May 7, 2020
Office Depot, Inc. announced results for the first quarter ended 28 March 2020. Total reported sales for the first quarter of 2020 were $2.7 billion (€2.5 billion), a decrease of 2% compared to the first quarter of 2019. The decrease in revenue over the same period last year was primarily the result of lower sales in the Retail Division, driven by fewer retail stores in service partially offset by higher same store sales, combined with lower sales in the CompuCom Division and Business Solutions Division (BSD) largely driven by impacts related to the COVID-19 outbreak, Office Depot explained.
Product sales in the first quarter were down 1% relative to the prior year period. Service revenue was down 5% in the quarter related to lower comparable sales at CompuCom and sales of service in our Retail Division, both of which were negatively impacted by the COVID-19 outbreak. This decline in service revenues was partially mitigated by a 14% year-over-year increase in service revenue in the BSD Division. On a consolidated basis, service revenue represented approximately 14% of total Company sales in the first quarter of 2020.
Gerry Smith, Chief Executive Officer of Office Depot said: “Our strong Q1 performance reflects the commitment and tireless work of our team as we supported the essential needs of businesses, consumers, educators, students, healthcare workers, and first responders during the global health crisis that has unfolded in our nation. Our B2B focus is helping businesses remain operational in the home or at the office, our facilities have largely remained open serving customers with enhanced sanitation and safety protocols, and our eCommerce platform and retail stores are proving to be trusted means for customers to access the critical products and services they need. Same store sales were up 2% over the same period last year and sales in our eCommerce channel experienced a significant increase in demand. Our ability to continue to serve customers during the COVID-19 health crisis helped drive strong operating results and generate $188 million (€174 million) in operating cash flow including $173 million (€160 million) in adjusted free cash flow. This strong performance resulted in our highest net cash position in over 2 years and nearly $1.7 billion in total available liquidity.”
“While significant challenges remain ahead, we are in a strong financial position and remain focused on utilizing our B2B platform to provide essential products and services necessary to help our customers and the nation weather through this pandemic,” Smith continued. “We have an extremely strong balance sheet that has been further enhanced by refinancing our credit facility and paying off our term loan, which preserves cash and extends our credit facility maturity to 2025. We have a global sourcing and supply chain network capable of delivering essential products including personal protective equipment (PPE); we have business support capabilities enabling enterprises and individuals to work from home and learn from home; and we have a business model that has significant variable cost flexibility. We expect that all of these factors place us in a position to successfully navigate this evolving environment,” he added.
“Additionally, I believe our opportunities are evolving as we expand our value proposition to customers, sourcing and distributing a broader set of in-demand products and business support services. We are uniquely positioned to support our customers in this challenging environment and our focus on evolving our B2B platform and executing our pivot remains resolute. Combined with our strong balance sheet, I am confident that we are taking the necessary steps to navigate through the challenges posed by this global health crisis,” he added.
Office Depot said its Business Solutions Division (BSD) reported sales were $1.3 billion (€1.2 billion) in the first quarter of 2020, down 1% compared to the first quarter of 2019. The year-over-year comparable sales performance includes the positive impact of customer acquisitions and growth in adjacency categories, primarily cleaning and breakroom supplies and technology, which were up 25% and 10%, respectively, as customer demand for these products increased as a result of COVID-19 outbreak.
The Retail Division reported sales were $1.2 billion (€1.1. billion) in the first quarter of 2020, down 2% versus the prior year period. Planned closures of underperforming retail stores drove the reported decline with 64 fewer retail outlets at the end of the first quarter of 2020 as compared to the prior year. Compared to the prior year period, product sales in the quarter were relatively flat, while service revenue was down 11% as copy and print services and subscription offerings were negatively impacted by the effects related to the COVID-19 pandemic, including the government-imposed temporary closures of non-essential businesses.
Same store sales were up by 2% as the demand for essential products including cleaning and breakroom supplies, technology products, furniture, and work-from-home/learn-from-home enabling products increased significantly since the onset of the global health crisis caused by the COVID-19 outbreak, office Depot explained. Higher average order volume and sales per shopper, as well as a 26% increase in the buy online, pick up in store (BOPIS) offering, added to this performance.
The CompuCom Division reported sales were $235 million (€217.77 million) in the first quarter of 2020, down 5% compared to the first quarter of 2019 and flat with the fourth quarter of 2019. The year-over-year decrease, Office Depot said was due to project-related customer-imposed delays and lower services volumes as the COVID-19 health crisis impacted business operations of certain customers. Additionally, targeted actions to reduce certain unprofitable sales activities to improve profitability also impacted comparable year-over-year sales. These factors were partially offset by an increase in technology-related product sales despite supply constraints limiting the ability to fulfil the entirety of the demand.
“We remain encouraged by the early signs of progress and the opportunities ahead for CompuCom,” said Gerry Smith. “During the COVID-19 health crisis, CompuCom’s operational support was critical, and they have built significant credibility with customers by enabling them to remain operational during this period, as many companies pivoted to a work-from-home environment. Notwithstanding the near term challenges, CompuCom’s unique capabilities to support distributed work forces with state of the art technology, and a unique field force of over 6,500 field techs and support personnel, have it well positioned to capitalize on opportunities in this growing area. We continue to gain traction as evidenced by another quarter of significant new contract wins, including eight new major customers. CompuCom’s refocused strategy of connecting people, technology, and the edge, places greater emphasis on its core offerings and expands its value proposition. Although we have much more work to accomplish, CompuCom is on the right path to capture profitable growth in the expanding digital workforce arena,” he added.
Related to the global business disruption and uncertainty caused by the COVID-19 pandemic, Office Depot said it is withdrawing its previously issued guidance for 2020. Due to the uncertainty of the severity and duration of the impacts of the COVID-19 outbreak, the company said it is unable to estimate the magnitude by which sales of products and services in our business will be affected in the future quarters of 2020.
“Like many companies, we are withdrawing our 2020 guidance given the uncertainty related to the full impact of the COVID-19 pandemic. We are implementing several strategies to address and hopefully mitigate these challenges including utilizing our global sourcing capabilities to secure additional sources of essential products and supplies, including PPE, and providing technology support, facilitating work from home and virtual learning environments, and continuing efforts to drive a low cost business model. Combined with our strong balance sheet and available liquidity position, we are in a solid position to navigate the challenges posed by this health crisis,” Smith continued.
Given the uncertainty regarding the severity of the COVID-19 crisis and as part of its response, the company also said it is proactively adopting a more conservative approach to its capital return programme to preserve maximum liquidity and financial flexibility in the current environment. As part of that approach, the company is temporarily suspending its share repurchases and quarterly dividend. The company does not expect to repurchase shares in the near term under the current repurchase authorisation, which has $131 million (€121 million) remaining. Office Depot said it is also temporarily suspending its cash dividend beginning with the second quarter of 2020.
The company will re-evaluate its capital return programme when appropriate.
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