, the result the company shares surged nearly 7% during pre-market trading hours. In fact, in the past six months the company’s shares have gained nearly 28.7%, outperforming the Zacks categorized Retail-Miscellaneous/Diversified industry that increased 1.4%.

Overall Quarterly Performance

Office Depot posted adjusted earnings per share from continuing operations of 16 cents that came ahead of the Zacks Consensus Estimate of 12 cents and jumped 33.3% from the prior-year quarter. Including one-time items, the company delivered earnings of 14 cents a share from continuing operations in comparison with 11 cents in the prior-year period.

However, the company’s top-line continues to struggle, missing the Zacks Consensus Estimate for the 11^th consecutive quarter. Sales of $2,676 million lagged the Zacks Consensus Estimate of $2,730 million and declined 7% year over year.

Analysts pointed out that demand for office products (paper-based) has been decreasing due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Moreover, there has been persistent weakness in the office products sector. Further, stiff competition from online retailers such as Amazon.com, Inc. AMZN has been hampering Office Depot.

Nevertheless, the company is closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, concentrating on eCommerce platforms as well as focusing on offering innovative products and services.

Gross profit fell 5.6% year over year to $675 million, however, gross margin expanded 30 basis points (bps) to 25.2%. Adjusted operating income came in at $151 million, up 21.8% from the year-ago period, while adjusted operating margin increased 130 bps to 5.6%.

Segment Performance

In the reported quarter, the North American Retail division’s sales fell 9.8% to $1,358 million on account of planned closure of stores and a 5% drop in comparable-store sales (comps). Comps declined due to a fall in store traffic.

The segment reported operating income of $112 million, up 9.8% from the prior-year quarter, whereas operating margin expanded 140 basis points to 8.2%. This came on the back of cost containment efforts, closing of underperforming stores and Comprehensive Business Review.

Total store count at the North American Retail division was 1,439 at quarter end. During the quarter, the company shut down 2 outlets.

Sales for North American Business Solutions slipped 3.9% (or down 4% in constant currency) to $1,315 million owing to lower sales in the contract channel mainly account of customer attrition. The company registered flat sales in the direct channel as higher online sales were offset by lower catalog sales.

The division posted operating income of $58 million, surging 26.1% year over year, while operating margin expanded 100 bps to 4.4% on account of effective cost management, including lower SG&A expenses.

Office Depot, Inc. Price, Consensus and EPS Surprise

 

Office Depot, Inc. Price, Consensus and EPS Surprise | Office Depot, Inc. Quote

Other Financial Details

Office Depot ended the quarter with cash and cash equivalents of $744 million, long-term debt (net of current maturities) of $353 million, non-recourse debt of $792 million, and shareholders’ equity of $1,954 million.

Management expects to generate free cash flow from continuing operations of over $300 million in 2017. The company incurred capital expenditures of $30 million during the quarter under review. Management expects capital expenditures of approximately $200 million in 2017, which comprises of investments to fund critical priorities as well as the Store of the Future test format.

During the quarter, the company bought back 2 million shares for an aggregate amount of $10 million. Since May 2016, the company has bought back approximately 39 million shares at a total cost of $142 million with $108 million remaining at its disposal under the current share repurchase authorization of $250 million.

Discontinuation of International Business

Office Depot reached an agreement to divest operations in Australia and New Zealand to Platinum Equity. However, the terms of the transaction are kept under wraps. Recently, the company concluded the sale of its South Korean business. Earlier in January, the company completed the sale of European business to The AURELIUS Group.

However, the company plans to retain sourcing and trading operations in Asia. Results from the Asia operations are reported as “Other” segment outside of the North American segments.

Outlook

Management expects total sales to be lower in 2017 in comparison with 2016, owing to the store closures, tough market conditions and losses of contract customers in the previous year. However, management anticipates the rate of decline to decelerate throughout 2017 taking into consideration higher customer retention and improvement in the contract channel sales pipeline, along with the implementation of new customer wins. Office Depot expects adjusted operating income of about $500 million in 2017.

Strategic Measures

After termination of the merger with Staples, Office Depot has undertaken a strategic review of business operating model, growth prospects and cost structure. The company, by increasing penetration into adjacent categories and enhancing share of wallet with existing customers, intends to boost sales in the contract channel. Further, the company can leverage existing customer base by offering an expanded assortment of products.

Office Depot is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs as well as general and administrative expenditures. Further, the company will also gain from its U.S. retail store optimization plan. Management expects these endeavors to result in annual benefits of over $250 million by the end of 2018, with nearly half of those benefits are expected to be realized in 2017.

Zacks Rank

Office Depot currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the retail sector is Build-A-Bear Workshop, Inc. BBW with a Zacks Rank #1 (Strong Buy) and a long-term earnings growth rate of 22.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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