Dive Brief:

• Office Depot on Wednesday announced Q4 sales fell 2% to $2.73 billion and fiscal 2016 sales fell 6% to $11 billion. Both numbers (and profits) benefited from a 53rd week in fiscal 2016 that contributed some $143 million, according to a press release. In North America, Q4 sales were $1.4 billion as same-store sales fell 4% on traffic declines; Consensus Metrix analysts had expected a 1.3% same-store sales decrease, according to MarketWatch. 

• Still, profit soared thanks to the company’s cost-cutting efforts. Q4 net income was $80 million, or 15 cents per share, compared to $15 million, or 3 cents per share last year. Adjusted earnings were 11 cents per share, edging out a forecast from Thomson Reuters analysts for 10 cents a share. For the year, the company reported profit of $519 million, or 96 cents per share.

• Without detailing how much, the company expects 2017 sales to fall further, in part due to store closures and “challenging market conditions” as well as to contract customer losses after its proposed merger with Staples fell through. Office Depot shuttered 65 stores this year and expects to close another 75 this year. 

Dive Insight:

A couple of days after officially taking on the CEO role, Gerry Smith in his statement noted the office supplies retailer’s expectation-busting results and said that the momentum will continue this year. “I am very excited to assume the role of CEO and to inherit a business with such positive earnings trends,” he said. “Office Depot delivered another year of improved profitability in 2016, exceeding the full-year adjusted operating income guidance, despite experiencing substantial business disruption related to the Staples acquisition attempt.” 

But Smith, who came from Lenova and was named just at the end of January, has his work cut out for him. Previous CEO Roland Smith (no relation) signaled his intention to step down three months after Office Depot’s proposed $6.3 billion merger with rival Staples fell apart in the wake of a U.S. District Court Judge granting the Federal Trade Commission's request for an injunction against the deal.

While the combined might of Office Depot and Staples could have neutralized the growing threat posed by online competition (in particular Amazon), both office supplies retailers are now struggling to move forward as archrivals: Office Depot in September announced an agreement to sell its European business to investment firm The Aurelius Group, and in December, it detailed an aggressive cost-cutting effort that includes closing 300 stores over three years.

But the momentum that Gerry Smith talked about in his statement must come from more than just cost-cutting, which buoyed the quarter’s results this time around. The office supplies space is increasingly dependent on business contracts, an area that Amazon is also moving into, because consumer supplies have become a commoditized business, with goods available at several big box retailers and online — leaving price competition and low margins to dominate the market.