The office supplies retailer, Office Depot (ODP, Financial), posted its third quarter results on November 4, beating analyst expectations and lifted the outlook for the remaining fiscal year. After the decent quarter report was out, the share price surged nearly 13% in pre-market trading on that day. What are the forward projections from the company’s desk? Let’s dig deeper to get to the final answer.
Digging into the numbers
Net earnings for the quarter came in at $29 million, down from $133 million posted a year ago. Adjusted earnings per share stood at $0.10 per share, narrowly beating the analyst consensus of $0.09 per share. Sales rose 55% to $4.07 billion, while same-store sales fell 3%, compared with analyst forecast of $4.07 billion and decrease of 3.1% respectively.
It is to be noted that the synergies from the merger of Office Depot and OfficeMax have started to show up in the figures as the third quarter results are inclusive of OfficeMax operations. Adjusted operating income came in at $126 million, up significantly from the proforma operating income of $62 million in the third quarter of the previous fiscal year.
The segmental performance breakup
The North American Retail division’s revenue surged 52.7% to $1,722 million. However, comparable sales fell 3% due to reduction in transaction counts. Operating income of $79 million was reported in the segment, up from $15 million reported a year earlier.
As the retailer tried to curtail a certain part of its operational costs, it closed down 20 stores and opened one store at the division.
Again, revenue from North American Business Solutions jumped 87.5% to $1,522 million. Operating income came in as $67 million which grew year-over-year by 71.8%.
Revenue for the International division surged 17.2% to $797 million and the operating income rose 66.7% year-over-year to $10 million.
The total store count at the end of the quarter stood at 260 internationally, which included 145 company-owned outlets and 115 outlets run by franchisees and licensees.
About the merger
As the merger with OfficeMax (OMX, Financial) is complete, the company now expects to obtain synergies of over $750 million by the end of 2016, which is above the $700 million projected earlier. Moreover, within this year, the company expects to realize nearly $260 million of merger synergies which stood earlier at $220 million.
The updated guidance reflects the early achievement of synergies than expected originally when the merger was completed in November 2013. In fact, these synergies would aid in fighting against rivals such as Staples Inc. (SPLS, Financial) and Amazon.com (AMZN, Financial).
Restructuring in place
In October, the company has decided to adopt a European restructuring strategy and to become more business network-focused rather than being geographically focused. Office Depot also expects that through this plan of action it would be able to achieve roughly $90 million of annualised cost savings by end of 2016. However, it would also involve spending nearly $120 million as pre-tax restructuring charges, a major part of which would be recorded in the next two fiscal years.
Outlook modified upwards
Though management still projects total revenue for the fiscal year to be lower than that of the previous year, at the same time it expects the integration of OfficeMax to compensate for the impact of softened sales due to store closures and continued headwinds across product lines and distribution channels this year.
The adjusted operating income for the full year is now expected to be in the range of $255 million to $265 million, from the previous estimate of about $200 million. Furthermore, the company has provided some estimates for the next fiscal year which is also impressive as the incremental merger synergies is expected to lead to adjusted operating income of $475 million.
Looking ahead
Office Depot seems to be on a cost-cutting initiative to keep its top and bottom line intact in the upcoming quarters. The impact of the merger will be effective from the coming fiscal year, and thus, the guidance has been updated on a positive note. Let’s stay tuned and keep watching.
