Office Depot Inc. (ODP) posted impressive second-quarter 2014 results, buoyed by expectations of increased synergies from the merger with OfficeMax.
More importantly, this Zacks Rank #2 (Buy) stock is now on a store rationalizing drive and will close 400 overlapping locations (165 stores in 2014) by 2016, to generate synergies of at least $100 million annually, as compared to $75 million forecasted earlier. The savings will be accretive by 2016.
Office Depot’s adjusted loss per share came in at 2 cents, in line with the Zacks Consensus Estimate and narrower than the proforma loss per share of 3 cents recorded last year. Including one-time items, the company delivered loss per share of 36 cents, wider than a loss of 23 cents per share in the prior-year quarter.
Office Depot’s total revenue of $3,841 million surged 58.8% from the prior-year quarter and surpassed the Zacks Consensus Estimate of $3794 million. However, on a proforma basis, revenues slipped 2%.
Office Depot’s second-quarter 2014 results are inclusive of OfficeMax’s operations. Since the merger was finalized in Nov 2013, the company has provided proforma figures (i.e. including both Office Depot and OfficeMax operations) for second-quarter 2013 assuming completion of the merger in the beginning of 2013 to facilitate better year-over-year comparisons.
Gross profit for the quarter advanced 61.7% year over year to $883 million, with the margin expanding 40 basis points (bps) to 23%. However, on a proforma basis adjusted gross profit dipped 1.9%.
Adjusted operating income came in at $18 million, as against a proforma operating loss of $6 million in the second-quarter of 2013.
In the quarter, North American Retail division’s revenues soared 55% to $1,457 million. On a proforma basis, revenues fell 5%. Comparable-store sales fell 3% due to fall in transaction counts, partly offset by higher average order values. The segment reported operating loss of $6 million, compared to an operating loss of $20 million and proforma operating loss of 22 million in second-quarter 2013.
The year-over-year improvement in the operating results at this segment was driven by a fall in selling, general and administrative (SG&A) expenses and enhancement in gross margin.
Total store count at the North America Retail division was 1,870 at the quarter end (1,067 Office Depot outlets and 803 OfficeMax outlets). Moreover, during the quarter, the company closed 16 Office Depot stores and Office Max stores each and opened one of each.
Revenues for North American Business Solutions jumped significantly by 90.9% to $1,491 million. On a proforma basis revenues fell 1%, owing to soft Canadian sales. The division posted an operating income of $59 million, up 90.3% from the year-ago quarter and 11.3% on a proforma basis. The increase in operating income was driven by lower selling general & administrative expenses, partly offset by lower gross margin rate.
The International division’s revenues escalated 19.5% to $834 million. On a proforma basis, sales fell 5% in constant currency. The division reported an operating loss of $2 million in the quarter, compared to a loss of $5 million and a combined proforma loss of $6 million, last year.
At the end of the quarter, total store count at the International division was 257 comprising 143 company-owned outlets, 92 OfficeMax locations (Mexico) and 114 outlets operated by franchisees and licensees.
Including the store rationalization cost savings, the company now expects to achieve synergies of over $700 million by the end of 2016, over the earlier expectation of $675 million. The company expects to realize a minimum of $220 million in 2014.
Office Depot continues to expect $400 million of integration expenses (excluding store rationalization expenses) with $300 million expected to be incurred in 2014.
OfficeMax and Office Depot completed the merger in Nov 2013. The company, under its new CEO Roland Smith, completed the reorganization of the company in Feb 2014.
Office Depot and OfficeMax merged to compete better with peers like Staples, Inc. (SPLS) and Amazon.com Inc. (AMZN).
During the quarter, Office Depot penned an agreement to divest its stake in the Mexican Grupo OfficeMax business to its joint venture (:JV) partners. Hence, the assets and liabilities of the JV have been categorized as held for sale on the balance sheet and form a part of “Other” division in the income statement. The sale is anticipated to close by the third quarter of the current fiscal.
Other Financial Details
Office Depot ended the quarter with cash and cash equivalents of $768 million, long-term debt (net of current maturities) of $685 million and total shareholders’ equity (including non controlling interests) of $1,792 million.
During the quarter, this office supplies retailer sold all its remaining Boise Cascade shares worth $20 million. The company had already distributed 1.6 million shares of the aforementioned company in first-quarter 2014.
Outlook for 2014
Management foresees headwinds across product lines and distribution channels during 2014. As a result, the company projects total revenue to be lower than 2013 pro-forma combined sales.
However, adjusted operating income is expected to be at least $200 million, up from the earlier expectation of at least $160 million. In 2014, capital expenditure projection is maintained at approximately $150 million, excluding an additional $50 million of integration costs.
For 2014-2016, capital expenditure is expected to be around $200–$250 million, as forecasted earlier. Further, in the current fiscal, depreciation and amortization are envisioned to be roughly $300 million.
Another stock in the same industry that looks attractive at current levels is Barnes & Noble, Inc. (BKS), carrying the same Zacks Rank as Office Depot.