Office Depot, Inc. (ODP - Free Report) reported fourth-quarter 2019 results, which marked its seventh straight quarter of positive earnings surprise. The bottom line also improved year over year, while the top line fell and missed the Zacks Consensus Estimate. We note that sales declined across all three divisions of the company.
Impressively, profit margins grew in all the divisions, owing to gains from the Business Acceleration Program (“BAP”), which surpassed management’s expectations.
We note that the Zacks Rank #3 (Hold) stock has gained 84.4% in the past six months against the industry’s decline of 7.6%.
The retailer of office supplies delivered adjusted earnings per share of 12 cents from continuing operations, which surpassed the Zacks Consensus Estimate of 9 cents and increased 33.3% from the prior-year quarter. The upside can be attributable to reduced outstanding shares as well as lower interest expenses.
Office Depot generated total sales of $2,508 million, lagging the consensus mark of $2,580 million and declining 6% year over year. Sales declined at all three segments, with Retail Division sales bearing the brunt of lower same-store sales and reduced retail store count. Further, product sales fell 6% to $2,113 million and service revenues declined at an equal rate to $395 million. On a consolidated basis, service revenues were about 16% of Office Depot’s total sales.
Adjusted operating income was $92 million, up 9.5% year over year, while adjusted operating margin expanded 60 bps to 3.7%. The upside was mainly backed by solid operating performances at all divisions, courtesy of gains from BAP-related cost-containment initiatives. Moreover, adjusted EBITDA of $156 million rose 13% year over year, while adjusted EBITDA margin increased 100 bps to 6.2%.
The Business Solutions Division’s sales dipped 3% to $1,257 million. Further, the year-over-year comparable sales performance benefited from customer acquisitions and improvement in adjacency categories, especially breakroom and cleaning supplies. Adjacency categories — including cleaning and breakroom supplies, technology, and furniture with copy and print services — formed 37% of overall BSD sales. This was partly negated by the company’s planned actions to lower certain unprofitable sales activities to enhance profitability. Moreover, product sales dropped 4%, though service revenues jumped 14% in the reported quarter.
Segmental operating income was $69 million, up 27.8% from $54 million reported in the year-ago period. Management informed that efforts to enhance profitability, BAP-related cost-containment efforts and efficient distribution costs helped it witness higher operating income.
In the reported quarter, the Retail Division’s sales tumbled 7% to $1,011 million on the planned closure of underperforming stores. The company had 54 lesser retail outlets at the end of the fourth quarter. Moreover, comparable-store sales dropped 4%, owing to a decline in store traffic, partly compensated by a rise in conversion rates, increased sales per customer and enhanced loyalty program membership. Product sales fell 8% and service revenues dropped 3%.
Segmental operating income was $34 million, up 21% from the prior-year quarter. Operating margin also expanded 80 bps to 3.4%. This was largely fueled by enhanced gross margin; reduced SG&A expenses, owing to cost-saving efforts; improved distribution and inventory management costs; and a fall in operating lease costs. Also, investments in other service delivery capabilities and customer-oriented efforts impacted results.
The total store count at the division was 1,307 at the quarter end. During the reported quarter, the company shuttered 10 outlets.
The CompuCom Division generated sales of $237 million in the quarter, down 16% year over year on reduced product sales, a fall in services volume and efforts to curtail unprofitable sales.
The segment reported operating income of $9 million compared with $5 million reported in the year-ago period. This was primarily backed by cost efficiency in relation to the BAP initiative along with other cost-containment endeavors. Notably, management remains committed to delivering increased growth and enhance margins by realigning its efforts toward core strength areas.
Other Financial Details
Office Depot ended the reported quarter with cash and cash equivalents of $698 million, long-term debt (net of current maturities) of $575 million, and shareholders’ equity of $2,173 million. It had $920 million of available credit under its Amended and Restated Credit Agreement.
In the fourth quarter, cash generated from operating activities of continuing operations was $152 million, including costs of $4 million related to acquisition and integration, and $11 million of restructuring costs. Management incurred capital expenditure of $27 million in the quarter. On an adjusted basis, free cash flow from continuing operations was $135 million for the quarter. Office Depot anticipates generating free cash flow of $300 million for 2020.
As part of its shareholder-friendly moves, the company paid out dividends of nearly $14 million and repurchased about 11 million shares for $29 million during the fourth quarter. It also made a debt repayment of $19 million related to its 2022 term loan.
Management remains impressed with its progress made in 2019. The company, which is benefitting from BAP initiatives, is focused on fueling growth in its BSD and CompuCom segments; making expansions to its product and service offerings; and remaining committed toward rationalizing the retail footprint. While some of the actions may hurt its top line in the near term, these are likely to strengthen Office Depot’s competitive position in the long run.
For 2020. the company projects sales of $10.5 billion, whereas it reported $10.6 million in 2019. Adjusted EBITDA is likely to be $550 million, whereas it reported $590 million in 2019. Further, management expects adjusted operating income of $350 million, suggesting a decline from $367 million delivered in 2019.
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