Office Depot, Inc. (ODP) posted solid third-quarter 2014 results, backed by the achievement of desired synergies from the merger with OfficeMax.
Office Depot’s adjusted earnings per share came in at 10 cents, beating the Zacks Consensus Estimate by a penny and significantly up from the pro forma earnings per share of 5 cents recorded last year.
Including one-time items, the company’s earnings were 5 cents a share, compared to 41 cents in the prior-year quarter, which benefitted from the gain on sale of the Office Depot de Mexico joint venture.
On the back of sales from OfficeMax, this Zacks Rank #2 (Buy) company’s total revenue during the quarter surged 55.4% year over year to $4,069 million, almost in line with the Zacks Consensus Estimate of $4,070 million. However, on a pro forma basis, revenues slipped 3%.
Office Depot’s third-quarter 2014 results are inclusive of OfficeMax’s operations. Since the merger was finalized in Nov 2013, the company has provided pro forma figures (i.e. including both Office Depot and OfficeMax operations) for the third-quarter 2013 assuming completion of the merger in the beginning of 2013 to facilitate better year-over-year comparisons.
Gross profit for the quarter soared 55.9% year over year to $987 million, with the margin expanding 10 basis points to 24.3%. However, on a pro forma basis, adjusted gross profit dipped 1.9%.
Adjusted operating income came in at $126 million, up significantly from the pro forma operating income of $62 million in the third quarter of 2013.
Segment Performance
In the reported quarter, the North American Retail division’s revenues advanced 52.7% to $1,722 million. On a pro forma basis, revenues fell 7%.
Comparable-store sales fell 3% due to a fall in transaction counts. The segment reported operating income of $79 million, up from an operating income of $15 million and pro forma operating income of $34 million in third-quarter 2013.
Total store count at the North American Retail division was 1,851 at the quarter end. Moreover, during the quarter, the company closed 20 stores and opened 1 store at the division.
Revenues for North American Business Solutions jumped 87.5% to $1,522 million. On a pro forma basis, revenues fell 1%, owing to soft Canadian sales. The division posted an operating income of $67 million, up 71.8% year over year and 34% on a pro forma basis.
The International division’s revenues escalated 17.2% to $797 million. On a pro forma basis, sales fell 4% in constant currency. The division’s operating income of $10 million grew 66.7% year over year and 42.9% on a combined pro forma basis.
At the end of the quarter, total store count at the International division was 260, comprising 145 company-owned outlets and 115 outlets operated by franchisees and licensees.
The increase in operating income at all segments was driven by enhanced selling general & administrative expenses, and gross margin rate.
Merger Update
Including the store rationalization cost savings, the company now expects to achieve synergies of over $750 million by the end of 2016, over the earlier expectation of $700 million. Moreover, it expects to realize nearly $260 million of merger synergies in 2014, up from $220 million projected earlier. The updated guidance reflects the early achievement of synergies so far.
Office Depot continues to expect $400 million of integration expenses (excluding store rationalization expenses) to be incurred through 2016, with $300 million expected to be incurred in 2014.
OfficeMax and Office Depot completed the merger in Nov 2013. The company, under its new CEO Roland Smith, completed the reorganization of the company in Feb 2014.
Office Depot and OfficeMax merged to compete better with peers like Staples, Inc. (SPLS) and Amazon.com Inc. (AMZN).
Other Details
During the reported quarter, Office Depot sold its 51% stake in the Mexican Grupo OfficeMax business to its joint venture (“JV”) partners for $43 million.
Further, in Oct 2014, the company decided to adopt a European restructuring strategy and be more business network-focused rather than being geographic-focused. This plan, anticipated to be completed by Dec 2015, is also expected to generate annual cost savings of roughly $90 million by the end of 2016. However, it will also involve spending nearly $120 million as incremental pre-tax restructuring charges, a major part of which will be recorded in 2014 and 2015.
Other Financial Details
Office Depot ended the quarter with cash and cash equivalents of $965 million, compared to $948 million at the end of 2013. Long-term debt (net of current maturities) was at $680 million at the end of this quarter, compared to $692 million at the end of 2013. Total shareholders’ equity as of Sep 27, 2014 was $1,778 million, as compared to $2,063 million as of Dec 28, 2013.
Outlook
Management continues to foresee headwinds across product lines and distribution channels during 2014. Also, its store closures are likely to hurt sales during the year. As a result, the company still projects total revenue to be lower than 2013 pro forma combined sales.
However, at the same time, the company expects benefits integration of OfficeMax to compensate for the impact of weak sales. Consequently, adjusted operating income is now expected to be in the range of $255–$265 million, up from its previous prediction of at least $200 million.
Further, the company initiated preliminary adjusted operating income guidance for 2015, as it expects incremental merger synergies to lead to adjusted operating income of roughly $475 million.
In 2014, capital expenditure projection is maintained at approximately $150 million, excluding $25 million of integration costs.
For 2014–2016, capital expenditure is expected to be around $200 million. Further, in the current fiscal, depreciation and amortization are envisioned to be roughly $300 million.
Another stock in the same industry that looks attractive at current levels is Barnes & Noble, Inc. (BKS), carrying a Zacks Rank #1 (Strong Buy).
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