OfficeMax Beats, Remains Cautious

In a tough economic environment, OfficeMax Inc. (OMX - Analyst Report) posted better-than-expected third-quarter 2011 results. The quarterly earnings of 25 cents a share beat the Zacks Consensus Estimate by a penny, and rose 8.7% from 23 cents earned in the year-ago quarter despite witnessing a low-single digit fall in the top-line. The company has been actively managing its costs to cushion its bottom-line.

Cost of goods sold and occupancy costs dropped 2.1%, whereas operating, selling and general administrative expenses fell 2.6%.

Behind the Headline

Total sales tumbled 2.1% to $1,774.8 million from the same-quarter last year, and also fell short of the Zacks Consensus Estimate of $1,808 million reflecting a challenging economy.

The office supplies retailer now expects fourth-quarter 2011 sales to be marginally higher versus the comparable period, and forecasted that sales for fiscal 2011 will be marginally lower compared with the prior-year. Both include the positive impact of foreign currency translation.

The recovery in the economy is still lackluster. As a result, consumers and small businesses still remain wary on their spending. OfficeMax is repositioning itself to keep afloat in a difficult consumer environment. The company is containing costs, closing underperforming stores and focusing on providing innovative products and services.

OfficeMax notified that gross profit dipped 2.3% to $459.7 million, whereas gross profit margin remained flat at 25.9% but expanded 10 basis points sequentially. Operating income for the quarter inched up 0.9% to $41.3 million, whereas operating margin remained flat at 2.3% but increased 120 basis points sequentially.

Management now expects adjusted operating margin for the fourth quarter and fiscal 2011 to be in line with 1.7% attained in the first-nine months of 2011.

Segment Discussion

OfficeMax Contract segment sales grew marginally by 0.7% to $883.3 million in the quarter. The segment witnessed a decline of 2.4% in Contract operations sales in the U.S. but an increase of 7.7% in Contract operations sales in international markets. Segment sales tumbled 2.6% in constant currency. Segment gross profit margin contracted 10 basis points to 22.7%.

OfficeMax Retail segment sales dropped 4.3% to $891.5 million, reflecting a 4.3% decline in comparable-store sales. The fall in the U.S. comps was partially offset by healthy sales in Mexico. Segment gross profit margin expanded 10 basis points to 29%.

At the end of the quarter, OfficeMax operated 983 retail stores, comprising 900 retail stores in the U.S. and 83 retail stores in Mexico.  During the quarter under review, the company opened 4 retail stores in Mexico and closed 4 retail stores in the U.S. For fiscal 2011, OfficeMax now plans – to open 7 and close 2 stores in Mexico, and shutter 20 locations in the U.S.

Other Financial Details

OfficeMax ended the quarter with cash and cash equivalents of $485.4 million, total long-term debt of $270 million, non-recourse debt of $1,470 million and shareholders’ equity of $657.6 million. Capital expenditures for the quarter were $13.4 million.

Management now expects capital expenditures of approximately $75 million in fiscal 2011. During the nine months of fiscal 2011, the company generated cash flows of $78.7 million from operating activities. Management expects cash flow from operations to exceed capital expenditures for fiscal 2011.

Let’s Conclude

Although the future is unpredictable, but efforts to combat the tough economy are obvious. Business budgets remain tight, consumers remain more cautious than ever before and companies are trying hard to navigate through the challenging environment. Consumers and small businesses remain frugal about big-ticket spending on items such as business machines and other durable products.

We believe that the demand for office products is closely tied to the health of the economy. Currently, we maintain our long-term Neutral rating on the stock. However, OfficeMax, which competes with Office Depot Inc. (ODP - Analyst Report) and Staples Inc. (SPLS - Analyst Report), holds a Zacks #4 Rank, which translates into a short-term Sell rating.

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