Office Depot Inc has said that its first quarter results will be lower than expected, largely due to a weak performance at its CompuCom division.
The company released preliminary first quarter results today, more than a month ahead of its first quarter reporting date of 8 May, revealing that Q1 sales will be around $2.76 billion, about $40 million down on the same quarter last year. Adjusted operating profit is expected to be in the region of $65 million, a year-on-year fall of around 30%.
Depot indicated challenges at all three of its reporting divisions, with the main driver of the lower-than-anticipated results being its CompuCom IT services unit which is expected to report a Q1 operating loss of $15 million.
Profitability at CompuCom has been hit by lower-than-expected revenue from existing projects that has not been offset by reductions in associated expenses, as well as by spending to develop and market new services.
Office Depot said it is taking steps to improve the future operating performance at CompuCom. These include streamlining its operational structure, reorganising its customer-facing organisation to better align with customer needs, and realigning the sales team to more effectively identify new opportunities to increase penetration of existing clients and accelerate cross-selling opportunities.
The Business Solutions Division (BSD) is expecting to report Q1 operating income of approximately $46 million (2018: $55 million). This performance was impacted by paper and paper-related costs increases that could not be completely passed through to customers due to the timing of contractual limitations, said the company.
Paper costs have increased more than 20% during the past 12 months and Depot said it is pursuing several initiatives to mitigate the impact of such cost increases going forward. In addition, lower e-commerce-related sales coupled with investments in demand generation and e-commerce capabilities, including those associated with the collaboration agreement recently announced with Alibaba, adversely impacted results in the quarter.
Office Depot’s Retail division is expecting to report operating income of approximately $66 million in the first quarter (2018: $72 million). The company said its success in growing its service offerings is mitigating some of the broader industry trends associated with more traditional office products.
The reseller said it is continuing to evaluate and implement additional initiatives in its retail footprint to improve conversion and the product assortment mix. It noted its store-within-a-store and co-working initiatives have been showing early signs of success.
“Despite the current challenges we are facing, we are confident that our transformation is on track to drive long-term value for our stakeholders,” said CEO Gerry Smith.
“CompuCom’s operating performance was clearly disappointing and the actions we are taking to improve its operations and sales performance are expected to yield improving results in 2019. CompuCom is an important strategic asset for our future [and] I am pleased with the actions we are taking across the business to position us for long-term success.
“To ensure our success and to address potential headwinds, we are pursuing a companywide profit improvement plan to further improve cost efficiencies throughout the entire organisation. These initiatives include organisational improvements and leveraging the use of technology and automation in our facilities and offices.”