A month has gone by since the last earnings report for ODP Corp. (ODP Quick QuoteODP - Free Report) . Shares have added about 13.1% 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 the most recent earnings report in order to get a better handle on the important drivers.

ODP Surpasses Earnings and Revenues Estimates in Q3 ‘20

The ODP Corporation reported robust third-quarter 2020 performance. Both the top and bottom lines surpassed the Zacks Consensus Estimate while the latter also improved from the year-ago period. Further, the company has commenced its multiyear

Maximize B2B Restructuring Plan. This will lower its retail lease liabilities, improve cost structure, and provide resources to drive growth at the B2B platform. It has also been leveraging its supply-chain capabilities and developing key relationships to reinforce its leadership position.

Let’s Introspect

The provider of business services and supplies, products and technology solutions posted adjusted earnings of $1.80 a share, which increased 17.6% year over year and outshone the Zacks Consensus Estimate of $1.31. Lower interest expense and fewer outstanding shares contributed to this performance.

ODP’s total sales of $2,539 million surpassed the consensus mark of $2,469 million but decreased 9% year over year owing to the impact of the pandemic on the business environment. Although the top line has fallen year over year, we note that the rate of decline has decelerated sharply from 17% witnessed in the second quarter of 2020.

Nonetheless, consolidated sales grew 18% on a sequential basis driven by strong e-commerce sales and demand for work and learn-from-home products. Total omnichannel sales including delivery buy-online, pick-up-in-store and same-day orders were up over 30%.

Again, product sales dipped 7% to $2,209 million, while service revenues declined 19% to $330 million. On a consolidated basis, service revenues were about 13% of total sales. We note that sales fell across the company’s three divisions.

Adjusted operating income came in at $138 million, up 0.7% from the year-ago period. Moreover, adjusted operating margin increased 50 bps to 5.4%. Adjusted EBITDA of $186 million slipped 2.6% from the year-ago period.

Segment Performance

The Business Solutions Division’s (BSD) sales declined 11% year over year to $1,197 million, thanks to the coronavirus pandemic that adversely impacted the company’s contract channel sales. We note that diverse market channels and the large ecosystem are aiding this division to recover from pandemic-induced challenges.

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 30%, respectively. Adjacency categories — including cleaning and breakroom supplies, technology, furniture, personal protective equipment, and copy and print services — accounted for 47% of overall Business Solutions Division sales. The company is seeing strong growth in home office related products. While challenges remain, the company remains encouraged by the pace of new business wins and renewals.

Segment operating income came in at $45 million, down from $71 million reported in the year-ago period, while operating margin shrunk 150 basis points to 3.8%. Management informed that reduced sales volume owing to the pandemic and product mix impacted the metric. This was partly mitigated by lower SG&A expenses attained through Business Acceleration Program (“BAP”).

In the reported quarter, the Retail Division’s sales dipped 3% to $1,147 million due to the planned shutdown of underperforming outlets and fewer transactions. The company had 73 lesser retail outlets at the end of the quarter under review on a year-over-year basis. The back-to-school season was also hurt due to cancellation or delayed start of in-person school owing to the pandemic, contributing to lower sales.

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 an 82% jump in the buy-online, pick-up-in-store offering. Notably, the company continues offering curbside pick-up option in all locations. While product revenues were flat year over year, service revenues were down 22% adversely impacted by the COVID-19 pandemic.

While segment operating income of $119 million soared 42% from the prior-year quarter, operating margin expanded 320 bps to 10.4%. This was primarily fueled by robust demand for home office and cleaning/breakroom categories as well as lower operating lease costs and reduced SG&A expenses owing to cost-saving efforts, improvements in distribution and inventory management costs.

The total store count at the division was 1,244 at the quarter end. During the reported quarter, the company shuttered 16 outlets.

The CompuCom Division generated sales of $197 million in the quarter, down 22% year over year, thanks to lower services volumes and product sales due to business disruptions caused by the coronavirus crisis. Nonetheless, the company remains optimistic about evolving trends in the "future of work" and cloud-based services. Annuity services revenues remained relatively stable.

The segment reported operating income of $3 million, flat with the year-ago period, while operating margin expanded 30 basis points to 1.5%. This was primarily driven by cost efficiency in relation to the BAP initiative.

Other Financial Details

ODP ended the reported quarter with cash and cash equivalents of $743 million, long-term debt (net of current maturities) of $354 million, and stockholders’ equity of $1,795 million. Total debt at the end of the quarter was about $375 million, of which $100 million remains outstanding under the ABL facility, which does not mature until 2025.

For the quarter, cash provided by operating activities was $309 million. Also, management incurred capital expenditure of $14 million in the quarter. The company generated free cash flow of $295 million in the quarter.

Further, the company’s board has approved the resumption of the existing share-repurchase program to boost shareholder returns. It had about $130 million left on its $200-million authorization, which is expected to resume in the fourth quarter and run throughout 2021. This is backed by strength in the company’s business and financial position.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 57.43% due to these changes.

VGM Scores

Currently, ODP Corp. has a great 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

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise ODP Corp. has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.