Office Depot has released Q4 and full-year 2018 results with CEO Gerry Smith claiming that the reseller “achieved [its] key priorities”.
“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 Smith in Office Depot’s earnings press release.
“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 online pick-up in-store sales,” he continued.
“Overall, we made great progress on our transformation priorities and have positioned Office Depot to continue to deliver profitable growth in the future.”
Nevertheless, all three of Office Depot’s reporting divisions faced profitability pressures in 2018 and Smith also revealed that in 2019 the company would take actions to drive greater profitability. These include “realigning our merchandising organisation, pursuing cost efficiencies throughout the entire organisation, leveraging our asset base in traditional and non-traditional ways, and enhancing customer penetration and share of wallet”.
The results of CompuCom are included from November 2017, several dealer acquisitions were made over the past 12 months and there are a number of one-off items – including a $25 million legal expense accrual related to a proposed settlement with the Federal Trade Commission over Office Depot’s use of the PC Health Check software. These make an apples-to-apples comparison of Depot’s Q4 and full-year 2018 results versus the prior year a challenge, although the company did provide a few pointers.
Below is a summary of the results:
2018 consolidated results:
Total sales for the year were $11.01 billion versus $10.24 billion in 2017. This includes $1.09 billion in 2018 sales from CompuCom, the impact of dealer acquisitions in the Business Solutions Division (BSD) and the closure of 19 retail stores during the year.
Product sales were flat in the year at $9.3 billion, while services sales were up 84% to $1.69 billion, largely due to the inclusion of CompuCom.
Excluding CompuCom, services sales increased by an aggregate of 13% at Retail and BSD.
Adjusted operating profit was $360 million, or 3.3% of sales, versus $432 million, or 3.6% of sales, in 2017.
Adjusted EBITDA was $567 million compared with $603 million in 2017.
Results by division:
BSD
BSD’s 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 adjacent 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.
Q4 operating income at BSD was $54 million compared to $68 million in the fourth quarter of 2017. Operating margin fell by 120 basis points to 4.2%.
For the full year, BSD sales were $5.28 billion, 3% higher than in 2017, while operating profit fell from $262 million in 2017 to $243 million in 2018. Operating margin declined by 50 basis points to 4.6%.
Retail
The Retail division’s reported sales were $1.09 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%. Product sales in the quarter declined 8% year on year, primarily due to lower sales volume, while service revenue increased 18%.
Retail division operating income was $28 million in the fourth quarter of 2018, compared to $40 million in the prior-year period. The decrease was due to deleveraging related to store closures, lower sales volume, and investments in additional service delivery capabilities.
During the quarter, Office Depot opened one new store, replaced one store and closed 13 stores, ending the quarter with a total of 1,361 stores.
For the full year, Retail sales were $4.64 billion. This represented a comparable store decline of 4%. Operating profit fell from $254 million in 2017 to $193 million in 2018, with operating margin declining by 90 basis points to 4.2%.
CompuCom
Sales for 2018 were $1.09 billion, a 1% increase versus the prior year. Operating profit for the year dropped from $45 million in 2017 to $17 million in 2018, while operating margin fell by 360 basis points to 1.6%.
Outlook
Office Depot expects 2019 sales to be slightly up versus 2018. It reconfirmed its previous guidance for FY2019 sales of around $11.1 billion. Adjusted EBITDA and adjusted operating profit are also forecast to be slightly higher than 2018.
