What happened
Shares of Office Depot (ODP 0.35%) fell as much as 10.3% on Wednesday following the company's fourth-quarter earnings release. The stock is down about 6.6% at the time of this writing.
While Office Depot's revenue and adjusted earnings per share were both slightly ahead of analyst estimates, softer-than-expected guidance for Office Depot's 2018 adjusted earnings per share may have some investors worried about the company's ability to navigate an evolving retail landscape.
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So what
For its fourth quarter, Office Depot reported adjusted earnings per share of $0.08 on sales of $2.6 billion. These results are worse than year-ago adjusted earnings per share and sales of $0.11 and $2.7 billion, respectively. But both figures were ahead of consensus analyst estimates for adjusted earnings per share and revenue of $0.07 and $2.54 billion, respectively.
Where Office Depot missed the mark was its earnings guidance. Management said it expected full-year 2018 adjusted earnings per share of $0.30, down from $0.45 in fiscal year 2017 and $0.46 in fiscal year 2016.
While management listed several reasons it expects lower profitability in 2018, the most notable was an expectation for incremental growth investments aimed to help it accelerate its "transition toward a services-driven model," management said. Of course, Office Depot also continues to expect profitability to be impaired by "the flow-through impact of lower sales volume," management noted.
Now what
Investors should keep an eye on Office Depot's investments as it transitions to a services-driven model. In total, investors should expect Office Depot's incremental growth investments to negatively impact adjusted operating income in 2018 by $40 million.
Looking beyond 2018, management believes its investments today will help the company return to earnings-per-share growth.
"We recognize that 2018 is a year of transition and that investments are required to advance our Company's multi-year transformation," said Office Depot CEO Gerry Smith. "However, as we look to 2019 and beyond, I expect that 2018 will be our pivot year as the actions we have already taken, coupled with the additional initiatives and investments we have planned this year, should allow us to grow year-over-year profitability in 2019."
