Office Depot Eyes Forming Holding Company, Looks To B2B Growth

Office Depot is continuing to re-focus on the B2B market, particularly services via its BDS and CompuCom businesses, and is studying the possibility of forming a new holding company, The ODP Corporation, as a way to be more flexible going forward.

Office Depot, known primarily for its large office product retail operations, this week said it is continuing its move to become a major force in the business-to-business market as shown by shifts in revenue and profitability in its third fiscal quarter of 2019.

The path to future growth for Office Depot includes new digital workplace services that bring together the capabilities of the company's two B2B businesses, CompuCom and the Business Services Division.

The company also unveiled a feasibility study around the possibility of transferring its shares to a holding company, called the ODP Corp., similar to recent moves that Google and Xerox made, with a goal of improving flexibility and improving the alignment of its assets and channels.

[Related: Office Depot: B2B Business, Not Retail, Driving Growth]

The moves were disclosed Wednesday just prior to Office Depot's third fiscal quarter 2019 financial conference call.

Gerry Smith,CEO of the Boca Raton, Fla.-based company, said in his prepared remarks to investors that the third quarter reflects his company's focus on profitability as it enhances operating results and continues to enhance its platform for future growth.

The third quarter saw Office Depot continue making enhancements to its B2B platform, including its distribution and supply chain capabilities, along with strengthening its business model, Smith said.

"Our results show that we made significant progress, driving another quarter of improving operating results, and strong free cash flow generation," he said. "Profit margins were up across all three of our divisions as we continue to execute upon our Business Acceleration Program."

That Business Acceleration Program, or BAP, is a multi-year move to create a more competitive enterprise and fuel future growth, with plans to deliver at least $40 million in savings this year out of the total expected savings of over $100 million over time, Smith said.

Total Office Depot revenue for its third fiscal quarter 2019, which ended Sept. 28, was $2.8 billion, which was about 4 percent lower than the revenue of the third fiscal quarter 2018. Smith said the fall in revenue was led by a 6 percent drop in retail store sales along with a 6 percent drop in revenue from the company's CompuCom division.

Office Depot's Business Services division, or BSD, revenue declined 1 percent from last year as the company moved to eliminate certain unprofitable sales activities, Smith said.

CompuCom and BSD together now account for 60 percent of Office Depot's total revenue, he said.

Profit margins were up across all three of the firm’s divisions versus last year thanks to increased efficiencies from BAP, including the increased use of robotics automation as well as better leveraging of its distribution market, he said.

Office Depot's retail services business, primarily from copy and print and subscription-based services, grew 10 percent year-over-year on a same store basis, Smith said. CompuCom's services revenue dipped vs. last year, but is expected to grow going forward, driving Office Depot's overall services business revenue to over the current 15 percent of consolidated revenue, he said.

While Office Depot's total BSD revenue fell 1 percent over last year, it saw a 6-percent increase in operating income, Smith said. The company plans to grow that business by improving sales efficiency. improved use of data analytics, expanding to new adjacent markets, find cross-selling opportunities with CompuCom, and do acquisitions, he said.

"We are continuing to execute upon our plan of selectively acquiring leading players in markets where we have little to no presence, expanding our distribution reach, and increasing our customer base," he said.

Smith also said he is working closely with Mick Slattery, president of CompuCom, who in June joined the company after started in that role after nearly a year as CEO of Conduent Transportation.

Office Depot acquired CompuCom in 2017 as part of a move to become a major B2B provider.

Slattery, in his prepared remarks, said CompuCom has a big opportunity to provide its customers with the digital workplace services necessary to support their businesses' aspirations.

CompuCom combines device management, edge networking, remote monitoring, and automation with the ability to dispatch field technicians to customer locations across the U.S. and Canada from retail outlets to branch banks to distributed offices as part of a compelling digital workplace experience, Slattery said.

It is a growing market with a lot of potential, he said.

"We estimate the current addressable market for the managed device working placed in infrastructure services in North America to be in excess of $130 billion," he said. "The market is highly fragmented. And despite our growth over 32 years, we've only captured a small portion of this market. As the market evolves and our focus intensifies, we have significant potential for growth."

One of the key elements of CompuCom's growth strategy is unlocking synergies with Office Depot, Slattery said.

"Specifically, we are working very closely with the BSD team, in particular to shape a series of standardized, Powered by CompuCom digital workplace services, which can be targeted towards mid-market enterprises," he said. "We believe this is an underserved market which faces the same challenges as the larger enterprise market. This is a market that the BSD team services today and we believe represents significant future growth potential."

Office Depot on Wednesday also said that its board of directors has approved a feasibility review looking at the potential implementation of a holding company reorganization. The feasibility review is slated to be completed by the end of the first quarter of 2020.

Should Office Depot decide to go through with the reorganization, it would create a new holding company, The ODP Corp., that would become the new parent company of Office Depot.

Joseph Lower, Office depot executive vice president and chief financial officer, said during the financial analyst call that the intent of the reorganization is to simplify the company's legal entity and tax structure, more closely align its operating assets with respective operating channels, and increase its operational flexibility.

When asked about the potential benefits from moving to a holding company structure, Lower responded by telling analysts to remember that the company is only studying the move for now.

"And really, this is a very common public holding company structure that frankly, I've seen many other companies like Google and Xerox implement, which effectively creates a public holding company that then allows us to have separate operating entities below that, and better align the assets," he said. "Frankly, this simplifies the legal entities. It simplifies the tax structure. It improves our alignment. It creates flexibility. So I don't want anyone to jump to conclusions."

Lower said this may be a long-overdue move. "[It] arguably should have been done back at the time of the Depot Max merger, and something that we will be evaluating over the course of the next several months with an intent or an expectation that we would implement [it] by the end of the first quarter 2020," he said.

When asked by an analyst about impacts from tariffs, Lower said Office Depot's margins show that the company has done a good job of mitigating the impact. "Our tariff exposure, less than $15 million, anticipated be about the same in Q4, which we anticipate we will be able to mitigate and much the same way we did in Q3," he said.

For its third fiscal quarter 2019, Office Depot reported net income on a GAAP basis of $60 million, or 11 cents per share, which was flat with the third fiscal quarter 2018.

On a non-GAAP basis, the company reported income of $84 million, or 15 cents per share, up from last year's $71 million, or 13 cents per share.