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Factors Likely to Influence Office Depot's (ODP) Q4 Earnings

Office Depot, Inc.ODP is slated to release fourth-quarter 2018 results on Feb 27. This supplier of a range of office products and services has outperformed the Zacks Consensus Estimate in the trailing four quarters, recording average positive earnings surprise of 11.9%. In the las t report ed quarter, the company delivered a positive earnings surprise of 8.3%.

The Zacks Consensus Estimate for the quarter under review is pegged at 8 cents, which is line with the prior-year quarter's results. We note that the Zacks Consensus Estimate has remained stable in the last 30 days. The Zacks Consensus Estimate for revenues stands at $2,684 million, up about 4% from the year-ago quarter.

Factors Holding Key to Performance

Strategic Endeavors Undertaken

Office Depot has undertaken initiatives such as strategic review of business operating model, growth prospects and cost structure that have helped it get back on track. Moreover, the company is closing underperforming stores, shuttering non-critical distribution facilities, concentrating on e-commerce platforms and focusing on providing innovative products and services.

The company intends to boost sales in the contract channel by increasing penetration into adjacent categories and enhancing share of wallet with existing customers. Management had earlier guided full-year sales to be $11 billion. We note that revenues had increased 10% in the third quarter of 2018.

Office Depot, Inc. Price, Consensus and EPS Surprise

Office Depot, Inc. Price, Consensus and EPS Surprise | Office Depot, Inc. Quote

Catapulting into a Product & Services-driven Enterprise

Management is making incremental investments to catapult it into a product and services-driven enterprise. Service revenue now represents approximately 15% of the total sales. Management intends to increase the revenue contribution from services to approximately 20% of total sales in the next two years.

To widen its domain of offerings, Office Depot acquired CompuCom Systems that is helping it to acclimatize to the fast-changing retail landscape, and providing enterprise-level tech services and products to customers. The company also signed a channel partner agreement with MicroCorp, a premier value-added distributor of telecom and cloud solutions. It is also incorporating Tech-Zone services desk across its stores.

Headwinds to Counter

Office Depot is exposed to headwinds stemming from soft demand for office products due to technological advancements. Smartphones, tablets and laptops are fast emerging as viable substitutes for paper-based office supplies. Moreover, higher marketing, advertising and other growth-related investments may hurt margins.

Further, rise in cost of goods sold and occupancy costs as well as increased SG&A and interest expenses have been a threat to the company's bottom line for a while now. We note tha t earnings per share had declined 50%, 17% and 7% in the first, second, and third quarters of 2018, respectively, albeit at a decelerating rate. Also, dismal comparable-store sales run across the company's Retail division for the past few quarters and stiff competition from office supply retailers remain concerns.

What Does the Zacks Model Unveil?

Our proven model does not conclusively show that Office Depot is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Office Depot has a Zacks Rank #2 but an Earnings ESP of 0.00%, consequently making the surprise prediction difficult. You can see the complete list of today's Zacks #1 Rank stocks here .

Stocks Poised to Beat Earnings Estimates

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post earnings beat.

Zumiez ZUMZ has an Earnings ESP of +0.45% and a Zacks Rank #1.

Abercrombie & Fitch ANF has an Earnings ESP of +0.94% and a Zacks Rank #2.

Costco COST has an Earnings ESP of +1.42% and a Zacks Rank #3.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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