Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The ODP Corp (ODP, Financial) has initiated several strategic growth initiatives, including five major business process improvement projects expected to drive significant growth and profitability in 2025 and beyond.
- Veyer, the company's supply chain business, continues to show strong progress, attracting new third-party customer relationships and driving healthy increases in external EBITDA.
- The company has repurchased over $140 million of stock during the quarter, demonstrating a strong focus on capital allocation and shareholder return.
- Project Core, an enterprise-wide initiative, is on track to achieve annualized run rate savings of at least $100 million, significantly improving the company's position for future growth.
- The ODP Corp (ODP) has a strong balance sheet and liquidity position, ending the quarter with total liquidity of $831 million, allowing flexibility to invest in core business and return capital to shareholders.
Negative Points
- The company's performance in the second quarter was below expectations, impacted by ongoing macroeconomic headwinds and a challenging business environment.
- Revenue for the quarter was down about 10% compared to last year's second quarter, primarily driven by lower sales in Office Depot and ODP Business Solutions.
- GAAP operating income in the quarter was only slightly positive, with adjusted operating income significantly lower than the previous year.
- The company faced delays in onboarding new customers and customer losses, impacting the ability to regain stronger top-line traction.
- The weaker macroeconomic environment reduced consumer and business spending, resulting in lower demand and creating headwinds in efforts to drive better revenue traction.
Q & A Highlights
Q: What has been the delay in onboarding some of the enterprise customers that you announced as having won a couple of quarters ago? Is it an issue on your end or customer-related? Also, could you give more color on the customer that you lost? Was it an existing customer or a pipeline customer? And is there any risk of further loss out of the pipeline? Lastly, what gives you confidence in the pipeline for the back half of the year and your ability to convert against that?
A: (D. Anthony Scaglione, CFO) Customers are being more cautious, impacting our top line and delaying onboarding due to prioritizations or their own restructurings. Some wins were reprioritized by customers to stay with incumbents. We are focused on weekly deal reviews and seeing early signs of improvement. (Gerry Smith, CEO) We are working on trajectory-changing deals, including a significant new agreement for Veyer that could nearly double its top line from the prior year.
Q: How much is the more intense competitive landscape playing into the shortfall expected in the back half? How would you divide it between the challenging macro environment and the competitive landscape?
A: (Gerry Smith, CEO) The softness is primarily due to macroeconomic conditions affecting both B2B and B2C customers, not increased competition. Customers are buying less due to layoffs and reduced spending. (D. Anthony Scaglione, CFO) It's a combination of longer close cycles, customers trading down, and delayed big-ticket purchases, all happening simultaneously.
Q: What needs to happen to reverse the significant erosion in gross margin from the last couple of quarters?
A: (D. Anthony Scaglione, CFO) Project Core actions will begin to show benefits in the back half of the year. Stabilizing the top line and new volume from significant deals, like the one just announced for Veyer, will help improve gross margins.
Q: What have you seen in the laptop category? What percentage of your laptop sales in the last couple of months have been AI-enabled laptops?
A: (D. Anthony Scaglione, CFO) Demand for AI-enabled laptops is expected to drive a meaningful refresh cycle over the next 6-12 months. Most of our sales are in laptops rather than traditional desktops.
Q: What have you seen so far early in the back-to-school holiday season? Has it been a continuation of the trends experienced in the second quarter?
A: (D. Anthony Scaglione, CFO) It's early, but we are well-positioned with our teacher and school supply lists, Dormify dorm room accessories, and other initiatives. The environment is competitive, but we are encouraged by our inventory and product offerings.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
