Office Depot’s Push To Emphasize B2B Over Retail Paying Off

Office Depot said its business-to-business, or B2B, focus is continuing to pay off, with its Business Services Division and CompuCom division gaining momentum even as it continues to some of its close retail stores.

Office Depot, known more for its ubiquitous retail operations across the country, is continuing its transformation to a focus on the business-to-business market, an area where it expects to see real growth going forward, the company said Wednesday.

Gerry Smith, CEO and director of the Boca Raton, Fla.-based retail and business solutions giant, on Wednesday told financial analysts on the company's fourth fiscal quarter 2019 analyst conference call that Office Depot in 2017 embarked on a multi-year transformation strategy rooted in strengthening its business-to-business, or B2B, business, developing more predictable revenue streams, and leveraging its assets to drive long-term profitable growth.

"Our primary focus in 2019 was to further improve our operating structure and enhance our competitive agility," Smith said. "And as evidenced by our results, we made tremendous progress. For the year, we improved our profitability, expanded our value proposition, and leveraged key assets to enhance our B2B platform."

[Related: Office Depot Eyes Forming Holding Company, Looks To B2B Growth]

A big part of that success is Office Depot's Business Acceleration Program, or BAP, which Smith described as a multi-year effort to increase competitiveness and drive cost efficiencies to provide additional sources of capital to improve customer satisfaction and fuel future growth.

"This program exceeded even our own ambitious goals for the year, delivering significant cost savings and driving improved operating performance," he said.

Office Depot also enhanced its integrated B2B platform, which includes both its Business Services Division, or BSD, and CompuCom, to generate future profitable growth, Smith said. Together, they drove about 60 percent of Office Depot's total revenue and well over half of its operating income.

"Under our new leadership in both divisions, we took several actions to build a stronger more profitable pipeline for future growth," he said. "We refined our value proposition, improved our sales operations in quality, and refocused our strategy at CompuCom. These efforts combined along with the BAP resulted in significant improvements in profitability and positions us to compete more effectively going forward."

Office Depot also grew its business outside of its traditional office product offerings in adjacent categories like cleaning and breakroom supplies and copy and print services. Together, they accounted for over one-third of the BSD's sales, Smith said.

While Office Depot enjoyed strong financial results in the fourth quarter, particularly in terms of operating income increases, some actions had an adverse near term impact to revenue, he said.

"These actions, along with lower sales in our retail division with fewer stores and service, impacted revenue, which was down in a year end quarter, 3 percent and 6 percent respectively," he said. "That said, we believe that these actions are necessary to improve our operations and to enhance our low-cost delivery model designed to drive future growth in our BSD and CompuCom divisions."

Office Depot's Business Solutions Division, which is the largest component of its B2B platform, serves about 10 million business customers, including 200,000 enterprise customers and about half of the Fortune 500, Smith said.

BSD revenue was flat year-over-year and down 3 percent in the fourth quarter, largely due to the targeted actions taken to improve operating margins and reduced unprofitable sales activities, he said. Sales from adjacency categories including cleaning and breakroom supplies and copy and print services accounted for 37 percent of BSD sales.

"While these actions had a near-term adverse impact on revenue, we believe it's the right approach to prepare our platform to drive profitable growth in the future," he said.

Looking forward, Office Depot plans to grow its BSD business with a stronger platform and improved processes, Smith said. This includes utilizing data analytics to better understand customer segmentation, expanding its distribution reach through high-quality customer acquisitions and expanded share-of-wallet opportunities, and improving cross-selling opportunities between BSD and CompuCom, he said.

"Just as we did over the past three years when we changed the trajectory of BSD from a business that was declining and into a growing and profitable business, our platform is poised to drive the next phase of growth," he said.

CompuCom, acquired in 2017 by Office Depot, has become a big part of its B2B business and an important part of the development of its services businesses, Smith said. Its customers include about half of the Top-10 Fortune 500 companies, he said.

While the CompuCom business started 2019 with challenges, by year-end its business had stabilized and it was driving higher operating income and increasing its pipeline and new business, Smith said.

While CompuCom revenue fell 60 percent year-over-year thanks to deliberate actions taken to improve profitability as well as the timing of both product orders and project-related work, the organization generated $9 million in operating income, up 80 percent over last year, and won new business in excess of $300 million in total lifetime contract value, Smith said.

Office Depot in 2020 will focus on delivering top line growth utilizing its B2B platform to drive growth in its BSD and CompuCom divisions, take advantage of expanded product and service offerings, and continue to optimize its retail footprint, Smith said.

"In support of these growth initiatives, we're adding selling resources, investing in our delivery platform utilizing new intelligent tools and technology, and leveraging our scale to reach more customers with a broader array of high-quality business products and services," he said. "Continued cost savings derived from both the Business Acceleration Program and our retail optimization efforts will help support these investments in our future growth."

Smith, responding to an analyst question about possible store closing, said Office Depot expects to close slightly more stores in 2020 than it did in 2019 while continuing to focus on optimizing the footprint and continue looking at ways to drive traffic.

"But I want to emphasize that the store footprint is important," he said. "We have 6 billion customers within [a] three or four-square-mile radius of our stores. And so, we're going to target those B2B customers. We started using local marketing programs in the second half of the year, and we're going to continue to do that to grow our B2B customer base."

For its fourth fiscal quarter 2019, which ended December 28, Office Depot reported total revenue of $2.51 billion, down about 6 percent from the $2.67 billion the company reported for its fourth fiscal quarter 2018.

This included product revenue of $2.11 billion compared to last year's product revenue of $2.25 billion, and services revenue of $395 million, down from last year's $420 million. Both product and services revenue were down 6 percent over last year.

For the quarter, Office Depot reported GAAP net income of $55 million, or 10 cents per share, a significant rise from last year's net loss of $14 million, or 2 cents per share. On a non-GAAP basis, the company reported adjusted net income from continuing operations of $68 million, or 12 cents per share, up from last year's $52 million, or 9 cents per share.

For the full fiscal 2019, Office Depot reported total revenue of $10.65 billion, down about 3 percent from the $11.02 billion the company reported for fiscal 2018.

This included product revenue of $9.03 billion, down about 3 percent from last year's $9.32 billion, and services revenue of $1.61 billion, down about 5 percent from last year's $1.69 billion.

For the year, Office Depot reported GAAP net income of $99 million, or 18 cents per share, which was flat with last year's net income. On a non-GAAP basis, the company reported adjusted net income from continuing operations of $228 million, or 41 cents per share, up from last year's $199 million, or 35 cents per share.

Office Depot, which reported its financials early in the trade day, saw its share prices rise a mere 0.63 percent to $2.36 per share. They fell 2 cents a share in the first hour of after-hours trading.