OfficeMax Walks the Tightrope

We have a long-term Neutral recommendation on OfficeMax Inc. (OMX - Analyst Report) with a price target of $4.75. The company provides office supplies and paper, print and document services, technology products and solutions as well as office furniture to business firms, government organizations and other retail consumers.

The Balancing Act

As the economy continues to be sluggish, consumers and small businesses remain frugal about big-ticket spending like business machines and other durables. Therefore, we believe that the demand for office products is closely tied to the health of the economy.

Consequently, OfficeMax is repositioning itself to keep afloat in a difficult consumer environment. The company is containing costs, closing underperforming stores and focusing on innovative products and services, which should all contribute to margin improvements. Further, the company also anticipates regaining operating margins of more than 3.8% by 2015.

The company also focuses on optimal store sites in order to boost store productivity. OfficeMax is also committed to improving sales per square foot by increasing customer traffic and converting it into potential buyers by targeted advertising, ongoing sales training and customer-oriented initiatives. The company has initiated control center technology services to assist customers with PC maintenance or removal of viruses.

Bottom-Line Better than Forecast

OfficeMax 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 drop in the top-line. The company’s active management of costs provided the much-needed bottom-line cushion.

Economy Remains a Headwind

The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain wary of spending. Challenging macroeconomic conditions are making business difficult for office suppliers such as OfficeMax, Office Depot Inc. (ODP - Analyst Report) and Staples Inc. (SPLS - Analyst Report). These companies are still seen to be grappling with soft demand.

OfficeMax experienced a decline in the top-line during the third quarter of 2011. Total sales dropped 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, a reflection of the tough economy. Management now expects sales for fiscal 2011 to be marginally lower than the last year.

Let’s Conclude

No one can predict the future, but genuine efforts are being implemented to combat the tough economy. Business budgets remain tight, consumers remain cautious and companies are trying hard to navigate through the challenging maze. Going by the pulse of the economy and given the pros and cons, we prefer to have a long-term Neutral rating on the stock. However, OfficeMax holds a Zacks #4 Rank that translates into a short-term Sell rating.

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Read the full analyst report on SPLS