Office supply retailer blames disappointing earnings on lower-than-expected performance by CompuCom
Office Depot took a big hit yesterday when it reported significantly lower-than-expected earnings due, in large part, to a slump in earnings through its managed services division, CompuCom. The earnings slump, however, is only part of the larger challenge facing Office Depot as it tries to pivot from an office supply retailer to a technology service provider.
The Lowdown: Florida-based Office Depot blamed its poor first-quarter performance on lower-than-expected income from existing projects and engagements at CompuCom. The retailer bought CompuCom in 2017 for $1 billion as the cornerstone of its pivot to B2B IT services. Office Depot banked much of its future on CompuCom’s ability to expand into B2B services and fuel new consumer-level technical support.
While not part of the earnings report, rumblings throughout the industry say Office Depot is struggling to spark a fire with managed service providers to resell its business support services. Some in the channel say MSPs are reluctant to sign up customers for business support as it could serve as lead generation for CompuCom.
The Details: Office Depot reported revenue of $2.76 billion and adjusted operating income of $65 million for the first quarter, whereas Wall Street expected revenue of $2.82 billion. What’s more, those numbers are down from what they were in 2018, when revenue was $2.83 billion and operating income was $93 million. Office Depot blames almost all of its poor financial performance on CompuCom, and is planning to reorganize the division to improve customer-facing functions.
The fact that Office Depot called out “customer-facing” activities as a point of needed improvement could indicate that CompuCom got distracted in integrating with Office Depot’s operations. Over the past year, CompuCom served as the foundation for new in-store tech support centers modeled after the Apple Store experience. A dilution of CompuCom’s resources could explain part of the earnings slump.
Not mentioned in the the earnings report is the recent settlement with the Federal Trade Commission over Office Depot’s practice of allegedly tricking people into buying technical and security support. In March, Office Depot agreed to a $35 million settlement while admitting no wrongdoing for pushing $300 support subscriptions on consumers who used its Support.com service. According to the FTC, Office Depot offered free PC health checks to consumers. Store employees would tell consumers they were at risk of malware infections and push $300 contracts that many didn’t need.
The Impact: The immediate impact of the CompuCom slump is obvious. The real question is whether Office Depot can effectively operate an IT service organization that supports B2B and B2C customers with the same level of quality and reliability. Office Depot didn’t give a reason for the lower-than-expected income from CompuCom, but the note that the issue is with existing contracts could indicate customers are scaling back their service consumption or the division is suffering a higher-than-expected customer attrition rate. Customer churn has a huge impact on recurring revenue consistency, as recently exemplified by SecureWorks, which took an 8% market cap hit after seeing its customer attrition rate jump 8%.
Background: CompuCom may be struggling, but the larger retail operation is under tremendous pressure. Analysts say Amazon’s push into business services and contracts is eating into Office Depot’s and Staple’s long-standing business supply services. Amazon is increasingly signing up businesses and government agencies to business supply contracts that were once dominated by Office Depot and Staples.
The Buzz: “Despite the current challenges we are facing, we are confident that our transformation is on track to drive long-term value for our stakeholders,” said Office Depot CEO Gary Smith. “CompuCom’s operating performance was clearly disappointing, and the actions we are taking to improve its operations and sales performance are expected to yield improving results in 2019.”
Channelnomics Point of View: Office Depot isn’t the first retailer aiming to transform into a technology company. Both Staples and Office Depot have visions of being one-stop shops for businesses by offering everything from IT services and support, paper, and coffee cups to accounting services, toilet paper, and pens. Building the infrastructure and resources is just part of the challenge; the other part is getting the market to view a company as a viable source. Best Buy struggled to gain B2B traction with Geek Squad and mindSHIFT, eventually selling the latter to Ricoh. Staples couldn’t make its managed print services a major business, and Office Depot is now struggling with CompuCom. Eventually, retailers can reach above and find success in B2B IT services, but it takes time to break through the walls of negative perception along the way.