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Office Depot Stock Surged after 1Q18 Results

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Stock rose 6.5%

Office Depot (ODP) stock rose 6.5% on May 10 after the company reported its 1Q18 results on May 9. Sales came in at $2.8 billion, which beat the analyst estimate of $2.7 billion. But adjusted EPS (earnings per share) of $0.08 was in line with the Wall Street estimate. On a YoY (year-over-year) basis, sales grew ~6%, but adjusted EPS fell 50%. Its top line was driven by strategic initiatives.

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Services-focused business

It looks like Office Depot’s transition to becoming a business service provider was a smart move. It reported that services revenue comprised 14% of its overall sales in 1Q18.

More importantly, its Business Solutions division reported growth for the first time since 2012. For 1Q18, the division’s sales rose 1% to $1.3 billion, driven by sales growth in adjacent categories and online sales.

With technological advancement rendering most paper-based office supplies unnecessary, Office Depot has been looking for growth opportunities elsewhere. Tough competition from e-commerce retailers such as Amazon (AMZN) has added to office supply retailers’ woes, eroding Office Depot’s top line and stock value. Year-to-date as of May 10, the stock has fallen 35%.

Office Depot is one of the few remaining office supply retailers, and its new CEO, Gerry Smith, has embarked on an ambitious turnaround. The company is now transitioning to become a top-notch business service provider. It acquired CompuCom, launched an in-house service platform called BizBox, and is concentrating on subscription-based services.

On its 1Q18 earnings conference call, Smith stated that its B2B (business-to-business) segments now represent nearly 60% of the company’s total sales. That implies that retail makes up just 40% of total sales. Smith noted several new customer wins and that many of its existing customers are starting new IT (information technology) projects, which spells business opportunity for Office Depot’s CompuCom division.

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