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Why Is Office Depot (ODP) Up 33.8% Since Last Earnings Report?
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A month has gone by since the last earnings report for Office Depot (ODP - Free Report) . Shares have added about 33.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Office Depot due for a pullback? 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 Q1 Earnings Beat Estimates
Office Depot, Inc. reported better-than-expected first-quarter 2020 results. While the bottom line continued with its positive earnings surprise streak for the eighth straight quarter, the top line also surpassed the Zacks Consensus Estimate following a miss in the preceding two quarters.
Management notified that robust demand for essential products and services in the wake of the novel coronavirus helped drive strong operating results and cash flow generation. Also, the company’s B2B platform is facilitating businesses to remain operational. Moreover, the company experienced significant increase in sales in e-commerce channel during the quarter.
While consolidated sales did decline during the quarter, due to the pandemic, earnings managed to improve year over year. Impressively, operating margin expanded owing to gains from the Business Acceleration Program (“BAP”). Notwithstanding, the company cautioned that “recent supply constraints for essential products and operational disruptions occurring in businesses throughout North America” are likely to hurt revenues in the near future. Moreover, on account of the uncertainty related to the pandemic, the company has withdrawn its previously issued guidance for 2020.
Concurrent with the earnings release, the company announced that it has adopted a limited duration shareholder rights plan or a poison pill to prevent any hostile takeover attempts in this volatile market.
Q1 Highlights
The retailer of office supplies posted adjusted earnings of 12 cents a share, which surpassed the Zacks Consensus Estimate of 8 cents and improved considerably from 7 cents reported in the prior-year period. The upside can be attributable to lower cost of goods sold and occupancy costs, decline in SG&A expenses, fall in interest expense and fewer outstanding shares.
Office Depot generated total sales of $2,725 million that surpassed the consensus mark of $2,647 million but declined 2% year over year. Sales declined across all the three segments. Further, product sales fell 1% to $2,337 million and service revenues declined 5% to $388 million. On a consolidated basis, service revenues were about 14% of total sales.
Adjusted operating income came in at $108 million, up from $67 million in the year-ago period. Moreover, adjusted operating margin expanded 160 bps to 4%. The upside primarily came on the back of solid operating performances in the CompuCom and Retail Divisions, courtesy of gains from BAP-related cost-containment initiatives and flow through effect of higher demand for essential products and services due to the pandemic. Notably, adjusted EBITDA of $157 million rose 33% year over year, while adjusted EBITDA margin increased 150 bps to 5.8%.
Segmental Performance
The Business Solutions Division’s (BSD) sales dipped 1% to $1,334 million. Further, the year-over-year comparable sales performance benefited from customer acquisitions and improvement in adjacency categories, especially cleaning and breakroom supplies and technology, which were up 25% and 10%, respectively, on account of increased demand for these products due to COVID-19 outbreak. Adjacency categories — including cleaning and breakroom supplies, technology, furniture, and copy and print services — accounted for 39% of overall Business Solutions Division sales.
However, aforementioned drivers were more than offset by fall in demand for certain product categories as some of the company’s B2B customers either stopped operations or work remotely for the time being due to restrictions imposed in the month of March to curb the spread of the virus. This hurt contract channel sales. Nonetheless, the company witnessed higher e-commerce sales. Management expects the aforementioned headwinds to impact Business Solutions Division sales during the second quarter.
We note that product sales fell 2%, while service revenues increased 14% year over year during the quarter. Segmental operating income came in at $40 million, down from $46 million reported in the year-ago period, however, margins remained flat. Management informed that reduced sales, product mix, and increased distribution expenditures related to the COVID-19 impacts adversely impacted operating income.
In the reported quarter, the Retail Division’s sales tumbled 2% to $1,156 million on the planned closure of underperforming stores. The company had 64 lesser retail outlets at the end of the quarter under review. However, comparable-store sales improved 2% due to increased demand for essential products — cleaning and breakroom supplies, technology products, furniture, and work-from-home/learn-from-home enabling products — courtesy of the coronavirus. The company registered a 26% surge in the buy online, pick up in store offering. By late March curbside pick-up option was made available across all locations.
However, management stated that given the recent supply constraints for essential products, closure of a limited number of outlets to maintain government protocols, and lowering of store hours by two hours per day are likely to hurt sales in the in the second quarter.
We note that product sales were relatively flat, while service revenues fell 11% year over year during the quarter. While segmental operating income of $87 million surged 30% from the prior-year quarter, operating margin expanded 180 bps to 7.5%. This was primarily 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.
The total store count at the division was 1,295 at the quarter end. During the reported quarter, the company shuttered 12 outlets.
The CompuCom Division generated sales of $235 million in the quarter, down 5% year over year, thanks to lower services volumes and delay in projects on the part of customers due to business disruptions caused by the coronavirus crisis. Also, efforts to lower unprofitable sales impacted comparable year-over-year sales. However, these were partly offset by higher technology-related product sales.
The segment reported operating income of $3 million against operating loss of $15 million reported in the year-ago period. This was primarily backed by cost efficiency in relation to the BAP initiative and other cost-containment endeavors.
Other Financial Details
Office Depot ended the reported quarter with cash and cash equivalents of $842 million, long-term debt (net of current maturities) of $548 million, and shareholders’ equity of $2,135 million. In the first quarter, cash generated from operating activities was $188 million. Also, management incurred capital expenditure of $25 million in the quarter. Adjusted free cash flow generated during the quarter was $173 million.
As part of its shareholder-friendly moves, the company paid out dividends of nearly $13 million and repurchased about 13 million shares for $30 million during the quarter. It also made a debt repayment of $19 million related to its 2022 term loan. Retirement of term loan expected to result in $90 million in annual interest and amortization savings. Considering the current economic scenario, management has temporarily suspended share repurchase activity and dividend payments. The company has roughly $131 million remaining under the current repurchase authorization.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 14.29% due to these changes.
VGM Scores
At this time, Office Depot has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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
Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. It comes with little surprise Office Depot has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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Why Is Office Depot (ODP) Up 33.8% Since Last Earnings Report?
A month has gone by since the last earnings report for Office Depot (ODP - Free Report) . Shares have added about 33.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Office Depot due for a pullback? 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 Q1 Earnings Beat Estimates
Office Depot, Inc. reported better-than-expected first-quarter 2020 results. While the bottom line continued with its positive earnings surprise streak for the eighth straight quarter, the top line also surpassed the Zacks Consensus Estimate following a miss in the preceding two quarters.
Management notified that robust demand for essential products and services in the wake of the novel coronavirus helped drive strong operating results and cash flow generation. Also, the company’s B2B platform is facilitating businesses to remain operational. Moreover, the company experienced significant increase in sales in e-commerce channel during the quarter.
While consolidated sales did decline during the quarter, due to the pandemic, earnings managed to improve year over year. Impressively, operating margin expanded owing to gains from the Business Acceleration Program (“BAP”). Notwithstanding, the company cautioned that “recent supply constraints for essential products and operational disruptions occurring in businesses throughout North America” are likely to hurt revenues in the near future. Moreover, on account of the uncertainty related to the pandemic, the company has withdrawn its previously issued guidance for 2020.
Concurrent with the earnings release, the company announced that it has adopted a limited duration shareholder rights plan or a poison pill to prevent any hostile takeover attempts in this volatile market.
Q1 Highlights
The retailer of office supplies posted adjusted earnings of 12 cents a share, which surpassed the Zacks Consensus Estimate of 8 cents and improved considerably from 7 cents reported in the prior-year period. The upside can be attributable to lower cost of goods sold and occupancy costs, decline in SG&A expenses, fall in interest expense and fewer outstanding shares.
Office Depot generated total sales of $2,725 million that surpassed the consensus mark of $2,647 million but declined 2% year over year. Sales declined across all the three segments. Further, product sales fell 1% to $2,337 million and service revenues declined 5% to $388 million. On a consolidated basis, service revenues were about 14% of total sales.
Adjusted operating income came in at $108 million, up from $67 million in the year-ago period. Moreover, adjusted operating margin expanded 160 bps to 4%. The upside primarily came on the back of solid operating performances in the CompuCom and Retail Divisions, courtesy of gains from BAP-related cost-containment initiatives and flow through effect of higher demand for essential products and services due to the pandemic. Notably, adjusted EBITDA of $157 million rose 33% year over year, while adjusted EBITDA margin increased 150 bps to 5.8%.
Segmental Performance
The Business Solutions Division’s (BSD) sales dipped 1% to $1,334 million. Further, the year-over-year comparable sales performance benefited from customer acquisitions and improvement in adjacency categories, especially cleaning and breakroom supplies and technology, which were up 25% and 10%, respectively, on account of increased demand for these products due to COVID-19 outbreak. Adjacency categories — including cleaning and breakroom supplies, technology, furniture, and copy and print services — accounted for 39% of overall Business Solutions Division sales.
However, aforementioned drivers were more than offset by fall in demand for certain product categories as some of the company’s B2B customers either stopped operations or work remotely for the time being due to restrictions imposed in the month of March to curb the spread of the virus. This hurt contract channel sales. Nonetheless, the company witnessed higher e-commerce sales. Management expects the aforementioned headwinds to impact Business Solutions Division sales during the second quarter.
We note that product sales fell 2%, while service revenues increased 14% year over year during the quarter. Segmental operating income came in at $40 million, down from $46 million reported in the year-ago period, however, margins remained flat. Management informed that reduced sales, product mix, and increased distribution expenditures related to the COVID-19 impacts adversely impacted operating income.
In the reported quarter, the Retail Division’s sales tumbled 2% to $1,156 million on the planned closure of underperforming stores. The company had 64 lesser retail outlets at the end of the quarter under review. However, comparable-store sales improved 2% due to increased demand for essential products — cleaning and breakroom supplies, technology products, furniture, and work-from-home/learn-from-home enabling products — courtesy of the coronavirus. The company registered a 26% surge in the buy online, pick up in store offering. By late March curbside pick-up option was made available across all locations.
However, management stated that given the recent supply constraints for essential products, closure of a limited number of outlets to maintain government protocols, and lowering of store hours by two hours per day are likely to hurt sales in the in the second quarter.
We note that product sales were relatively flat, while service revenues fell 11% year over year during the quarter. While segmental operating income of $87 million surged 30% from the prior-year quarter, operating margin expanded 180 bps to 7.5%. This was primarily 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.
The total store count at the division was 1,295 at the quarter end. During the reported quarter, the company shuttered 12 outlets.
The CompuCom Division generated sales of $235 million in the quarter, down 5% year over year, thanks to lower services volumes and delay in projects on the part of customers due to business disruptions caused by the coronavirus crisis. Also, efforts to lower unprofitable sales impacted comparable year-over-year sales. However, these were partly offset by higher technology-related product sales.
The segment reported operating income of $3 million against operating loss of $15 million reported in the year-ago period. This was primarily backed by cost efficiency in relation to the BAP initiative and other cost-containment endeavors.
Other Financial Details
Office Depot ended the reported quarter with cash and cash equivalents of $842 million, long-term debt (net of current maturities) of $548 million, and shareholders’ equity of $2,135 million. In the first quarter, cash generated from operating activities was $188 million. Also, management incurred capital expenditure of $25 million in the quarter. Adjusted free cash flow generated during the quarter was $173 million.
As part of its shareholder-friendly moves, the company paid out dividends of nearly $13 million and repurchased about 13 million shares for $30 million during the quarter. It also made a debt repayment of $19 million related to its 2022 term loan. Retirement of term loan expected to result in $90 million in annual interest and amortization savings. Considering the current economic scenario, management has temporarily suspended share repurchase activity and dividend payments. The company has roughly $131 million remaining under the current repurchase authorization.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 14.29% due to these changes.
VGM Scores
At this time, Office Depot has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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
Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. It comes with little surprise Office Depot has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.