Office Depot Announces Fourth Quarter and Full Year 2018 Results

BOCA RATON, Fla.--(BUSINESS WIRE)--Office Depot, Inc. (“Office Depot,” or the “Company”) (NASDAQ: ODP), a leading integrated business-to-business (“B2B”) distribution platform of business services and supplies, products and technology solutions, today announced results for the fourth quarter and full year ended December 29, 2018.

“In the pivotal year of our transformation, we achieved our key priorities of recapturing top-line growth, expanding our distribution platform, growing our services business, generating significant free cash flow, and strengthening our balance sheet”

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“In the pivotal year of our transformation, we achieved our key priorities of recapturing top-line growth, expanding our distribution platform, growing our services business, generating significant free cash flow, and strengthening our balance sheet,” said Gerry Smith, chief executive officer of Office Depot. “The progress we’ve made in enhancing our platform throughout the year was driven by growth in our integrated B2B business and year-over-year trend improvements in our retail business, benefitting from a 24% increase in our buy on-line pick up in store sales. We increased our reach to the nearly 29 million customers we serve today, including approximately 10 million small and medium businesses. We invested in and expanded our distribution network, upgraded the technology in our stores and improved our on-line and mobile experience. We also made significant progress in integrating CompuCom into our service offerings and are pleased to report that CompuCom has been once again recognized by Gartner as a 2019 Magic Quadrant leader. Overall, we made great progress on our transformation priorities and have positioned Office Depot to continue to deliver profitable growth in the future.”

Consolidated Results

Reported (GAAP) Results

Total reported sales for the fourth quarter 2018 were $2.7 billion compared to $2.6 billion in the fourth quarter of 2017, an increase of 3%. Product sales in the fourth quarter were down 1%, while service revenues grew 34%, driven primarily by service revenue contributed by the partial inclusion of CompuCom divisional results and growth in our BSD division. Service revenue excluding the CompuCom division and revenue recognition impacts grew 19% for the combined Retail and BSD divisions in the fourth quarter compared to last year. On a reported basis service revenue represented approximately 16% of total Company sales.

In the fourth quarter of 2018, Office Depot reported operating income of $24 million, compared to operating income of $56 million in the prior year period. Fourth quarter 2018 operating income results included a $25 million legal expense accrual related to a proposed settlement with the Federal Trade Commission (“FTC”) associated with the Company’s use of a third-party software product, as well as costs associated with investments in the business platform to support future growth. Net loss from continuing operations was $14 million, or $0.02 per share, compared to a loss of $48 million and $0.09 per share in the fourth quarter of 2017. The fourth quarter of 2018 net income results included a $15 million loss on the modification of debt related to the refinancing of the company’s term loan to lower future interest expense.

Total reported sales for the full year 2018 period were $11.0 billion, an increase of 8% over the same period last year, largely driven by the addition of CompuCom, growth in the B2B distribution platform, and growth in service revenues. Product sales for the year were flat with the prior year, while services sales grew 84% over last year, driven largely by the inclusion of CompuCom. Service revenue excluding the CompuCom division and revenue recognition impacts grew 13% year over year. Office Depot reported full year 2018 operating income of $254 million compared to an operating income of $327 million in the prior year period. Full year 2018 operating income results included the previously mentioned $25 million legal expense accrual related to a proposed settlement with the FTC. Net income from continuing operations in 2018 was $99 million, or $0.18 per share, compared to net income from continuing operations of $146 million, or $0.27 per diluted share, in 2017.

Adjusted (non-GAAP) Results (5)

Adjusted results for the fourth quarter of 2018 exclude charges and credits totaling $60 million, comprised of $1 million in executive transition costs, $7 million in asset impairments, $21 million in merger, acquisition and integration-related expenses, $6 million in restructuring and other charges, and $25 million in legal expense accrual, as well as the after-tax impact of these items.

• Fourth quarter adjusted EBITDA was $138 million flat with the prior year period, despite increased costs associated with additional investments in the Company’s B2B platform.
• Fourth quarter 2018 adjusted operating income was $84 million compared to an adjusted operating income of $92 million in the fourth quarter of 2017.
• Fourth quarter 2018 adjusted net income from continuing operations was $52 million, or $0.09 per diluted share, compared to an adjusted net income from continuing operations of $45 million, or $0.08 per diluted share, in the fourth quarter of 2017.
• Full year 2018 results included adjusted EBITDA of $567 million; adjusted operating income of $360 million; and adjusted net income of $199 million or $0.35 per diluted share.

Fourth Quarter Division Results

Business Solutions Division

The Business Solutions Division reported sales were $1.3 billion in the fourth quarter of 2018, up 3% compared to the fourth quarter of 2017. The year-over-year increase reflects the impact of acquisitions, without which sales were approximately flat with the prior year. Organic sales performance was primarily driven by continued growth in adjacency categories and services. Including acquisitions, product sales in the fourth quarter of 2018 increased 2%, while service revenue increased 20% compared to the prior year period.

Business Solutions Division operating income was $54 million in the fourth quarter of 2018 compared to $68 million in the fourth quarter of 2017. The decrease in operating income versus the prior year was driven primarily by certain cost impacts in the quarter as identified below and investments to drive future growth. Cost impacts in the quarter were related to platform consolidation from prior merger related activities, absorption of certain paper cost increases before realizing mitigation benefits, and higher distribution costs.

Retail Division

The Retail Division reported sales were $1.1 billion in the fourth quarter of 2018, down 6% versus the prior year period. Planned closures of underperforming stores and an approximately $10 million negative impact to revenue resulting from the adoption of the new revenue recognition standard contributed to the reported decline. Comparable store sales were down 5% excluding the change in revenue recognition. Product sales in the quarter declined 8% compared to the prior period, primarily due to lower sales volume, while service revenue increased 18% compared to the prior year period, excluding the revenue recognition change.

Retail Division operating income was $28 million in the fourth quarter of 2018, compared to $40 million in the fourth quarter of 2017. The decrease in operating income versus the prior year was due to deleveraging related to store closures, lower sales volume, and investments in additional service delivery capabilities adversely impacting gross profit and SG&A as a percentage of sales.

During the fourth quarter of 2018, the Company opened one new store, replaced one store, and closed 13 stores and ended the quarter with a total of 1,361 stores in the Retail Division.

CompuCom Division

CompuCom Division results are included in total Company results since the acquisition of CompuCom on November 8, 2017. Included in the Company’s reported fourth quarter 2017 results were revenues of $156 million and operating income of $8 million from the CompuCom division. Unaudited adjusted historical results for the entire fourth quarter of 2017 have been presented below for reference. CompuCom Division reported sales were $283 million in fourth quarter of 2018, up 4% versus sales of $271 million in the prior year historical period, despite lower sales from one of the divisions largest customers, which is currently experiencing a significant reorganization of its business.

CompuCom Division operating income was $5 million in the fourth quarter of 2018 versus historical operating income of $11 million in the fourth quarter of 2017. Operating income was down versus the prior year primarily due to lower sales from a large customer experiencing a significant reorganization of its business, lower gross margin on product sales mix, expenses associated with onboarding new customers, and expenses related to growth initiatives. These growth initiatives contributed to a 6% increase in service order wins in 2018 versus 2017. CompuCom’s commitment to service excellence was once again recognized by Gartner as a 2019 Magic Quadrant leader, an exceptionally strong external endorsement of the quality of CompuCom’s services.

Corporate and Other

Corporate expenses include support staff services and certain other expenses that are not allocated to the Company’s operating divisions. Unallocated expenses decreased to $3 million in the fourth quarter of 2018 compared to $24 million in the fourth quarter of 2017, primarily due to a release of incentive-based compensation accruals, reduction of professional fees, and other cost efficiencies.

The Company’s “Other” segment, which contains the global sourcing and trading operations in Asia and the elimination of intersegment revenues, had no material contribution to sales or operating income in the fourth quarter of 2018.

Balance Sheet and Cash Flow

As of December 29, 2018, Office Depot had total available liquidity of approximately $1.6 billion consisting of $658 million in cash and cash equivalents and $947 million of available credit under the Amended and Restated Credit Agreement. Total debt was $785 million, excluding $754 million of non-recourse debt supported by the Timber Notes receivable.

In the fourth quarter of 2018, the Company successfully reduced the rate on its Term Loan Credit Agreement due 2022 (“term loan”) by 175 basis points, saving an estimated $21 million in future annual net interest expense. As part of this repricing, the Company utilized existing cash balances to pay down approximately $200 million of the term loan’s outstanding balance.

For the fourth quarter of 2018, cash provided by operating activities of continuing operations was $61 million, including the impact of $1 million in OfficeMax merger–related costs, $21 million in acquisition and integration-related costs and $5 million in restructuring costs, compared to $59 million in the fourth quarter of the prior year.

Capital expenditures in the quarter were $66 million versus $49 million in the prior year, reflecting increased investments in our service platform, distribution network and eCommerce capabilities. Accordingly, Free Cash Flow from continuing operations was a net outflow of $5 million in the fourth quarter of 2018. For full year 2018, cash provided by operating activities was $616 million with $187 million of capital expenditures for Free Cash Flow from continuing operations of $429 million.

During the fourth quarter of 2018, the Company paid a quarterly cash dividend of $0.025 per share on December 14, 2018 for approximately $14 million and made a $19 million scheduled debt repayment on the 2022 term loan. In addition, Office Depot repurchased approximately 6 million shares at a total cost of $17 million in the fourth quarter of 2018. The Company also invested $17 million in the quarter through acquisitions to expand its BSD distribution network and its customer base. As part of the Company’s ongoing commitment to increasing shareholder value, the Board of Directors approved a new $100 million stock repurchase authorization effective January 1, 2019. The new stock repurchase program follows the Company’s current program, which expired on December 31, 2018.

2019 Guidance(7)

“The actions we took in 2018 to regain sales growth and invest in our business platform showed progress and we are encouraged about the opportunities in 2019 to more fully exploit our key assets. These assets include our nearly 29 million customers; a distribution network that can deliver to 98.5% of the U.S. population next day; and our 1,800 person dedicated B2B sales force,” said Gerry Smith. “In the year ahead, we are taking actions to improve profitability while continuing to grow our top-line revenue. In addition to leveraging the investments we’ve made in our business, the actions we are taking to drive greater profitability include realigning our merchandizing organization, pursuing cost efficiencies throughout the entire organization, leveraging our asset base in traditional and non-traditional ways, and enhancing customer penetration and share of wallet.”

The Company reconfirmed its previously issued guidance for 2019 which includes:

This guidance considers improving sales trends in its BSD, Retail and CompuCom divisions. Additionally, this guidance also reflects successfully addressing the targeted initiatives aimed at addressing supplier, distribution and wage rate cost pressures and a continued focus on Free Cash Flow generation.