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Why The ODP Corporation Stock Fell as Much as 10% on Aug. 5

By Reuben Gregg Brewer – Aug 5, 2020 at 2:01PM

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The office-supply specialist formerly known as Office Depot didn't make the grade when it reported earnings.

What happened

Shares of office supply and service provider The ODP Corporation (ODP -1.43%), formerly known as Office Depot, fell as much as 10% on Aug. 5. Although it managed to work back from that loss, by 2 p.m. EDT, the stock was still down roughly 7%. The big news behind the move was the company's second-quarter earnings release.

So what

Before getting into second-quarter earnings, there's a little background to cover. On July 1, Office Depot reorganized as The ODP Corporation. Although it was more than a simple name change (it involved creating a holding company to better organize the ODP's various businesses), the real impact on investors is minimal. At the same time, however, the company announced that it had completed a 1 for 10 reverse stock split.

Now the stock is trading in the high-teens as the split doesn't actually change anything at the company. However, it did pull the stock up from the low-single-digit dollar area that investors tend to avoid when looking at stocks to buy. That said, stocks often trade lower after material reverse splits like this one. 

A mess of paper files on the ground

Image source: Getty Images.

Now let's talk about ODP's second-quarter earnings. The top line fell 17% year over year, with operating income going from a $24 million loss in the second quarter of 2019 to a huge $439 million loss this year. That translates to a second-quarter 2020 loss of $8.19 a share, but that was driven largely by one-time items (including notable impairment charges).

Pulling out those items, the company's adjusted loss was $0.07 per share in 2020 versus an adjusted profit of $0.68 a share in 2019. Wall Street had been expecting a profit of $0.08, so investors weren't all that pleased with the final results here and acted as you'd expect. 

To be fair, COVID-19 has been a material headwind at a time when the company has been working toward sizable structural changes. Although that's not an excuse, there's a lot going on at ODP today as it seeks to shift its focus away from physical retail outlets and more toward a business-to-business model. The story is, at best, complicated right now. 

Now what

As the second quarter and subsequent events highlight, ODP is something of a work in progress. In fact, most investors would probably be better off thinking of it as a special-situation stock. As such, ODP is only appropriate for more aggressive investors willing to pay extra attention to their portfolios. More conservative long-term investors would be better off sitting on the sidelines until more progress has been made in this corporate overhaul. 

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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