Office Depot, Inc. ODP reported second-quarter 2015 adjusted earnings of 6 cents per share that came in line with the Zacks Consensus Estimate and vastly improved from a loss of 2 cents per share reported in the prior-year quarter.
Including one-time items, the company’s loss of 11 cents a share narrowed significantly from a loss per share of 36 cents recorded in the prior-year quarter.
Synergies from the merger with OfficeMax continue to boost results. The company began 2015 with $500 million in synergy benefits and continues to expect synergies of over $750 million by 2016-end, given its integration with OfficeMax.
However, the company’s total revenue decreased 10% year over year to $3,440 million and fell way short of the Zacks Consensus Estimate of $3,519 million. Excluding impact of store closures, prior-year quarter’s Grupo OfficeMax JV sales, and forex fluctuations, sales slipped 3%.
Management continues to project total sales in 2015 to be lower than that of 2014 on account of store closures, currency headwinds, business disruption owing to impending merger with Staples, Inc. SPLS and tough market conditions.
Industry experts believe that the $6.3 billion Staples and Office Depot deal is a step to stave off competition, attain cost synergies and provide consumers with a better omni-channel platform. The idea of this merger, however, is not a new one as the same was proposed 18 years ago but was dismissed by the Federal Trade Commission back then, after being slammed as anticompetitive.
Nevertheless, a changing consumer landscape is pushing it forward this time, as office supply retailers are facing more and more competition from companies like Wal-Mart Stores Inc. WMT and Amazon.com Inc. AMZN.
The transaction has received approval from a thumping majority of Office Depot shareholders. Moreover, the governments of New Zealand and China have provided clearance for the transaction. The company is working in tandem with the U.S authorities and Staples already has obtained the debt to finance the $6.3 billion transaction. Moreover, the company has been working with authorities across the European Union, Canada and Australia, to close the transaction by the end of this year.
Back to results, adjusted gross profit during the quarter under review fell 6.1% year over year to $814 million, whereas gross margin expanded 80 basis points to 23.7%.
Adjusted operating income came in at $73 million, which more than quadrupled from the operating income of $18 million in the year-ago quarter. Adjusted operating margin grew to 2.1% from 0.5% recorded in the prior-year quarter.
Segment Performance
In the reported quarter, the North American Retail division’s revenues fell 8% to $1,342 million. Comparable-store sales increased 1% due to operational effectiveness. The segment reported operating income of $42 million, which improved substantially from loss of $6 million reported in the prior-year quarter, mainly on the back of lower occupancy costs and decreased selling, general and administrative expenses.
Total store count at the North American Retail division was 1,626 at quarter-end. During the quarter, the company shuttered 99 outlets. The company plans to close 175 stores in 2015 and another 60 in 2016, taking the total count to 400 stores over two year time frame.
Revenues for North American Business Solutions fell 4% to $1,434 million owing to soft Canadian sales and planned transition of some large customers under a legacy OfficeMax Tier 1 arrangement. The division posted operating income of $63 million, up 6.8% from the prior-year quarter while margin grew 40 bps to 4.4%.
The International division’s revenues tumbled 20% to $664 million as currency headwinds intensified. On a constant currency basis too, sales declined 6%. However, the division’s operating income of $2 million improved from the loss of $2 million reported in the prior-year quarter driven by lower selling, general & administrative expenses.
At the end of the quarter, total store count at the International division was 267, comprising 146 company-owned outlets and 121 outlets operated by franchisees and licensees.
Other Financial Details
Office Depot, which carries a Zacks Rank #3 (Hold), ended the quarter with cash and cash equivalents of $867 million, long-term debt of $648 million and shareholders’ equity of $1,583 million. Management has projected capital expenditures of approximately $200 million in 2015.
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