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Office Depot’s Margin and Earnings for 1Q18

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Margin contraction

Office Depot’s (ODP) gross margin contracted ~160 bps (basis points) to 23.6% since the cost of goods sold increased more than 8%. The company’s operating margin narrowed by 190 bps to 2.7%, primarily due to an ~8% increase in SG&A (selling, general, and administrative) expenses. Its adjusted operating margin contracted 220 bps to 3.3%, marred by the company’s transformative initiatives and lower sales for the Retail division.

The Retail segment’s operating margin narrowed 240 bps to 5.8% in 1Q18, affected by lower sales. The Business Solutions division’s operating margin contracted 30 bps to 4.1% due to higher customer conversion costs stemming from OfficeMax customer migration. CompuCom had an operating margin of 2%.

The company has been winding down its international operations to improve profitability and has now divested its New Zealand operations. It divested its Mainland China and European operations in 2017 and its Australia operations in February 2018.

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The company’s adjusted EPS (earnings per share) of $0.08 was in line with analysts’ projection but fell 50% YoY (year-over-year). The decline was due to higher costs from investments made in its transformative initiatives. The company reported free cash flow of $170 million compared to $58 million in 1Q17. The increases were driven by changes made to working capital, which offset the negative impact from its ongoing investment.

Raised outlook

For 2018, Office Depot now expects adjusted operating income of ~$360 million compared to $350 million projected earlier. It raised its guidance due to strong 1Q18 results as well as the services solutions business picking up momentum. The company has also upped its free cash flow projection to $350 million from the earlier projection of $325 million.

EPS expectations for peers

For fiscal 1Q19, Best Buy (BBY) has projected adjusted EPS of $0.68–$0.73. Analysts’ projection is $0.74, representing a 30% growth YoY.

In 1Q18, Genuine Parts (GPC) reported adjusted EPS of $1.27, missing analysts’ estimate of $1.31 but increasing 17.6% from 1Q17. Increases in its top line and profits boosted its bottom line.

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