Shares of The ODP Corporation ODP increased roughly 18.4% during the trading session on Nov 5, following the company’s robust third-quarter 2020 performance. Both the top and bottom lines surpassed the Zacks Consensus Estimate while the latter also improved from the year-ago period.
Further, the company has commenced its multiyear Maximize B2B Restructuring Plan. This will lower its retail lease liabilities, improve cost structure, and provide resources to drive growth at the B2B platform. It has also been leveraging its supply-chain capabilities and developing key relationships to reinforce its leadership position.
The provider of business services and supplies, products and technology solutions posted adjusted earnings of $1.80 a share, which increased 17.6% year over year and outshone the Zacks Consensus Estimate of $1.31.
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ODP’s total sales of $2,539 million decreased 9% year over year owing to the impact of the pandemic on the business environment. We note that sales fell across the company’s three divisions. However, the metric surpassed the consensus mark of $2,469 million.
Although the top line has fallen year over year, we note that the rate of decline has decelerated sharply from 17% registered in the second quarter of 2020. Further, consolidated sales increased 8% on a sequential basis.
Again, product sales dipped 7% to $2,209 million, while service revenues declined 19% to $330 million. On a consolidated basis, service revenues were about 13% of total sales.
Adjusted operating income came in at $138 million, up 0.7% from the year-ago period. Moreover, adjusted operating margin increased 50 bps to 5.4%. Adjusted EBITDA of $186 million slipped 2.6% from the year-ago period.
We note that shares of this Zacks Rank #3 (Hold) company have increased 31.2% in the past three months compared with the industry’s 0.8% growth.
The Business Solutions Division’s (BSD) sales declined 11% year over year to $1,197 million, thanks to the coronavirus pandemic that adversely impacted the company’s contract channel sales. We note that diverse market channels and the large ecosystem are aiding this division to recover from pandemic-induced challenges.
Nonetheless, the company witnessed sales increase of 20% in e-commerce channel and growth in certain adjacency categories, namely cleaning and breakroom supplies, and technology, which were up 20% and 30%, respectively. Adjacency categories — including cleaning and breakroom supplies, technology, furniture, personal protective equipment, and copy and print services — accounted for 47% of overall Business Solutions Division sales.
Segmental operating income came in at $45 million, down from $71 million reported in the year-ago period, while operating margin shrunk 150 basis points to 3.8%. Management informed that reduced sales volume owing to the pandemic and product mix impacted the metric. This was partly mitigated by lower SG&A expenses attained through Business Acceleration Program (“BAP”).
In the reported quarter, the Retail Division’s sales dipped 3% to $1,147 million due to the planned shutdown of underperforming outlets and fewer transactions. The company had 73 lesser retail outlets at the end of the quarter under review on a year-over-year basis.
However, this was partly offset by higher demand for essential products — cleaning and breakroom supplies, technology products, and work-from-home/learn-from-home enabling products — courtesy of the coronavirus pandemic. The company witnessed an 82% jump in the buy-online, pick-up-in-store offering. Notably, the company continues offering curbside pick-up option in all locations.
While segmental operating income of $119 million soared 42% from the prior-year quarter, operating margin expanded 320 bps to 10.4%. This was primarily fueled by robust demand for home office and cleaning/breakroom categories as well as lower operating lease costs and reduced SG&A expenses owing to cost-saving efforts, improvements in distribution and inventory management costs.
The total store count at the division was 1,244 at the quarter end. During the reported quarter, the company shuttered 16 outlets.
The CompuCom Division generated sales of $197 million in the quarter, down 22% year over year, thanks to lower services volumes and product sales due to business disruptions caused by the coronavirus crisis.
The segment reported operating income of $3 million, flat with the year-ago period, while operating margin expanded 30 basis points to 1.5%. This was primarily driven by cost efficiency in relation to the BAP initiative.
Going forward, management is optimistic about the opportunities associated with the evolving trends in the future of work and cloud-based services. The company is performing an end-to-end business review and assessing all options to drive success in 2021 and beyond.
Other Financial Details
ODP ended the reported quarter with cash and cash equivalents of $743 million, long-term debt (net of current maturities) of $354 million, and stockholders’ equity of $1,795 million. Total debt at the end of the quarter was about $375 million, of which $100 million remains outstanding under the ABL facility, which does not mature until 2025.
For the quarter, cash provided by operating activities was $309 million. Also, management incurred capital expenditure of $14 million in the quarter. The company generated free cash flow of $295 million in the quarter.
Further, the company’s board has approved the resumption of the existing share-repurchase program to boost shareholder returns. It had about $130 million left on its $200-million authorization, which is expected to resume in the fourth quarter and run throughout 2021. This is backed by strength in the company’s business and financial position.
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