Office Depot Inc. (ODP) lost nearly 9% of its market cap following dismal fourth-quarter and full-year 2013 results. The office supplier retailer posted adjusted loss per share of 3 cents, as against the Zacks Consensus Estimate of earnings of 3 cents and the breakeven attained in the prior year-quarter.
Including one-time items, Office Depot’s loss per share came in at 34 cents compared with a loss of 6 cents in the prior-year quarter.
For the full year, adjusted loss per share came in at 11 cents, compared with the Zacks Consensus Estimate of earnings per share of 2 cents and 3 cents in the prior-year quarter. Including one-time items, loss per share came in at 29 cents, compared with loss of 39 cents reported in the prior-year quarter.
Office Depot’s total revenue of $3,486 million increased about 33.0% from the prior-year quarter but lagged the Zacks Consensus Estimate of $4,135.0 million.
Full-year revenues came in at $11,242 million, up 5.1% year over year but missed the Zacks Consensus Estimate of 15,441 million.
Office Depot’s fourth quarter and full year 2013 results are inclusive of OfficeMax’s operations (from date of merger to Dec 28, 2013, which is known as the Stub period). The Stub period contributed $939 million in sales.
Gross profit for the quarter grew 30% to $787 million while gross margin declined 50 basis points to 22.6% in the quarter.
Segment Performance
In the quarter, North American Retail division’s revenues increased 31.0% to $1,403 million, driven by $384 million sales generated from the OfficeMax stub period. Comparable-store sales fell 4% due to reduced average order values and fall in transaction counts attributable to decline in traffic. However, the segment reported operating loss of 8 million, flat as compared with the prior-year quarter.
Total store count at the North America Retail division was 1,912 at the year-end (1,089 Office Depot outlets and 823 OfficeMax outlets). Moreover, during the quarter, the company closed 16 Office Depot stores and 7 OfficeMax stores and opened 1 store each of Office Max and Office Depot.
Revenues for North American Business Solutions rose nearly 53.6% to $1,173 million. Revenue includes sales of $422 million generated from the OfficeMax stub period. The division posted an operating income of $16 million, down 51.5% from the year-ago quarter. The fall in operating income was due to the adverse impact of lower sales, along with increased selling, general, and administrative expense. These factors were partly offset by the favorable impact from the OfficeMax stub period.
The International division’s revenues grew 12% on a constant currency basis and 15.5% based on U.S. dollars to $911 million. Revenue includes sales of $133 million generated from the OfficeMax stub period. The overall sales in the European contract as well as the Direct and Retail channels fell in the mid single digits. The decline was due to loss-making customer exits as well as continued fall in catalog sales, which were partly offset by rise in online sales.
The division reported an operating income of $26 million in the quarter, up 62.5% from the prior-year period driven by increased gross margin and reduced payroll and advertising costs.
At the end of 2013, total store count at the International division was 352 comprising 144 company-owned outlets, 93 OfficeMax locations (Mexico) and 115 outlets operated by franchisees and licensees.
Merger Update
OfficeMax Incorporated and Office Depot completed the merger in Nov 2013. The company, under its new CEO Roland Smith, expects the complete reorganization of the company to be complete by the end of Feb 2014.
The all-stock merger agreement, which involved 2.69 Office Depot shares for each share of OfficeMax, would result in cost synergies of $600 million by the end 2016. The company expects to incur $400 million as integration expenses in the next three years up to 2016.
OfficeMax and Office Depot decided to merge their businesses to compete with the industry bellwether, Staples Inc. (SPLS) and online peers like Amazon.com Inc. (AMZN). The move was a strategic one for both the companies, which have been grappling with soft sales.
Other Financial Details
The company ended the quarter with cash and cash equivalents of $955 million, long-term debt (net of current maturities) of $696 million and total shareholders’ equity of $2,063 million. It incurred capital expenditure of $137 million and generated negative cash flow of $107 million from operating activities during the year.
Outlook for 2014
Management foresees headwinds across product lines and distribution channels during 2014. As a result, the company projects total revenue to be lower than 2013 pro-forma combined sales while adjusted operating income is expected to be at least $140 million. In 2014, capital expenditure will be approximately $150 million, excluding an additional $50 million of integration costs.
At present, Office Depot carries a Zacks Rank #5 (Strong Sell). Another better ranked stock in retail that can be considered for investment includes ITOCHU Corporation (ITOCY), which sports a Zacks Rank#1 (Strong Buy).
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