Office Depot, Inc.’s (ODP - Free Report) second-quarter 2019 results marked the fifth straight quarter of positive earnings surprise. Further, total sales marginally came ahead of the Zacks Consensus Estimate. Although the top line fell year over year, the bottom line increased from the year-ago period. The company registered healthy results across its Business Solutions Division and witnessed improved performance at CompuCom division on a sequential basis.
The company has undertaken initiatives such as strategic review of business operating model, growth prospects and cost structure to bring itself back on track. It is also concentrating on e-commerce platforms. Management is also making incremental investments to catapult it into a product and service-driven enterprise.
Office Depot initiated Business Acceleration Program that involves reducing costs, improving operational efficiencies, enhancing service delivery, effective use of technology and automation and identifying strategic investment opportunities. As a result, management continues to anticipate cost savings of at least $40 million in 2019 and attain more than $100 million in annual run-rate costs savings thereafter. Further, the company kept 2019 view intact.
We note that shares of this Zacks Rank #3 (Hold) company have tumbled roughly 16% in the past three months compared with the industry’s decline of 11%.
This office supplies retailer delivered adjusted earnings per share from continuing operations of 7 cents that beat the Zacks Consensus Estimate by a couple of cents and increased 40% from the prior-year quarter.
The company generated total sales of $2,588 million that marginally surpassed the consensus mark of $2,587 million but declined 2% year over year owing to lower sales in CompuCom and Retail divisions, partly offset by sturdy sales performance in the Business Solutions Division. We note that while product sales fell 1% to $2,183 million, service revenues declined 6% to $405 million.
Adjusted operating income came in at $71 million, up 13% year over year, while adjusted operating margin expanded 30 bps to 2.7%. Adjusted EBITDA of $125 million jumped 9% year over year, while adjusted EBITDA margin increased 40 bps to 4.8%.
Business Solutions Division sales grew 2% to $1,328 million buoyed by acquisitions, robust performance in core contract channel and higher sales of paper-related products. Growth in certain adjacency categories such as cleaning and breakroom supplies also contributed to sales. However, the company witnessed lower revenue from e-commerce channel owing to increased focus on higher margin sales. Excluding acquisitions, sales were down 1%. Product sales grew 2%, while service revenue rose 5% during the reported quarter.
Segment operating income came in at $86 million, up from $67 million reported in the year-ago period. Management informed that increased gross profit margins, cost containment efforts and improved margin performance in e-commerce channel helped post higher operating income.
In the reported quarter, the Retail Division’s sales fell 5% to $1,000 million on account of planned closure of stores, partly offset by surge of 17% in buy on-line, pick up in store sales. Product sales fell 7%, while service revenue advanced 7%. Comparable-store sales dropped 4% owing to fall in store traffic, partly mitigated by rise in conversion rates, increased sales per customer, improvement in buy on-line, pick up in store sales, and increased loyalty program membership.
Segment operating income came in at $9 million, sharply down from $22 million in the prior-year quarter. The year-over-year decline can be attributed to deleverage related to closure of outlets, lower sales, and investments in additional service delivery capabilities. Operating margin shrunk 120 bps to 0.9%.
Total store count at the division was 1,320 at the quarter end. During the reported quarter, the company shuttered 39 outlets.
CompuCom Division generated sales of $258 million in the quarter, down 7% year over year on account of sluggish revenues from existing customer projects and lower services volume. On a sequential basis, sales increased 4%.
The segment reported operating income of $1 million compared with operating income of $6 million in the year-ago period. This can be attributed to lower sales volume, less-than-proportionate fall in labor related expenses, and expenditures associated to develop and market additional service offerings. Notably, segment operating income marked a sharp improvement from an operating loss of $15 reported in the first quarter of 2019.
Other Financial Details
Office Depot ended the reported quarter with cash and cash equivalents of $444 million, long-term debt (net of current maturities) of $618 million, and shareholders’ equity of $2,082 million. The company also repaid approximately $19 million scheduled debt repayment on the 2022 term loan during the quarter.
Management incurred capital expenditures of $45 million during the quarter. On an adjusted basis, free cash flow from continuing operations was an outflow of $48 million. Office Depot continues to anticipate generating free cash flow in the range of $300-$325 million in 2019.
Office Depot continues to project sales in the band of $10.8-$10.9 billion, adjusted EBITDA in the range of $525-$550 million and adjusted operating income between $325 and $350 million.
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