Office Depot in North America has announced a companywide restructuring plan that it is calling a ‘business acceleration programme’ as it posted disappointing first quarter results.
As a result of the actions, the reseller said it expects to achieve cost savings of at least $40 million in the second half of this year and at least $100 million in annual run-rate costs savings from 2020 onwards. Total costs to implement the plan are estimated to be around $110 million, with about $85 million of that to be incurred during the current financial year.
According to the Office Depot Q1 earnings release: “This programme is a companywide, multiyear, cost-reduction and business-improvement process to systematically drive down costs, improve operational efficiencies and enable future growth investments. Under the programme, the company will make numerous organisational realignments emanating from process improvements, increased leverage of technology and accelerated use of automation. This will result in the elimination of certain positions and leveraging the use of technology in its facilities and offices. In addition, the company adopted a zero-based budgeting approach to reduce discretionary spending.”
CEO Gerry Smith said that plan was a means “to accelerate our transformation, enhance our profitability and fund future growth initiatives” and that it would create “a leaner and more competitive enterprise”.
The company’s first quarter results were not a surprise given that it had issued a profit warning at the beginning of April, and the headline numbers were in line with those provided a few weeks ago as operating profit fell at all three of its reporting divisions: Business Solutions Division (BSD), Retail and CompuCom.
Q1 results summary (versus Q1 2018 unless stated otherwise):
Company:
·Sales: $2.77 billion (-2%)
·Product sales: $2.36 billion (-3%)
·Services sales: $408 million (flat)
·Adjusted EBITDA: $118 million (-16.3%)
·Adjusted operating profit: $67 million (-28%)
·Adjusted net profit: $39 million (-13.3%)
BSD:
·Sales: $1.34 billion (+1% as reported, -2% excluding acquisitions)
·Organic sales performance was primarily driven by continued growth in adjacency categories and services that was more than offset by declines in the more traditional office product categories.
·Including acquisitions, product sales increased 1% while services revenue increased 13%.
·Operating profit: $46 million (-16.4%)
·Operating margin: 3.4% (-70 basis points)
·The operating result was driven by areas such as higher paper costs, lower online sales and investments in demand generation and e-commerce capabilities.
Retail:
·Sales: $1.17 billion (-6% as reported, -4% same-store sales)
·The 4% comparable decline was driven by lower store traffic, partially offset by higher conversion rates and 16% growth in buy online, pick-up in store sales. Product sales fell 8%, primarily due to lower sales volume, while services revenue increased 16%.
·Operating profit: $67 million (-7%)
·Operating margin: 5.7% (-10 basis points)
·The decrease in operating income was due to the flow-through impact of lower sales and deleveraging related to store closures. These were partially offset by higher gross margins stemming from improvements in distribution and inventory management costs, as well as lower operating lease costs that were recognised as a result of the new lease accounting standard.
·Additionally, the Retail division’s operating income results include the impact of investments in additional service delivery capabilities, including targeted advertising, sales training and other customer-oriented initiatives.
·During the quarter, the company closed two stores and ended the quarter with a total of 1,359 stores.
CompuCom:
·Sales: $247 million (-3.9%)
·Operating loss: $15 million (versus operating profit of $5 million)
·Profitability was down due to lower-than-expected sales and ongoing expenditures to develop and market additional services.
·Office Depot is taking several actions to improve the performance at CompuCom. These include: streamlining the operational structure, reorganising its customer-facing organisation and realigning the sales teams under new leadership.
Outlook
Office Depot reduced its full-year outlook on all key metrics including sales, adjusted EBITDA, adjusted operating income and free cashflow.
Smith added: “We are taking decisive actions and making numerous improvements in our sales and operational processes to place this business back on target with its long-term expectations. That said, our strategy remains compelling and we are steadfast in our plan to transform Office Depot into a leading provider of business products and services through our world-class integrated distribution platform.”
