To say that ODP has struggled over the past several years would be an understatement. Before the financial crisis hit in 2008-2009, the stock was trading in the mid-$40 area. Today, the stock sits at around $3.50. Like many other brick and mortar retailers, the company has been badly squeezed by online competitive threats such as Amazon (AMZN), EBay (EBAY), Wal-Mart (WMT) and others. As consumers' and businesses' buying habits have continued to evolve towards the e-commerce channel, ODP has been slow to evolve and has seen its revenue growth evaporate and its margins pressured.
However, after twelve straight quarters of annual revenue declines, ODP has generated positive topline growth for three quarters in a row now. On that note, ODP beat analysts' Q4 earnings expectations on Feb. 27 with revenue up 3% to $2.67 bln, in line with expectations. Along with its in line outlook for FY19, the positive news has provided a spark with shares doubling from its late December lows.
So how does today's news fit in with this recent turnaround? Over the past couple of years, the company has been transitioning more towards business services, B2B, and its online channel. This transformation really began with its 2017 acquisition of CompuCom, a provider of IT managed services and re-seller of technology equipment. At the time, investors were certainly not enthusiastic about the deal as the stock tanked immediately following the announcement. One of the main concerns was the price tag for the deal and the fact that ODP would be taking on $750 mln in new debt, while also issuing 45 mln new shares.
However, the acquisition and its transformation seem to finally be paying off as business services revenue nearly doubled in 4Q18, representing 16% of total revenue now. This new collaboration with BABA figures to boost that growth further. Here is how: ODP's customers will gain access to BABA's global network of over 150K suppliers to find more product options and/or manufacturers to make their goods. As noted above, ODP is focusing more on the B2B channel, which now accounts for nearly 70% of revs compared to about 50% a couple years ago.
ODP provided an example of how this partnership will benefit ODP and its customers: If an entrepreneur were to order canoes through BABA's platform, they could then use ODP's supply chain network to get those canoes to boating supply shops. That business owner will also receive discounts on ODP products if they make a certain amount of purchases through BABA marketplace.
The primary goal for both ODP and BABA is to build SMB adoption of their e-commerce platforms and B2B services. By combining BABA's manufacturing sourcing and its logistics capabilities with ODP's B2B supply chain and retail locations, SMBs will have a more cost-effective and timely distribution network in the U.S.
For BABA, the collaboration gives it instant, indirect access to the U.S market with this being its first U.S. partnership with a large company. Although the company has been expanding in markets outside of China, about 90% of its revenue is still generated there. Mostly, the company has been expanding in nearby, similar markets in Southeast Asia, so this represents a significant milestone for BABA in terms of its reach. Eventually, both companies intend to help U.S. businesses sell their products to buyers in the U.S. through BABA's e-commerce platform.