Office Depot (ODP) Tops Q4 EPS by 1c
Office Depot (NASDAQ: ODP) reported Q4 EPS of $0.08, $0.01 better than the analyst estimate of $0.07. Revenue for the quarter came in at $2.6 billion versus the consensus estimate of $2.61 billion.
Strategy and Outlook(7)
“I’m very excited by the positive response we have received from our customers and key business partners since announcing our new strategic direction to transform and strengthen Office Depot,” said Gerry Smith. “This was never more evident than in our BizBox flagship store grand opening in Austin, Texas at the end of January. The BizBox services platform provides small and medium-sized businesses with the core services needed to start and grow their businesses. By delivering an increasing number of service offerings, we create broader and longer-lasting relationships with our customers. We are accelerating a number of initiatives to drive this transformation including expanding the CompuCom technology services footprint, rolling out the BizBox services platform and accelerating the offering of new subscription-based services.”
Accordingly, Office Depot expects sales from the new growth initiatives, including recent acquisitions, to help mitigate but not completely offset negative impacts to 2018 from:
- Lower store volume
- Prior year store closures
- Adoption of new revenue recognition standards estimated to reduce reported sales by approximately $60 million
At the end of 2017, the Company substantially completed the integration with OfficeMax which provided significant synergy benefits since the integration first began in 2014. In addition, since retaining the retail footprint is a critical part of the Company’s omni-channel strategy going forward, Office Depot has decided to significantly slow the pace of future store closures. As a result, the Company believes it is now significantly complete with the prior cost savings programs and does not expect material additional benefits from these programs to be realized in 2018.
Accordingly, adjusted operating income in 2018 is expected to be affected by the flow-through impact of lower sales volume, as well as additional factors including:
- Approximately $40 million of incremental growth investments as the Company accelerates the transition towards a services-driven model
- Normalized compensation-related expense over the prior year of approximately $30 million resulting from lower than expected payouts in 2017
- Adoption of new pension and defined benefit plan expense reporting requirements with a year-over-year impact of approximately $13 million
- Partially offset by a full-year of incremental benefits from acquisitions and realization of approximately $20 million in expected synergies from the CompuCom acquisition
Despite these impacts, the Company expects to deliver strong free cash flow performance in 2018 through a continued focus on driving working capital efficiencies, building upon the improvements initiated in 2017. Also, the Company’s cash tax rate is anticipated to remain low as tax operating loss carry forwards and credits continue to be utilized.
Taking these items into consideration, the Company provides the following outlook for fiscal 2018:
| Projected Outlook (7) | FY 2018 | |
| Combined Company full-year sales | ~ $10.6 billion | |
| Adjusted operating income | ~ $350 million | |
| Adjusted diluted earnings per share | ~ $0.30 | |
| Free Cash Flow | ~ $325 million | |
Other underlying assumptions include: | ||
| Net interest expense | ~ $100 million | |
| Non-GAAP effective tax rate | ~ 31% | |
| Full-year weighted-average diluted share count | ~ 570 million | |
| Depreciation and amortization expense | ~ $175 million | |
| Capital expenditures | ~ $175 million | |
| Cash tax rate | < 10% |
“We remain intensely focused on profitably growing Office Depot with a deliberate shift to a more services oriented revenue base while continuing to generate strong free cash flow,” said Gerry Smith. “We recognize that 2018 is a year of transition and that investments are required to advance our Company’s multi-year transformation. However, as we look to 2019 and beyond, I expect that 2018 will be our pivot year as the actions we have already taken, coupled with the additional initiatives and investments we have planned this year, should allow us to grow year-over-year profitability in 2019. I am confident that we have a compelling and differentiated strategy to create a unique omni-channel business services platform that will generate long-term sustainable growth and greater value to our customers, partners and shareholders.”
The Company expects to provide additional details on the long-term strategic direction and operating priorities, at an Investor Day expected to be held on or about May 16, 2018 in New York City. Further details on this event will be forthcoming.
For earnings history and earnings-related data on Office Depot (ODP) click here.