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The ODP Corporation's (ODP) Q4 Earnings Miss, Decline Y/Y

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Shares of The ODP Corporation (ODP - Free Report) declined roughly 9% during the trading session on Feb 24, following the company’s fourth-quarter 2020 performance. Both the top and the bottom lines not only missed the Zacks Consensus Estimate but also declined year over year, thanks to the challenges posed by the ongoing COVID-19 crisis. Management pointed that conditions triggered by the coronavirus pandemic will persist for at least in the first half of 2021.

Let’s Introspect

This provider of business services and supplies, products and digital workplace technology solutions posted adjusted earnings of 55 cents a share that decreased sharply from $1.24 reported in the year-ago quarter, and also fell short of the Zacks Consensus Estimate of $1.11.

The ODP Corporation’s total sales of $2,288 million declined 9% year over year due to the impact of the pandemic on the business environment. We note that sales fell across the company’s three divisions. The metric also came below the consensus mark of $2,306 million.

We note that product sales fell 7% year over year to $1,971 million. Again, service revenues were down 20% to $317 million because of lower comparable sales at CompuCom and decreased sales of services in Business Solutions Division and Retail Division.

Adjusted operating income amounted to $44 million, down significantly from $92 million reported in the year-ago period. Moreover, adjusted operating margin contracted 180 basis points to 1.9%. Adjusted EBITDA of $89 million fell from $156 million in the prior-year quarter.

We note that shares of this Zacks Rank #5 (Strong Sell) company have fallen 11.5% in the past one month against the industry’s growth of 1.8%.

The ODP Corporation Price, Consensus and EPS Surprise

The ODP Corporation Price, Consensus and EPS Surprise

The ODP Corporation price-consensus-eps-surprise-chart | The ODP Corporation Quote

Segment Performance

The Business Solutions Division’s sales declined 10% year over year to $1,129 million, thanks to the coronavirus pandemic that adversely impacted the company’s contract channel sales as business operations were interrupted and schools remained shut. Nonetheless, the company witnessed sales increase of 15% in e-commerce channel. Adjacency categories — including cleaning and breakroom, personal protective equipment, technology, furniture, and copy and print — accounted for 45% of overall Business Solutions Division sales.

Segment operating income came in at $18 million, down from $69 million reported in the year-ago period, while operating margin shrunk 390 basis points to 1.6%. 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.

In the reported quarter, the Retail Division’s sales dipped 6% to $951 million due to the planned shutdown of underperforming outlets. The company had 153 lesser retail outlets at the end of the quarter under review on a year-over-year basis. However, this was partly offset by higher demand for essential products — cleaning and breakroom supplies. The company witnessed a 50% jump in the buy-online, pick-up-in-store offering. Notably, the company continues to witness sturdy demand for curb-side pick-up.

Impressively, segment operating income of $50 million surged 47% from the prior-year quarter, while operating margin expanded 190 basis points to 5.3%. This increase was primarily fueled by robust demand for cleaning/breakroom categories, as well as lower operating lease costs and reduced SG&A expenses owing to cost containment efforts and improvements in distribution and inventory management costs.

Total store count at the division was 1,154 at the quarter end. During the reported quarter, the company shuttered 90 outlets.

The CompuCom Division generated sales of $207 million in the quarter, down 13% year over year, thanks to lower services volumes and product sales, and delay in projects on the part of customers owing to the COVID-19 crisis.

The segment reported operating income of $4 million, down from $9 million in the year-ago period, while operating margin decreased 190 basis points to 1.9%. Lower service and product sales volume was partly offset by Business Acceleration Program cost efficiency measures.

Enhancing B2B Capabilities

The ODP Corporation remains committed toward enhancing its business-to-business (B2B) services and technology solutions capabilities so as to effectively serve customers. Markedly, the company has been striving to expand into higher value industry segments. As part of this strategy, it has made notable progress on B2B pivot and digital transformation. Progressing along these lines, the company has acquired BuyerQuest Holdings, Inc. — a leader in cloud-based enterprise Procure-to-Pay (P2P) software. This will enable The ODP Corporation to deliver an integrated, e-commerce, P2P, and supply chain platform designed to transform how businesses buy and sell.

The ODP Corporation has also collaborated with Microsoft to migrate current workloads and legacy systems to Azure, a cloud computing platform. The company is also working to bring its new digital procurement technology platform to Microsoft Dynamics 365 Business Central customers that will allow them realize immediate purchase savings and procurement automation.

Management plans to make investments in the digital transformation endeavors in the range of $20 million to $25 million in capital expenditures and $30-$35 million in operating expenses in 2021.

Other Financial Details

The ODP Corporation ended the quarter with total available liquidity of about $1.7 billion, comprising of $729 million in cash and cash equivalents and $934 million of available credit under the Third Amended Credit Agreement. As of Dec 26, 2020, total debt was $378 million.

For the quarter, cash used in operating activities was $4 million. Also, management incurred capital expenditure of $14 million in the quarter. Adjusted free cash flow was $4 million outflow in the quarter under review.

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