Office Depot (ODP 0.14%) has struggled since its attempt to merge with Staples failed. The company is attempting to change its business model, adding technology solutions to its original model of selling office supplies. It's too early to know if that will work, but fourth-quarter and 2017 results, which the company reported on Feb. 28, were somewhat disappointing.
What happened
Sales in Q4 dropped to $2.6 billion from $2.7 billion the previous year. Full-year sales came in at $10.2 billion, a drop of 7% year over year. Perhaps most importantly, Office Depot reported a net loss of $48 million, or $0.09 per diluted share, down from a profit of $0.10 in the same quarter last year.
The company noted that the loss was due to "a net tax expense of approximately $68 million associated with changes to the Company's U.S. deferred tax assets and tax valuation allowance due to recent tax law reform." Still, even if you factor out the tax loss, adjusted earnings fell slightly for the quarter and the year.
Office Depot has struggled to get consumers to its stores. Image source: Office Depot.
So what
Office Depot is a company that's transforming itself. Since its new CEO Gerry Smith has only been on the job since January, it's fair to say he has not yet had time to remake the company, though he said everything is on track in his remarks in the Q4 earnings release:
Fourth quarter sales trends in the Business Solutions Division continued to improve sequentially and we also saw relative improvement in store traffic recently as a result of strategic shifts in our offer and marketing mix. We are encouraged to see our initiatives to transform the Company beginning to gain traction, including our ability to generate Free Cash Flow to fund these future growth engines.
Smith may have the right plan, but so far, investors aren't buying it. After closing February at $2.63, according to data from S&P Global Market Intelligence, shares fell to $2.15 to close March, an 18% drop. That drop is nearly identical to the decline Office Depot posted in February.
Now what
Give Smith time. He wants to make Office Depot less reliant on stores, while improving sales at those same brick-and-mortar locations. Those aren't easy tasks and they're not going to happen quickly.
This is a retailer that's in transformation and turnaround mode. One quarter, or even a few, will not likely determine whether it succeeds or not.
