Office Depot on Wednesday said that first quarter total reported sales fell 2% year over year to $2.8 billion, "the result of lower sales in its CompuCom and Retail divisions."
Retail division operating income fell to $67 million from $72 million a year ago, as store comps declined 4%, according to a company press release. During the quarter Office Depot closed two stores, ending with 1,359 in the retail division.
The decline at CompuCom, plus paper cost increases, hit margins. Operating income plummeted to $24 million, from $77 million in the year-ago period, according to a company press release. Adjusted earnings before interest, tax, depreciation and amortization fell to $118 million from $141 million a year ago. Net income fell to $8 million from $41 million a year prior.
Office Depot's shift to business services through its CompuCom operations and its retail division hit a roadblock in the first quarter, and CEO Gerry Smith on a conference call with analysts Wednesday said the performance "clearly did not meet expectations."
Despite that, Office Depot will double down on its transformation into a business-to-business services-oriented company, he said. He also said the company will aggressively cut costs to boost its income, but pointed to top-line success in services as evidence that the company is on the right track.
Product sales in the first quarter fell 3%, while service revenues were flat, (driven by a 13% increase in business solutions services and 16% increase in the retail division services, offset by lower service-related revenue at its CompuCom division), according to the release. On a consolidated basis, service revenue reached some 15% of total sales in the quarter, compared to 14% in the year-ago period. Cleaning and break room, and copy and print services were the best performing services, he noted.
"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," Smith said, adding that improvements to its supply chain and enhancements to stores, co-working spaces and product assortment are ongoing. The company will also expand its collaboration with Chinese e-commerce site Alibaba, he said.
Improvements to stores helped with the top-line, and stores remain important because the company's many small-business customers want the in-person connections they make possible, he said on the call. Still, the company will close more stores this year than last, he said. The retailer shuttered 19 stores in fiscal 2018, according to a February press release.
Effective immediately, the company is instituting cost cuts that will garner some $40 million in savings this year, Smith told analysts. In addition to cost cutting, including job cuts and the use of more technology, the company made changes in its CompuCom division, including a more aggressive sales program, he said.
That includes the appointment of Stephen Mohan as executive vice president of its Business Solutions Division, effective May 13. Mohan, who will report directly to Smith, will be responsible for accelerating growth of B2B sales across customer segments and vertical markets, according to a company press release earlier this week. He will also manage contract sales and help develop short- and long-term initiatives in business solutions, the company said. Mohan arrives from global logistics company XPO Logistics, where he had been senior vice president of sales and marketing, North American Transportation.
The company lowered its guidance for the year, ratcheting expectations for sales down to between $10.8 billion to $10.9 billion from the previous guidance for $11.1 billion, and for adjusted operating income down to between $325 million to $350 million, from $375 million previously.