A month has gone by since the last earnings report for Office Depot (ODP Quick QuoteODP - Free Report) . Shares have lost about 7.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Office Depot due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Office Depot Beats on Q3 Earnings & Sales, Updates View

Office Depot delivered second straight quarter of positive earnings and sales surprises when it reported third-quarter 2018 results. However, in spite of higher sales, earnings declined year over year. This can be attributed to rise in the cost of goods sold, occupancy costs, and increased SG&A and interest expenses. Moreover, the prior-year period was favorably impacted by the tax benefit.

Nevertheless, analysts believe that decent results and strategic initiatives — including strengthening of core businesses, and expansion of service and subscription offerings — might have prompted management to raise 2018 sales view.

Experts believe that improvement in Business Solutions and CompuCom divisions is likely to benefit the company going forward. It undertook a review of business operating model, growth prospects and cost structure. The company is also concentrating on e-commerce platforms. Management is making incremental investments to catapult it into a product and services-driven enterprise. Service revenues now represent approximately 15% of total sales.

The company is trying all means to give itself a complete makeover. This seems evident as 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. Further, stiff competition from online retailers such as Amazon and lower traffic count in retail stores have been playing spoilsport.

Quarterly Results

This office supplies retailer delivered adjusted earnings per share from continuing operations of 13 cents that beat the Zacks Consensus Estimate by a penny but declined roughly 7% from the prior-year quarter.

The company generated sales of $2,887 million that fared better than the consensus mark of $2,858 million and increased 10% year over year. We note that while product sales inched up 1% to $2,453 million, service revenues more than doubled to $434 million.

Adjusted operating income was $120 million, down 6% year over year, while adjusted operating margin shriveled 70 basis points (bps) to 4.2%. Adjusted EBITDA of $172 million increased 3%, while adjusted EBITDA margin contracted 40 bps to 6%.

Segment Performance

Business Solutions Division’s sales increased 6% to $1,364 million on account of growth endeavors taken in adjacency categories, online sales and buyouts. Product sales grew 5% while services revenues surged 28% during the quarter. Operating income was $67 million, down from $71 million reported in the year-ago period on account increased SG&A expenses, partly offset by higher gross margin. Operating margin decreased 60 bps to 4.9%.

In the reported quarter, the Retail Division’s sales fell 6% to $1,254 million on account of planned closure of stores and adoption of the new revenue recognition standard that lowered revenues by approximately $8 million. Product sales fell 7% while services revenues advanced 11%. Comparable-store sales (comps) drop 5% due to lower transactions. Segment operating income came in at $70 million, down from $82 million in the prior-year quarter. The year-over-year decline can be attributed to deleverage related to closure of outlets, fall in volume sales, and investments in additional service delivery capabilities. Operating margin shrunk 60 bps to 5.6%.

Total store count at the division was 1,372 at the quarter end. During the reported quarter, the company shut down two outlets.

CompuCom Division posted sales of $268 million in the quarter while operating income was $1 million or 0.4% of sales.

Other Financial Details

Office Depot ended the reported quarter with cash and cash equivalents of $925 million, long-term debt (net of current maturities) of $887 million, non-recourse debt of $759 million, and shareholders’ equity of $2,197 million. The company repaid $18 million of outstanding term loan in relation to the repayment schedule. It bought back approximately 5 million shares for $14 million in the quarter.

During the quarter, the company generated cash flow of $304 million from operating activities and incurred capital expenditure of $47 million, consequently resulting in free cash flow of $257 million. Management expects to generate free cash flow of $450 million and $350 million in 2018 and 2019, respectively.

Guidance

Office Depot now expects full-year sales of $11 billion, up from $10.8 billion guided earlier. Management continues to project adjusted operating income of $360 million for 2018. The company now envisions adjusted EBITDA of $560 million.

For fiscal 2019, management forecasts sales of $11.1 billion, adjusted operating income of $375 million and adjusted EBITDA of $575 million.
 

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -6.25% due to these changes.

VGM Scores

Currently, Office Depot has a strong Growth Score of A, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Office Depot has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.