Office Depot Announces Fourth Quarter and Full Year 2018 Results

Delivered strong revenue growth and free cash flow; expanded
distribution network; grew services revenue; improved balance sheet and
returned capital to shareholders in 2018.

Poised for profitable growth in 2019

Full Year 2018 Highlights

Reported Sales of $11.0 Billion, up 8%

Operating Income of $254 Million and Net Income from Continuing
Operations of $99 Million

Adjusted Operating Income of $360 Million and Adjusted EBITDA of $567
Million

Generated $616 Million in Operating Cash Flow

Invested in Distribution Network, eCommerce Platform and Demand
Generation

Fourth Quarter 2018 Highlights

Reported Sales of $2.7 Billion, up 3%

Services Revenue 16% of Total Revenue

Operating Income of $24 Million, Due to Lower Divisional Performance
and FTC-related Accrual

Adjusted Operating Income of $84 Million

CompuCom Named Leader in Gartner Magic Quadrant

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.

                         
Consolidated (in millions, except per share amounts)     4Q18     4Q17     FY18     FY17
Selected GAAP measures:                        
Sales     $2,670     $2,581     $11,015     $10,240
Sales change from prior year period     3%           8%      
Operating income     $24     $56     $254     $327
Operating income margin     0.9%     2.2%     2.3%     3.2%
Net income (loss) from continuing operations     $(14)     $(48)     $99     $146
Diluted earnings (loss) per share from continuing operations     $(0.02)     $(0.09)     $0.18     $0.27
Operating Cash Flow (1)     $61     $59     $616     $467
Selected Non-GAAP measures: (2)                        
Adjusted EBITDA (3)     $138     $138     $567     $603
Adjusted operating income     $84     $92     $360     $432
Adjusted operating income margin     3.1%     3.6%     3.3%     4.2%
Adjusted net earnings per share from continuing operations (most
dilutive)
    $0.09     $0.08     $0.35     $0.45
Free Cash Flow (1) (4)     $(5)     $10     $429     $326
               

(1)

 

Both Operating Cash Flow and Free Cash Flow are from
continuing operations.

(2)

Adjusted results represent non-GAAP measures and exclude
charges or credits not indicative of core operations and the tax
effect of these items, which may include but not be limited to
merger integration, restructuring, acquisition costs, asset
impairments, executive transition costs, and loss on modification
of debt. Reconciliations from GAAP to non-GAAP financial measures
can be found in this release as well as on the Investor Relations
website at investor.officedepot.com.

(3)

2018 Adjusted EBITDA includes a $4 million reduction
related to a reclassification from the first quarter 2018.

(4)

As used throughout this release, Free Cash Flow is defined
as cash flows from operating activities of continuing operations
less capital expenditures. Free Cash Flow is a non-GAAP measure
and reconciliations from GAAP financial measures can be found in
this release.

 

“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.

                                                         
Sales Breakdown (in millions)             4Q18             4Q17             FY18             FY17
Product sales             $2,250             $2,267             $9,322             $9,320
Sales change from prior year             (1)%                           0%              
Service revenues             $420             $314             $1,693             $920
Sales change from prior year             34%                           84%              
Total sales             $2,670             $2,581             $11,015             $10,240
                                               

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.

(5)

 

Adjusted results represent non-GAAP measures and exclude
charges or credits not indicative of core operations and the tax
effect of these items, which may include but not be limited to
merger integration, restructuring, acquisition costs, asset
impairments, executive transition costs, loss on modification of
debt, and legal accruals. Reconciliations from GAAP to non-GAAP
financial measures can be found in this release as well as on the
Investor Relations website at investor.officedepot.com.

 

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 (in millions)             4Q18             4Q17             FY18             FY17
Sales             $1,293             $1,257             $5,282             $5,108
Sales change from prior year             3%                           3%              
Division operating income             $54             $68             $243             $262
Division operating income margin             4.2%             5.4%             4.6%             5.1%
                                               

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 (in millions)             4Q18             4Q17             FY18             FY17
Sales             $1,090             $1,164             $4,641             $4,962
Comparable store sales change from prior year             (5)%                           (4)%              
Division operating income             $28             $40             $193             $254
Division operating income margin             2.6%             3.4%             4.2%             5.1%
                                               

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 (in millions)             4Q18             4Q17             FY18             FY17
                            Historical (6)                           Historical (6)
Sales             $283             $271             $1,086             $1,080
Sales change from prior year             4%                           1%              
Division operating income             $5             $11             $17             $45
Division operating income margin             1.8%             4.1%             1.6%             4.2%
 

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.

(6)

 

The CompuCom unaudited adjusted historical results for the
fourth quarter of 2017 reflect information prepared prior to our
acquisition and have not been subject to audit or the Company’s
internal control processes. Results have been adjusted for
historical restructuring and acquisition costs and have been
presented for reference purposes only. The results for 2017 may
not be comparable to current year results nor indicative of the
results of future operations of the CompuCom Division or the
results that would have been attained had the acquisition been
completed on January 1, 2017.

 

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:

                       
                      FY 2019 Guidance
Sales                     ~$11.1 billion
Adjusted EBITDA                     ~$575 million
Adjusted Operating Income                     ~$375 million
Free Cash Flow                     ~$350 million
                   
                       
Other underlying assumptions include:                      
Net interest expense                     ~$75 million
Non-GAAP effective tax rate                     ~30%
Capital Expenditures                     Up to $175 million
Cash Tax Rate                     < 10%
 

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.

(7)

 

The Company’s outlook for 2019 included in this release is
for continuing operations only and includes non-GAAP measures,
such as adjusted EBITDA, adjusted operating income, and free cash
flow. These measures exclude charges or credits not indicative of
core operations, which may include but not be limited to merger
integration expenses, restructuring charges, acquisition-related
costs, executive transition costs, asset impairments and other
significant items that currently cannot be predicted. The exact
amount of these charges or credits are not currently determinable
but may be significant. Accordingly, the Company is unable to
provide equivalent GAAP measures or reconciliations from GAAP to
non-GAAP for these financial measures.

 

About Office Depot, Inc.

Office Depot, Inc. (NASDAQ:ODP) is a leading provider of business
services and supplies, products and technology solutions through its
fully integrated B2B distribution platform of approximately 1,350
stores, online presence, and dedicated sales professionals and
technicians to small, medium and enterprise businesses. Through its
banner brands Office Depot®, OfficeMax®, CompuCom® and Grand&Toy®, as
well as others, the Company offers its customers the tools and resources
they need to focus on their passion of starting, growing and running
their business. For more information, visit news.officedepot.com
and follow @officedepot on Facebook,
Twitter
and Instagram.

Office Depot is a trademark of The Office Club, Inc. OfficeMax is a
trademark of OMX, Inc. CompuCom is a trademark of CompuCom Systems, Inc.
Grand&Toy is a trademark of Grand & Toy, LLC in Canada. ©2019 Office
Depot, Inc. All rights reserved. Any other product or company names
mentioned herein are the trademarks of their respective owners.

FORWARD LOOKING STATEMENTS

This communication may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements or disclosures may discuss goals, intentions and expectations
as to future trends, plans, events, results of operations, cash flow or
financial condition, or state other information relating to, among other
things, Office Depot, based on current beliefs and assumptions made by,
and information currently available to, management. Forward-looking
statements generally will be accompanied by words such as “anticipate,”
“believe,” “plan,” “could,” “estimate,” “expect,” “forecast,”
“guidance,” “outlook,” “intend,” “may,” “possible,” “potential,”
“predict,” “project,” “propose” or other similar words, phrases or
expressions, or other variations of such words. These forward-looking
statements are subject to various risks and uncertainties, many of which
are outside of Office Depot’s control. There can be no assurances that
Office Depot will realize these expectations or that these beliefs will
prove correct, and therefore investors and stockholders should not place
undue reliance on such statements.

Factors that could cause actual results to differ materially from those
in the forward-looking statements include, among other things, highly
competitive office products market and failure to differentiate Office
Depot from other office supply resellers or respond to decline in
general office supplies sales or to shifting consumer demands;
competitive pressures on Office Depot’s sales and pricing; the risk that
Office Depot may not be able to realize the anticipated benefits of
acquisitions due to unforeseen liabilities, future capital expenditures,
expenses, indebtedness and the unanticipated loss of key customers or
the inability to achieve expected revenues, synergies, cost savings or
financial performance; the risk that Office Depot is unable to transform
the business into a service-driven company or that such a strategy will
result in the benefits anticipated; failure to execute effective
advertising efforts; the risk that Office Depot is unable to
successfully maintain a relevant omni-channel experience for its
customers; failure to attract and retain key personnel, including
qualified employees in stores, service centers, distribution centers,
field and corporate offices and executive management; disruptions in
Office Depot computer systems; breach of Office Depot information
technology systems affecting reputation, business partner and customer
relationships and operations and resulting in high costs; loss of
business with government entities, purchasing consortiums, and sole- or
limited- source distribution arrangements; product safety and quality
concerns of manufacturers’ branded products and services and Office
Depot private branded products; increases in fuel and other commodity
prices; increases in the cost of material, energy and other production
costs, or unexpected costs that cannot be recouped in product pricing;
unanticipated downturns in business relationships with customers or
terms with the suppliers, third-party vendors and business partners;
disruption of global sourcing activities, evolving foreign trade policy
(including new tariffs on certain foreign made goods); a downgrade in
Office Depot credit ratings or a general disruption in the credit
markets; covenants in the credit facility and term loan; incurrence of
significant impairment charges; fluctuation in quarterly operating
results due to seasonality of Office Depot business; changes in tax laws
in jurisdictions where Office Depot operates; unexpected claims,
charges, litigation, dispute resolutions or settlement expenses; the
inability to realize expected benefits from the disposition of the
international operations; fluctuations in currency exchange rates;
changes in the regulatory environment, legal compliance risks and
violations of the U.

Contacts

Tim Perrott
Investor Relations
561-438-4629
Tim.Perrott@officedepot.com

Danny Jovic
Media Relations
561-438-1594
Danny.Jovic@officedepot.com

Read full story here

error: Content is protected !!