It has been about a month since the last earnings report for Office Depot (ODP Quick QuoteODP - Free Report) . Shares have lost about 13.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Office Depot due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Office Depot Tops Q3 Earnings Estimates

Office Depot, Inc.’s third-quarter 2019 results marked the sixth straight quarter of positive earnings surprise. Notably, the bottom line also improved from the year-ago period. Lower interest expense coupled with fewer outstanding shares aided year-over-year growth. However, the company’s top line not only missed the Zacks Consensus Estimate but also fell year over year. We note that sales declined across all three divisions of the company.

Impressively, profit margins grew in all the divisions, owing to gains from Business Acceleration Program (“BAP”). As a result, management continues to anticipate generating cost savings of at least $40 million in 2019 and more than $100 million in annual run-rate cost savings thereafter. Further, the company kept its view for 2019 intact.

Concurrent to the earnings release, Office Depot announced that its board approved a review of the implementation of a holding company reorganization. This is likely to be concluded by first-quarter 2020. If this is implemented, the reorganization is expected to create a new holding company, The ODP Corporation. This will then become the new parent company of Office Depot, replacing the latter’s current ticker symbol “ODP” trading on Nasdaq.

Q3 Highlights

The retailer of office supplies delivered adjusted earnings per share of 15 cents from continuing operations, surpassing the Zacks Consensus Estimate by a penny and increasing 15.4% from the prior-year quarter. The upside is backed by a fall in the company’s total cost of goods sold and occupancy costs coupled with lower SG&A and interest expenses, and fewer outstanding shares in relation to the year-ago period.

It generated total sales of $2,782 million, lagging the consensus mark of $2,830 million and declining 3.6% year over year. Notably, product sales fell 3% to $2,377 million and service revenues declined 7% to $405 million.

Adjusted operating income was $137 million, up 14.2% year over year, while adjusted operating margin expanded 70 bps to 4.9%. The upside was mainly backed by solid operating performance at the Retail and BSD divisions along with gains from BAP-related cost-containment initiatives. Moreover, adjusted EBITDA of $191 million rose 11% year over year, while adjusted EBITDA margin increased 90 bps to 6.9%.

Segmental Performance

Business Solutions Division’s sales dipped 1% to $1,350 million. Further, the year-over-year comparable sales performance benefited from customer tuck-in acquisitions and improvement in adjacency categories, which led to in-line results in the contract channel. Adjacency categories — including cleaning and breakroom supplies, technology, and furniture with copy and print services, rose marginally to 37% of overall BSD sales. Growth was compensated with the company’s planned actions to diminish certain unprofitable sales activities to drive profitability. Moreover, product sales dropped 1%, while service revenues remained flat in the reported quarter.

Segmental operating income was $71 million, up 6% from $67 million reported in the year-ago period. Management informed that increased gross profit margin, cost containment efforts and efficient distribution costs helped it witness higher operating income.

In the reported quarter, Retail Division’s sales fell 6% to $1,177 million on the planned closure of stores, partly offset by 6% rise in buy online, pick up in store sales. Moreover, comparable-store sales dropped 4%, owing to a decline 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 enhanced loyalty program membership. Product sales fell 8%, while service revenues advanced 7%. On a same-store comparable basis, service revenues went up nearly 10%.

Segment operating income was $84 million, up 20% from the prior-year quarter. Operating margin also expanded 150 bps to 7.1%. This is largely fueled by higher product gross margin and lower SG&A expenses coupled with enhanced services sales, improved distribution and inventory management costs, and fall in operating lease costs. Also, the impact of investments in other service delivery capabilities and customer-oriented efforts aided results.

Total store count at the division was 1,317 at the quarter end. During the reported quarter, the company shuttered 3 outlets.

CompuCom Division generated sales of $252 million in the quarter, down 6% year over year on sluggish revenues from existing customer projects and a fall in services volume. This was somewhat offset by higher product sales.

The segment reported operating income of $3 million compared with operating income of $1 million in the year-ago period. This was primarily backed by cost efficiency in relation to the BAP initiative. Notably, management remains committed to boost the segment’s operating performance by refining endeavors to utilize CompuCom’s strengths and value proposition in the digital workforce, with more emphasis on core offerings.

Other Financial Details

Office Depot ended the reported quarter with cash and cash equivalents of $588 million, long-term debt (net of current maturities) of $593 million, and shareholders’ equity of $2,127 million. It had about $962 million of available credit under its Amended and Restated Credit Agreement.

Furthermore, cash generated from operating activities of continuing operations was $212 million, including costs of $3 million related to acquisition and integration, and $30 million of restructuring costs. Management incurred capital expenditure of $32 million in the quarter.

On an adjusted basis, free cash flow from continuing operations was $209 million. Office Depot continues to anticipate generating free cash flow of $300-$325 million for 2019.

As part of its shareholder-friendly moves, it paid out dividends of nearly $14 million in the same quarter, and approved an increase in the present share repurchase authorization to $200 million, with an extension of the program by 2021 end. Notably, the latest authorization includes the outstanding authorized amount under the previous stock repurchase plan. As a result, Office Depot will have roughly $190 million available for share buybacks.

Guidance

The company continues to project sales of $10.8-$10.9 billion, adjusted EBITDA of $525-$550 million and adjusted operating income of $325-$350 million.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.

VGM Scores

Currently, Office Depot has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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

Office Depot has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.