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Third Quarter 2023 – Solid Operating Results

Joe Gomes

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Consumer Cyclical

Retail - Cyclical

The ODP Corporation

Operating Results for the Third Quarter of 2023
From a 10,000 foot perspective, on a consolidated basis ODP drove strong operating income performance in the third quarter despite the generally weaker macroeconomic conditions. While overall revenue was down largely due to a more cautious demand environment and fewer stores and service, management&#8217;s low cost business model approach helped drive adjusted operating income results that were consistent with last year. Add in the impact of the stock repurchase program and adjusted EPS grew 27% year-over-year. 
 
Consolidated sales were lower by $163 million, or 8%, in the third quarter of 2023 compared to the same period in the prior year. ODP Business Solutions Division revenue decreased $34 million, or 3%, year-over-year. The segment experienced decreased sales across a majority of its product categories, primarily in technology, driven by lower demand from business-to-business customers, due to reduced spending. Office Depot Division sales were lower by $133 million, or 12%, as compared to the same period in the prior year, mainly as a result of planned store closures, lower demand, and lower average order values at the retail stores and eCommerce platform. Four Office Depot locations were closed in the quarter, bringing the year-to-date number to 30 store closures. The sales decline was across the majority of Office Depot Divisionâ€™s product categories, except copy and print. The demand for these categories was impacted by reduced spending of customers during the competitive back-to-school season in the third quarter of 2023. We would note tech sales were $531 million in the just completed quarter, down from $597 million a year ago and furniture and other sales were down to $297 million from $336 million in the same period a year ago. The contribution of the Veyer Division and Varis Division to consolidated sales was not material.
Total gross profit decreased $12 million, or 3% in the third quarter of 2023 when compared to the same period in 2022. ODP Business Solutions Division had $8 million higher gross profit resulting from favorable product margin. The Veyer Division had $5 million higher gross profit due to the increase in sales to third parties and lower product costs. The Varis Division also contributed $1 million higher gross profit during this period. However, these improvements were more than offset by the $26 million decrease in gross profit at the Office Depot Division. The decrease in the Office Depot Division gross profit in the third quarter of 2023 is primarily due to the flow through impact of lower sales, partially offset by improved product margin.&nbsp;Total gross margin for the third quarter was 24%, up 100 basis points from the same period last year. 
 
SG&amp;A expenses decreased $12 million compared to the same period in 2022, mainly driven by a $10 million decrease in the Office Depot Division in the third quarter as store closures and certain strategic initiatives, including the Maximize B2B Restructuring Plan, lowered segment SG&amp;A costs. These decreases were partially offset by increases in employee-related costs in the ODP Business Solutions Division and the Veyer Division. SG&amp;A expenses as a percentage of total sales was 19% in the third quarter compared to 18% in the same prior year period, mainly due to the deleveraging from lower sales.
ODP recorded $3 million of asset impairment charges in the third quarter, primarily related to the impairment of operating lease ROU assets associated with retail store locations. Merger, restructuring and other operating expenses, net were $1 million in the quarter.
 Despite the lower revenue in the quarter, GAAP operating income was $91 million, up over 8% from the third quarter last year. Included in operating income was $4 million of charges primarily associated with noncash asset impairments, largely related to the right-of-use assets. Adjusted operating income for the third quarter was $95 million, consistent with last year and included unallocated corporate expenses of $20 million. Adjusted EBITDA was $125 million for the quarter compared to $131 million in the same period last year. This includes depreciation and amortization expense of $28 million and $32 million in the third quarter of 2023 and 2022, respectively. 
 ODP reported GAAP net income of $70 million, or $1.79 per share, compared to $67 million, or $1.36 per share from continuing operations last year. The increase in diluted earnings per share from continuing operations in the third quarter compared to the same prior year period is due to higher net income and lower weighted average shares. On an adjusted basis, the Company reported adjusted net income of $73 million, or $1.88 per share, compared to $73 million, or $1.48 per share in last year&#8217;s third quarter.

 
Segments Overview 
 
ODP Business Solutions Division revenue decreased $35 million in the third quarter of 2023 compared to the corresponding quarter in 2022. During the third quarter of 2023, the Division experienced decreased sales across a majority of its product categories, primarily in technology, compared to the corresponding quarter in 2022, driven by lower demand from business-to-business customers, due to reduced spending. Division operating income was $56 million in the third quarter of 2023 compared to $48 million in the third quarter of 2022, an increase of 17%. Operating income as a percentage of sales increased 1% year-over-year. The improvement in operating income was mainly driven by favorable product margin, which resulted in 140 basis points higher gross profit margin. This was partially offset by SG&amp;A expense, which, as a percentage of sales, increased compared to the corresponding period in the prior year. Notwithstanding the more restrained level of business spending, ODP Business Solutions continues to win new accounts and management believes revenue performance is outpacing other market participants, resulting in share gains. The Division is working to onboard some recent large enterprise wins that have taken longer to implement, but they are expected to be up and running by year-end or early next year.
Sales in the Office Depot Division decreased $133 million, or 12%, year-over-year. Notably, the Division saw $10 million of increased sales in copy and print services in the third quarter, as more customers transitioned to on-site work and in-person learning. However, this was more than offset by fewer transactions in product sales for the third quarter. The largest drivers of the product sales decline were planned store closures, lower demand, and lower average order values in stores as well as through the eCommerce platform.&nbsp;Comparable store sales decreased 6% in the third quarter, reflecting lower store traffic and average order value, partially offset by higher conversion rate. The average order value was impacted by lower sales in workspace and computer product categories.&nbsp;Office Depot Division operating income was $66 million in the third quarter of 2023, which decreased 20% as compared to $83 million in the third quarter of 2022. Operating income as a percentage of sales was flat in the third quarter of 2023 compared to the corresponding period in 2022. The reduction in operating income was mainly due to the flow through impact of lower sales. The gross margin rate was 90 basis points higher primarily due to improved product margin, however, this was more than offset by the impact of selling, general and administrative costs, mainly due to deleveraging from lower sales. 
Veyer external sales increased to $11 million from $7 million. External sales represent supply chain services provided to third parties, as well as product sales by the Asia sourcing operation to third parties. Veyer Division operating income was $10 million in the third quarter of 2023 compared to $9 million in the third quarter of 2022. The increase related to the favorable impacts of higher sales to third parties and lower product costing.
Sales in the Varis Division in the third quarter of 2023 were $2 million, flat compared to the same period last year. Sales were predominantly related to subscription services. Division operating loss was $17 million, flat compared to third quarter of 2022. Varis had lower employee-related costs in the third quarter.
Cash Flows
ODP generated solid cash flow results in the quarter. Operating cash flow in the quarter was $112 million compared to $163 million last year. Capital expenditures in the quarter were $25 million, flat compared to last year&#8217;s third quarter, targeting investments in the Company&#8217;s supply chain, digital transformation and e-commerce capabilities. Adjusted free cash flow in the quarter was $89 million compared to $160 million in the same period last year. On a year-to-date basis, ODP has generated $192 million in adjusted free cash flow versus $54 million year-to-date through the same period last year. The difference in adjusted free cash flow is primarily related to the timing of working capital. 
 
Capital Deployment 
 
 At September 30, 2023, the Company had $384 million in cash and cash equivalents and $771 million of available credit under the Third Amended Credit Agreement for total liquidity of approximately $1.2 billion. Long-term debt totaled $164 million at quarter&#8217;s end. 
 
The Company repurchased&nbsp;659,000&nbsp;shares of its common stock at a cost of $32&nbsp;million during the third quarter and has repurchased&nbsp;six&nbsp;million shares of its common stock at a cost of $266&nbsp;million year-to-date. Of the total shares repurchased,&nbsp;two&nbsp;million shares were purchased from HG Vora for a cost of $89&nbsp;million pursuant to the related stock purchase agreement that the Company entered with HG Vora, effective March 13, 2023. As of September 30, 2023, $583&nbsp;million remains available for stock repurchases under the current stock repurchase program. After the end of the third quarter of 2023 and through November 1, 2023, the Company repurchased&nbsp;249,000&nbsp;shares of its common stock at a cost of $11&nbsp;million.
Updated Projections
 While the weaker macroeconomic conditions have impacted the level of business and consumer activity, creating top line headwinds, management&#8217;s focus on operational excellence has enabled ODP to post solid drive operating results. Considering performance to date, along with current macroeconomic conditions and expectations for revenue trends, management provided the following guidance: revenue in the range of $7.8 billion to $7.9 billion, down from a prior $8 billion. Adjusted EBITDA was kept in the $400-$430 million range. Management&nbsp; increased guidance for adjusted operating income to a range of $280 million to $310 million, up from the previous range of $270 million to $300 million, and increased guidance for adjusted earnings per share to a range of between $5.30 to $5.60, up from a previous range of $5.00 to $5.30.
For the fourth quarter, we reduced our top line to $1.85 billion from $1.95 billion. Adjusted EBITDA is estimated at $63 compared to a prior $73 million. Net income is projected at $24 million, or $0.63 per share, compared to a prior $31 million, or $0.81 per share. For the full year, we are projecting revenue of $7.88 billion, adjusted EBITDA of $406 million, and net income of $200 million, or EPS of $5.05 and adjusted EPS of $5.33.

The ODP Corporation (ODP)

Third Quarter 2023 – Solid Operating Results

Fundamental Analysis:

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Efficiency is the Key (ODP)

A Shareholder Letter (ODP)

NobleCon19 Presentation Notes (ODP)

Third Quarter 2023 – Solid Operating Results (ODP)

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