Office Depot shores up profit on cost-cutting moves

Dive Brief:

Office Depot, Inc. on Tuesday reported first quarter results that beat expectations, as the office supplies retailer managed to rein in costs and profited from the sale of some stores, according to a company press release.
Q1 adjusted operating income was $151 million, up from $124 million in the year-ago quarter. Q1 adjusted net income from continuing operations was $88 million, or 16 cents per share, up from adjusted net income from continuing operations of $69 million, or 12 cents per share in the year-ago quarter. That beat average estimates from Thomson Reuters I/B/E/S analysts, cited by Reuters, for 12 cents per share.
Retail sales remain muted however: Q1 retail division sales in North America were $1.4 billion, down from $1.5 billion in the prior-year period, due to the impact of planned store closures over the past twelve months and a 5% decline in same-store sales and lower store traffic. Overall net sales in the quarter fell to $2.68 billion from $2.88 billion, largely due to the loss of business through shuttered stores and the loss of its overseas business, which it sold off last year.

Dive Insight:

Following the failed merger with rival Staples, which was thwarted last spring by the Federal Trade Commission, Office Depot is focused squarely on its North America operations, CEO Gerry Smith said in his statement on Tuesday. He noted that the company completed its sale of its South Korean business late last month and has entered into a favorable agreement to sell its operations in Australia and New Zealand.

Eventually, though, those sales and even high-octane cost-cutting measures may not be enough. Both Office Depot and rival Staples must find a way to thrive in a retail environment that, for office supplies, has increasingly seen sales go to less specialized retailers like Target, Wal-Mart's Sam's Club and, increasingly, Amazon.

While the judge who last year granted the FTC its injunction against the proposed Staples-Office Depot deal didn’t buy the argument that Amazon was enough of a rising player in the space to provide enough competition, Amazon has indeed muscled its way into the office supplies space. Amazon is in fact seeing success in its business-to-business retail side in recent months, an area thought to be more protected than the retailers’ consumer retail sales, Matt Sargent, senior vice president of Retail at Frank N. Magid Associates, told Retail Dive in an email last month.

“The impact that Amazon has had on Staples' consumer segment cannot be underestimated, but what is more concerning is the impact that Amazon is having within the B2B space,” Sargent said. “Amazon is penetrating small, medium and large corporations within office supplies. This is a red flag for Staples given that corporate office supplies are the most profitable segment of Staples' portfolio.”

It's a concern for Office Depot as well: Its Q1 business contracts sales fell 4% to $1.3 billion in constant currency compared to the first quarter of 2016, largely due to the disruption caused by the retailer’s prolonged merger attempt, the company said.

Nearly a quarter of corporate buyers “frequently” shop at Amazon, according to Magid’s research. “This would not necessarily be a shock for small businesses, but we found this to be true even in large businesses where 22% of buyers buying for businesses over 250 employees indicated they use Amazon ‘frequently.’ When seeing that 38% of Staples' customers use Amazon for business on a frequent basis, it really hits home for the company.”