Office Depot, Inc. (ODP - Free Report) is scheduled to release third-quarter 2018 results on Nov 7. In the last reported quarter, the company reported an earnings beat of 25%. Further, this Florida-based company has an impressive earnings surprise history, with average beat of 9.8%.
How are Estimates Faring?
The Zacks Consensus Estimate for the quarter under review is 12 cents, reflecting a decline of 14.3% from the year-ago quarter. We note that the Zacks Consensus Estimate has gone down by a penny in the past 30 days. The Zacks Consensus Estimate for revenues is $2,858 million, up 9.1% from $2,620 million recorded in the year-ago period.
Let’s see how things are shaping up prior to this announcement.
Factors to Consider
Office Depot is exposed to headwinds stemming from soft demand for office products due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Moreover, higher marketing, advertising and other growth-related investments may hurt margins.
Further, rise in cost of goods sold and occupancy costs as well as increased SG&A and interest expenses have been a threat to the company’s bottom line for a while now. We note that earnings per share had declined 50% and 17% in the first and second quarter of 2018, respectively. Also, dismal comparable-store sales run across the company’s Retail division for the past few quarters and stiff competition from office supply retailers are concerns.
Such downsides led the stock to plunge 10.1% in the past month, against the industry’s growth of 3.2%.
However, the company has undertaken initiatives such as strategic review of business operating model, growth prospects and cost structure that have helped it get back on track. Moreover, the company is closing underperforming stores, reducing exposure to higher dollar-value inventory items, shuttering non-critical distribution facilities, concentrating on e-commerce platforms and focusing on providing innovative products and services.
Office Depot’s initiative of buy online and pick up in-store is also gaining traction. 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. It has been improving in-store shopping experience, and expanding into the cleaning and breakroom category, copy & print services and furniture.
Management is making incremental investments to transform the business into a product and services-driven enterprise. Service revenues now represent approximately 14% of the total sales. Management intends to increase revenue contribution from services to approximately 20% of total sales in the next two years.
To widen its domain of offerings, Office Depot acquired CompuCom Systems that is helping it to acclimatize to the fast-changing retail landscape along with providing enterprise-level tech services and products to customers. The company also signed a channel partner agreement with MicroCorp, a premier value-added distributor of telecom and cloud solutions. It is also incorporating Tech-Zone services desk across its stores.
The company is on track with its cost containment efforts. In doing so, Office Depot is employing a more efficient customer coverage model, and focusing on lowering indirect procurement costs and general and administrative expenses. The company is also gaining from its U.S. retail store optimization plan. Management had earlier informed that these endeavors would result in benefits of more than $250 million by the end of 2018. Cost savings along with synergy benefits from the OfficeMax integration in excess of $750 million would amount to total annual savings of approximately $1 billion.
Office Depot, Inc. Price and EPS Surprise
What the Zacks Model Unveils
Our proven model shows that Office Depot is likely to beat estimates this quarter as the stock has the right combination of two key ingredients — a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Office Depot carries a Zacks Rank #3 and an Earnings ESP of +8.33%.
Other Stocks Poised to Beat Earnings Estimates
Here are some companies you may want to consider, as our model shows that these have the right combination of elements to post earnings beat:
Kohl’s Corporation (KSS - Free Report) has an Earnings ESP of +0.35% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Express, Inc. (EXPR - Free Report) has an Earnings ESP of +7.32% and a Zacks Rank #2.
KAR Auction Services (KAR - Free Report) has an Earnings ESP of +3.44% and a Zacks Rank #2.
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