Office Depot's B2B push shows favorable signs, but sales stall

Dive Brief:

Office Depot on Wednesday reported fourth quarter sales of $2.6 billion, a 5% drop from the year-ago quarter and short of the consensus analyst estimate from FactSet for $2.61 billion cited by Marketwatch. Retail division sales fell 15% to $1.16 billion, and same-store sales fell 4%, due to fewer transactions and lower average order values, the company said. Business solution services sales fell 7% to $1.3 billion in the quarter, according to a company press release.
The office supplies retailer swung to a net loss of $52 million, or earnings of 10 cents per share, from a profit of $80 million, or 15 cents per share, in the same period a year ago — including net loss from continuing operations of $48 million, which the company said is due to the tax bill. Excluding one-time items, adjusted earnings were 8 cents per share, besting the FactSet estimate of 7 cents per share cited by Marketwatch.
For the year, sales fell 7% to $10.2 billion. Both Q4 and full year results benefited from an additional 53rd week of sales, of some $143 million, the company said. During the fourth quarter, the company, which runs Office Depot and Office Max stores, closed 26 locations, ending the year with a total of 1,378.

Dive Insight:

This year is one of transition, CEO Gerry Smith told analysts on Wednesday, according to a transcript from Seeking Alpha, which entails shifting the company's emphasis from retail sales to business services. He called that a "multi-year journey" that is already beginning to show some "favorable trends."

"But our top line sales trends have continued to decline," he also said. "What we need to become is [a] more important and more valued partner to our customers, bringing our strengths and expertise to their challenges and changing how we think about the value we can provide."

The call for patience is warranted, Jeffries analysts suggested in an email to Retail Dive. "While management is aggressively shifting to a more services-oriented business, the changes will take time to implement, particularly in retail, and may experience choppy results along the way," according to the note. "[R]olling out the services to a large, national store base takes time, as well as driving customer awareness. The uptake with business customers may be realized more quickly given [Office Depot] has relationships with these customers and a dedicated salesforces to target them."

Smith reiterated that the company's $1 billion acquisition last year of IT provider CompuCom Systems is key to that transition, on Wednesday calling it "the first major step in transforming our business to a services-driven company."

"We believe this strategic acquisition has substantial growth opportunities," he said, noting that Office Depot is in the midst of training its sales force, rolling out new services and executing a pilot in Austin, Texas.

That test brings business services to the forefront and enhances the look and feel of all 14 stores in that market. The downtown Austin flagship store uses a new store design and offers the company's new business services as well as a commercial grade furniture showroom, virtual reality office designer, 3D printing capabilities and a Dell-branded store within a store, he also said.

For non-flagship locations, the company is taking a lower-cost hybrid approach, which features many of the design elements from the flagship store, including improved signage and navigation, dark ceilings and enhanced lighting, and with a similar services-led experience by integrating small-business services, tech services, and copy and print prominently at the entrances, he said.

The company expects most revenue benefits from its changes to materialize in the second half of this year, according to CFO Joseph T. Lower, who said total company revenue will likely land at about $10.6 billion for the full fiscal year, with adjusted operating income of $350 million.