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Office Depot (ODP) Stock Plunges on Soft Q1 Sales Warning

Zacks Equity Research

Shares of Office Depot, Inc. ODP took a dive, following management’s cautionary statement on lower-than-expected operating performance at the CompuCom division. It also added that the segment’s muted performance will have a direct bearing on total revenues and operating income during the first quarter of 2019. These were enough to send the stock down more than 23% on Apr 5.

The provider of business services and supplies, products, and technology solutions now envisions first-quarter revenue to be approximately $2.76 billion, down more than 2% from the year-ago period. The figure is also below the current Zacks Consensus Estimate of $2.83 billion. Office Depot also forecast adjusted operating income of approximately $65 million, including an operating loss of about $15 million for CompuCom division and down from $93 million reported in the year-ago quarter.

With the acquisition of CompuCom in 2017, this Boca Raton-based company took initiatives to transition from a traditional office products retailer to a business services and technology company. However, weaker-than-anticipated revenues from existing customer projects and less-than-proportionate fall in related expenses compelled management to project an operating loss for the division in the first quarter of 2019. The division generated operating income of $5 million in the first quarter of 2018.

Nevertheless, the company hopes that strategic endeavors such as streamlining operational structure, exploring options to speed-up cross-selling opportunities and reorganizing customer-facing organization would help bring the segment back on track.

Office Depot also guided first-quarter operating income from Business Solutions Division to be approximately $46 million, down from $55 million in the year-ago period. Management informed that increase in paper and paper related costs, lower eCommerce sales and other investments were a drag on the operating income.

The company now anticipates Retail division’s operating income to be about $66 million in the first quarter of 2019, down from $72 million reported in the year-ago period. Nonetheless, management is focusing on improving conversion, product assortment mix and exploring store-within-a-store opportunities to improve the segment’s performance.

Definitely, the company is trying all means to give itself a complete makeover in an environment where demand for office products (paper-based) has shrunk due to technological advancements. The company is focusing on business operating model, viable projects and cost structure. Management is making incremental investments to catapult it into a product and services-driven enterprise.

We note that shares of this Zacks Rank #3 (Hold) company have increased 3.6% in the past three months compared with the industry growth of 17.4%.

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