Office Depot (ODP) Tops Q3 EPS by 1c

November 2, 2016 6:51 AM EDT

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Office Depot (NASDAQ: ODP) reported Q3 EPS of $0.16, $0.01 better than the analyst estimate of $0.15. Revenue for the quarter came in at $2.84 billion versus the consensus estimate of $3.49 billion.

Outlook (2)

Total company sales in the fourth quarter of 2016 are expected to be lower than 2015, primarily due to the impact of store closures, previous contract customer losses during the prolonged Staples acquisition attempt and continued challenging market conditions. However, the company expects the rate of decline to improve sequentially based on improvements in customer retention and the contract channel sales pipeline, as well as the implementation of new customer wins.

As announced on August 3, 2016, the company is proceeding with a second phase of the U.S. Retail Store Optimization Plan. This second phase includes closing approximately 300 stores over the next three years. During the third quarter, Office Depot closed 7 stores and anticipates closing approximately 65 stores in the fourth quarter as part of this program. The company is accelerating the store closure plan partly based on the success of the first phase, the beneficial sales transfer rates experienced and the timing of lease expirations.

Office Depot continues to expect to generate between $450 million and $470 million in adjusted operating income in fiscal 2016, excluding the former International Division that is now reported as discontinued operations, versus a comparable adjusted operating income of $438 million in fiscal 2015.

Total capital expenditures in 2016 are now estimated to be approximately $120 million as the company reprioritizes projects in line with its new three year strategic plan. This estimate includes approximately $30 million in capital spend related to the merger integration. Depreciation and amortization is expected to be approximately $190 million in 2016. As a result of the International Division’s results being reclassified to discontinued operations, Office Depot now expects full-year free cash flow of continuing operations to be in excess of $375 million in 2016.

Office Depot continues to expect total annual run-rate merger synergy benefits of more than $750 million from the OfficeMax integration and expects the integration to be substantially complete by the end of 2017. The company expects to incur approximately $70 million of merger integration expenses in 2016 and the remaining $30 million in 2017.

In regards to the recently announced cost saving program, the company expects to deliver over $250 million in annual benefits by the end of 2018, anticipated to be evenly split between fiscal 2017 and 2018. In addition, the company estimates it will incur a total of approximately $125 million in one-time costs and capital expenditures to implement the cost saving programs.

Office Depot anticipates a non-GAAP effective tax rate of approximately 40% in fiscal 2016, dependent on the mix and timing of income, and an estimated cash tax rate of between 10% and 15% as the company continues to utilize available tax operating loss carry forwards and credits.

For fiscal 2017, the company provides the following preliminary guidance:

  • Total company sales anticipated to be lower compared to the prior year
  • Adjusted operating income of approximately $500 million
  • Capital expenditures are expected to be approximately $200 million
  • Free cash flow of continuing operations anticipated to be more than $300 million

For earnings history and earnings-related data on Office Depot (ODP) click here.

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