Fiscal 4Q17 margin performance

Between fiscal 4Q16 and 4Q17, Office Depot’s (ODP) gross margin contracted ~50 basis points to 23.5%. Its operating margin narrowed by 2.3% (20 basis points), primarily due to lower sales offset by lower SG&A (selling, general, and administrative) expenses. Its adjusted operating margin stayed at 3.7%.

A Look at Office Depot’s Fiscal 4Q17 Margins

The company has been cutting costs and winding down its international operations to improve profitability. The company, which sold its European and Mainland China operations in 2017 and its Australia operations in February 2018, is now looking to divest its New Zealand operations.

The Retail segment’s operating margin narrowed 110 basis points to 3.4% in fiscal 4Q17, and Business Solutions’ operating margin contracted by ten basis points to 5.4%. In both cases, benefits from lower SG&A expenses were offset by reduced sales and gross margins. CompuCom had an operating margin of 4.8%, and the company’s Other segment reported an operating loss of $1 million in fiscal 4Q17.

Bleak outlook

In fiscal 2018, Office Depot expects adjusted operating income of ~$350 million, compared with $446 million in fiscal 2017. Its fiscal 2018 margins will primarily be impacted by the $40 million investment it’s made to switch the company’s focus to business services. However, the synergies of $20 million expected from its acquisition of CompuCom should provide some cushioning.

Peer performance

In 4Q17, Genuine Parts (GPC) posted operating profit of $313.3 million, reflecting a 13.4% increase year-over-year driven by higher sales and extensive cost cuts. In fiscal 4Q18, Best Buy’s adjusted operating margin contracted by 20 basis points to 6.4% due to costs offsetting its higher revenue. In the next article, we’ll assess Office Depot’s bottom-line performance.

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