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Office Depot, Inc. (ODP - Free Report) came out with its maiden earnings after an attempt to merge with Staples, Inc. in a $6.3 billion deal fell through. This office supplies retailer, apart from reporting second-quarter 2016 results, highlighted the strategic measures it has undertaken to bring itself back on the growth trajectory, and also announced shareholder-friendly moves. Well, these announcements were enough to boost investors’ confidence in the stock that gained roughly 5.6% in the trading hours yesterday and another 2% in the after-market trading session.
It is to be noted that shares of this Boca Raton, FL-based company jumped despite registering an earnings and revenue miss for the fourth and eighth straight quarter, respectively, alongside declining 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. Not to forget stiff competition from online retailers such as Amazon.com, Inc. (AMZN - Free Report) has been also playing spoilsport for Office Depot.
Office Depot posted adjusted earnings of 3 cents per share that missed the Zacks Consensus Estimate of 6 cents and plunged 50% from the year-ago quarter. Including one-time items, the company delivered earnings of 38 cents per share as against a loss of 11 cents in the prior-year period.
The company’s top line of $3,218 million lagged the Zacks Consensus Estimate of $3,222 million and also declined 6% year over year. Excluding the impact of U.S. retail store closures and foreign currency translation, sales dropped 3%.
Gross profit fell 8% year over year to $747 million, whereas gross margin contracted 50 basis points (bps) to 23.2%. Adjusted operating income came in at $67 million, down 8% from the year-ago period, while adjusted operating margin remained flat at 2.1%.
Segment Performance
In the reported quarter, the North American Retail division’s revenues fell 7% to $1,249 million due to the planned closure of stores. Comparable-store sales dipped 1% year over year on account of lower transaction counts, partly offset by an increase in average order value.
The segment reported operating income of $30 million, down substantially from $42 million in the prior-year quarter. The decline is attributable to favorable legal settlements registered in the year-ago period and a lower gross margin rate, partly offset by a fall in occupancy costs and SG&A expenses. Segment operating margin contracted 70 bps to 2.4%.
Total store count at the North American Retail division was 1,513 at quarter end. During the quarter, the company shut down 42 outlets, thus concluding the earlier announced 400 store closure plan.
Revenues for North American Business Solutions declined 7% to $1,330 million (or 7% on a constant currency basis) owing to lower sales in both the contract and direct channels.
The division posted operating income of $63 million, flat with the prior-year quarter, while operating margin expanded 30 bps to 4.7% on account of higher gross margin rate and lower SG&A expenses.
The International division’s revenues tumbled 4% to $639 million due to foreign currency headwinds. On a constant currency basis too, sales dropped 2% as a result of the sustained business disruption from the merger-related issues and review of strategic alternatives for European operations, the exit of unsuccessful venture in Asia, and stiff competition.
The division reported operating loss of $10 million as against operating income of $2 million in the year-ago quarter, resulting from lower sales and contraction in gross margin rate, partly offset by lower SG&A expenses.
At the end of the quarter, total store count at the International division was 289–149 company-owned outlets and 140 outlets operated by franchisees and licensees.
Other Financial Details
Office Depot ended the quarter with cash and cash equivalents of $1,118 million, long-term debt (net of current maturities) of $617 million, non-recourse debt of $808 million and shareholders’ equity of $1,860 million. The company also extended its $1.2 billion asset-based credit facility for five more years. Moreover, it will redeem 9.75% senior secured notes due 2019 in September, which will result in annual cash interest savings of about $24 million.
Management expects to generate free cash flow over $200 million in 2016 and in excess of $300 million in 2017. The company incurred capital expenditures of $23 million during the quarter, comprising $6 million related to merger integration. Management anticipates capital expenditures of approximately $175 million in 2016, including $50 million related to merger integration.
Office Depot also announced the commencement of quarterly dividend. The initial dividend of 2.5 cents a share (10 cents a share on an annualized basis) will be paid on Sep 15, 2016, to stockholders of record as on Aug 25.
In May 2016, Office Depot’s board of directors authorized a share buyback program of up to $100 million, and as of Jul 29, the company has bought back about 16 million shares for an aggregate amount of $55 million. Recently, the company’s board enhanced the share buyback program to $250 million from the prior authorization of $100 million. During the quarter, the company bought back 7 million shares aggregating $26 million.
Outlook
Management expects total sales to be lower in 2016 in comparison with 2015 on account of store closures, business disruption owing to merger related issues and tough market conditions. Office Depot now projects adjusted operating income between $450 million and $470 million in 2016.
During the second quarter, the company shuttered 42 stores with respect to its U.S. retail store optimization plan. In the second phase, the company plans to close about 25 more outlets in 2016.
Office Depot reiterated annual run-rate merger synergy benefits in excess of $750 million from the OfficeMax integration, which is likely to be concluded by the end of next year, and expects to incur merger integration expenses of about $70 million in 2016 and the remaining $30 million in 2017.
After the 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 its penetration into adjacent categories and enhancing share of wallet with existing customers, intends to boost sales in the contract channel. The company can also leverage its existing customer base by offering an expanded assortment of products.
As part of its U.S. retail store optimization program launched in 2014, the company had shuttered 400 stores in the first phase, and plans to close 300 more stores over the next three year time frame. The company is also focusing on smaller format stores of 15,000 square feet to better serve customers. As part of the pilot program the company converted 3 stores in July and plans to test this format at 24 stores by the end of this year, with 100 stores targeted for next year.
Coming to the cost containment efforts, Office Depot is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs and general and administrative expenditures, and also gaining 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. This, together with synergy benefits in excess of $750 million, will amount to total annual savings of $1 billion by the end of 2018.
Zacks Rank
Office Depot currently has a Zacks Rank #4 (Sell). A better-ranked stock in the space is Barnes & Noble, Inc. , carrying a Zacks Rank #2 (Buy).
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Office Depot (ODP) Q2 Earnings Miss, Reviews Strategies
Office Depot, Inc. (ODP - Free Report) came out with its maiden earnings after an attempt to merge with Staples, Inc. in a $6.3 billion deal fell through. This office supplies retailer, apart from reporting second-quarter 2016 results, highlighted the strategic measures it has undertaken to bring itself back on the growth trajectory, and also announced shareholder-friendly moves. Well, these announcements were enough to boost investors’ confidence in the stock that gained roughly 5.6% in the trading hours yesterday and another 2% in the after-market trading session.
It is to be noted that shares of this Boca Raton, FL-based company jumped despite registering an earnings and revenue miss for the fourth and eighth straight quarter, respectively, alongside declining 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. Not to forget stiff competition from online retailers such as Amazon.com, Inc. (AMZN - Free Report) has been also playing spoilsport for Office Depot.
Overall Quarterly Performance
Office Depot posted adjusted earnings of 3 cents per share that missed the Zacks Consensus Estimate of 6 cents and plunged 50% from the year-ago quarter. Including one-time items, the company delivered earnings of 38 cents per share as against a loss of 11 cents in the prior-year period.
The company’s top line of $3,218 million lagged the Zacks Consensus Estimate of $3,222 million and also declined 6% year over year. Excluding the impact of U.S. retail store closures and foreign currency translation, sales dropped 3%.
Gross profit fell 8% year over year to $747 million, whereas gross margin contracted 50 basis points (bps) to 23.2%. Adjusted operating income came in at $67 million, down 8% from the year-ago period, while adjusted operating margin remained flat at 2.1%.
Segment Performance
In the reported quarter, the North American Retail division’s revenues fell 7% to $1,249 million due to the planned closure of stores. Comparable-store sales dipped 1% year over year on account of lower transaction counts, partly offset by an increase in average order value.
The segment reported operating income of $30 million, down substantially from $42 million in the prior-year quarter. The decline is attributable to favorable legal settlements registered in the year-ago period and a lower gross margin rate, partly offset by a fall in occupancy costs and SG&A expenses. Segment operating margin contracted 70 bps to 2.4%.
Total store count at the North American Retail division was 1,513 at quarter end. During the quarter, the company shut down 42 outlets, thus concluding the earlier announced 400 store closure plan.
Revenues for North American Business Solutions declined 7% to $1,330 million (or 7% on a constant currency basis) owing to lower sales in both the contract and direct channels.
The division posted operating income of $63 million, flat with the prior-year quarter, while operating margin expanded 30 bps to 4.7% on account of higher gross margin rate and lower SG&A expenses.
The International division’s revenues tumbled 4% to $639 million due to foreign currency headwinds. On a constant currency basis too, sales dropped 2% as a result of the sustained business disruption from the merger-related issues and review of strategic alternatives for European operations, the exit of unsuccessful venture in Asia, and stiff competition.
The division reported operating loss of $10 million as against operating income of $2 million in the year-ago quarter, resulting from lower sales and contraction in gross margin rate, partly offset by lower SG&A expenses.
At the end of the quarter, total store count at the International division was 289–149 company-owned outlets and 140 outlets operated by franchisees and licensees.
Other Financial Details
Office Depot ended the quarter with cash and cash equivalents of $1,118 million, long-term debt (net of current maturities) of $617 million, non-recourse debt of $808 million and shareholders’ equity of $1,860 million. The company also extended its $1.2 billion asset-based credit facility for five more years. Moreover, it will redeem 9.75% senior secured notes due 2019 in September, which will result in annual cash interest savings of about $24 million.
Management expects to generate free cash flow over $200 million in 2016 and in excess of $300 million in 2017. The company incurred capital expenditures of $23 million during the quarter, comprising $6 million related to merger integration. Management anticipates capital expenditures of approximately $175 million in 2016, including $50 million related to merger integration.
Office Depot also announced the commencement of quarterly dividend. The initial dividend of 2.5 cents a share (10 cents a share on an annualized basis) will be paid on Sep 15, 2016, to stockholders of record as on Aug 25.
In May 2016, Office Depot’s board of directors authorized a share buyback program of up to $100 million, and as of Jul 29, the company has bought back about 16 million shares for an aggregate amount of $55 million. Recently, the company’s board enhanced the share buyback program to $250 million from the prior authorization of $100 million. During the quarter, the company bought back 7 million shares aggregating $26 million.
Outlook
Management expects total sales to be lower in 2016 in comparison with 2015 on account of store closures, business disruption owing to merger related issues and tough market conditions. Office Depot now projects adjusted operating income between $450 million and $470 million in 2016.
During the second quarter, the company shuttered 42 stores with respect to its U.S. retail store optimization plan. In the second phase, the company plans to close about 25 more outlets in 2016.
Office Depot reiterated annual run-rate merger synergy benefits in excess of $750 million from the OfficeMax integration, which is likely to be concluded by the end of next year, and expects to incur merger integration expenses of about $70 million in 2016 and the remaining $30 million in 2017.
OFFICE DEPOT Price, Consensus and EPS Surprise
OFFICE DEPOT Price, Consensus and EPS Surprise | OFFICE DEPOT Quote
Strategic Measures
After the 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 its penetration into adjacent categories and enhancing share of wallet with existing customers, intends to boost sales in the contract channel. The company can also leverage its existing customer base by offering an expanded assortment of products.
As part of its U.S. retail store optimization program launched in 2014, the company had shuttered 400 stores in the first phase, and plans to close 300 more stores over the next three year time frame. The company is also focusing on smaller format stores of 15,000 square feet to better serve customers. As part of the pilot program the company converted 3 stores in July and plans to test this format at 24 stores by the end of this year, with 100 stores targeted for next year.
Coming to the cost containment efforts, Office Depot is employing a more efficient customer coverage model, focusing on lowering indirect procurement costs and general and administrative expenditures, and also gaining 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. This, together with synergy benefits in excess of $750 million, will amount to total annual savings of $1 billion by the end of 2018.
Zacks Rank
Office Depot currently has a Zacks Rank #4 (Sell). A better-ranked stock in the space is Barnes & Noble, Inc. , carrying a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>