A month has gone by since the last earnings report for ODP Corp. (ODP - Free Report) . Shares have added about 23.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is ODP Corp. due for a pullback? 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.
ODP Corporation Q2 Earnings and Revenues Miss Estimates
The ODP Corporation disappointed with its second-quarter 2020 performance. Both the top and the bottom lines not only fell short of the Zacks Consensus Estimate but also sharply declined from the year-ago period, thanks to the impact of the coronavirus pandemic. We note that sales fell across the company’s three divisions.
The provider of business services and supplies, products and technology solutions posted adjusted loss of 7 cents a share against earnings of 68 cents in the year-ago quarter. The bottom line also compared unfavorably with the Zacks Consensus Estimate of earnings of 82 cents, following a beat in the preceding eight quarters. The downside can be attributed to fall in total sales. However, lower interest expense and fewer outstanding shares contributed to the performance.
ODP’s total sales of $2,158 million decreased 17% year over year owing to the impact of the pandemic on the business environment. The top line also lagged the consensus mark of $2,429.3 million, following a beat in the previous quarter. Product sales fell 15% to $1,857 million, while service revenues declined 26% to $301 million. On a consolidated basis, service revenues were about 14% of total sales.
Adjusted operating income came in at $10 million, down from $71 million in the year-ago period. Moreover, adjusted operating margin contracted 220 bps to 0.5%. Adjusted EBITDA of $59 million declined sharply from $125 million in the year-ago period.
The Business Solutions Division’s (BSD) sales declined 23% year over year to $1,024 million, thanks to the coronavirus pandemic that adversely impacted the company’s contract channel sales. Due to restrictions imposed in the month of March to curb the spread of the virus, the company’s several B2B customers either paused operations or temporarily transitioned into a remote work environment.
Nonetheless, the company witnessed sales increase of 20% in e-commerce channel and growth in certain adjacency categories, namely cleaning and breakroom supplies and technology, which were up 20% and 17%, respectively. Adjacency categories — including cleaning and breakroom supplies, technology, furniture, and copy and print services — accounted for 48% of overall Business Solutions Division sales. The company successfully launched Personal Protective Equipment, a new product category, during the quarter.
In spite of improving monthly trends in the quarter, management cautioned that business disruption caused by the ongoing crisis may continue to impact sales in the second half of 2020.
Segment operating income came in at $13 million, down from $86 million reported in the year-ago period, while operating margin shrunk 520 basis points to 1.3%. Management informed that reduced product sales volume owing to the pandemic and product mix, and a lower gross profit margin on account of increased product costs and higher supply chain expenses adversely impacted the operating income. This was partly mitigated by lower SG&A expenses attained through Business Acceleration Program (BAP).
In the reported quarter, the Retail Division’s sales tumbled 9% to $912 million due to the planned closure of underperforming stores and fewer transactions. The company had 60 lesser retail outlets at the end of the quarter under review.
However, this was partly offset by higher demand for essential products — cleaning and breakroom supplies, technology products, and work-from-home/learn-from-home enabling products — courtesy of the coronavirus pandemic. The company witnessed a 152% jump in the buy online, pick up in store offering.
Majority of the company’s retail outlets were operational during the quarter. Notably, the company introduced curbside pick-up option in all locations, including a portion of retail locations transferred to curbside pick-up only. The company also reduced store operating time by a couple of hours per day, temporarily.
We note that product sales were down 4%, while service revenues fell 38% as copy and print services and subscription offerings were adversely impacted by the coronavirus outbreak.
While segment operating income of $18 million soared 100% from the prior-year quarter, operating margin expanded 110 bps to 2%. This was primarily fueled by reduced SG&A expenses owing to cost-saving efforts, improvements in distribution and inventory management costs and fall in operating lease costs as a result of the new lease accounting standard.
The total store count at the division was 1,260 at the quarter end. During the reported quarter, the company shuttered 35 outlets.
The CompuCom Division generated sales of $214 million in the quarter, down 17% year over year, thanks to lower services volumes, delay in projects on part of customers and reduced demand for technology products due to business disruptions caused by the coronavirus crisis. Also, efforts to lower unprofitable sales impacted sales.
The segment reported operating income of $4 million, up from $1 million in the year-ago period, while operating margin expanded 150 basis points to 1.9%. This was primarily driven by cost efficiency in relation to the BAP initiative.
Other Financial Details
ODP Corporation ended the reported quarter with cash and cash equivalents of $762 million, long-term debt (net of current maturities) of $642 million, and stockholders’ equity of $1,717 million. For the quarter, cash used in operating activities was $8 million. Also, management incurred capital expenditure of $15 million in the quarter versus $45 million in the prior year period, reflecting lower investment in retail operations, while continuing growth investments in the company’s service platform, distribution network, and e-commerce capabilities. Adjusted free cash flow was $7 million outflow in the quarter.
ODP Corporation has been focusing on business operating model, viable projects and cost structure, and making incremental investments to enhance revenue contribution from services. It has been concentrating on product assortment mix and increasing penetration into adjacency categories.
Moreover, the company has been making every effort to enhance e-commerce platforms. The company’s e-commerce channel has been gaining, courtesy of increased demand for essential products and services to support home office operations. Notably, the company has been leveraging its global sourcing and supply chain capabilities to procure and deliver essential products, including Personal Protective Equipment.
The company also commenced a multiyear restructuring plan “Maximize B2B” in May 2020. Through this initiative the company intends to accelerate growth on its B2B platform, lower dependency on its retail consumer operations, and maximize cost savings. Management expects this restructuring plan to be completed by the end of 2023.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -21.56% due to these changes.
At this time, ODP Corp. has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise ODP Corp. has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.