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Amidst a tough economic environment, OfficeMax Inc. posted better-than-expected fourth-quarter 2011 results. The quarterly earnings of 17 cents a share beat both the Zacks Consensus Estimate and the prior-year quarter earnings by a penny, on the back of low single-digit growth in the top line and effective cost management.

Behind the Headline

Total sales climbed 3.9% to $1,835.8 million from the same quarter last year, and also came ahead of the Zacks Consensus Estimate of $1,812 million.

The office supplies retailer now expects first quarter sales to remain even with the comparable period, including the impact of foreign currency translation. Sales for fiscal 2012 are projected to be flat to marginally higher compared with the prior year, including the positive impact of foreign currency translation and excluding the extra week in 2011.

The fourth quarter of 2011 includes an extra week of operation in the U.S., excluding which, total sales edged down 0.8%. The additional week resulted in incremental sales of about $86 million, operating income of approximately $8 million and earnings of 6 cents a share. The additional benefit from an extra week was derived principally from the Retail Segment.

The recovery in the economy still lacks luster. 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. The company’s digital as well as technology and document solutions are also gaining traction.

As part of its strategic retail partnership initiative, OfficeMax commenced a pilot program with RadioShack Corporation (RSH - Analyst Report) in January 2012, under which the employees of the latter are selling mobile products and accessories and offering services in some of OfficeMax stores in San Francisco. On the other hand, RadioShack is helping OfficeMax to enhance its consumer electronics offering. The initiative in a way is assisting in driving traffic as well as resulting in optimum utilization of selling space.

OfficeMax notified that gross profit inched up 0.9% to $449.9 million, whereas gross profit margin contracted 80 basis points to 24.5%. Adjusted operating income for the quarter fell 1.3% to $30.4 million, whereas operating margin remained flat at 1.7%.

Management now expects adjusted operating margin for the first quarter and fiscal 2012 to be in line with 1.7% in the corresponding prior-year periods.

Segment Discussion

OfficeMax Contract segment sales grew 2.3% to $934.8 million in the quarter. The segment witnessed an increase of 5.3% in Contract operations sales in the U.S. but a decline of 4% in Contract operations sales in international markets. Segment sales rose 2.1% in constant currency. Segment gross profit margin contracted 60 basis points to 22.2%.

OfficeMax Retail segment sales climbed 5.7% to $901 million, reflecting a marginal increase of 0.2% in comparable-store sales. The healthy comparable-store sales in Mexico were partly offset by a marginal fall in the U.S.comps. Segment gross profit margin shriveled 90 basis points to 26.9%.

At the end of fiscal 2011, OfficeMax operated 978 retail stores–– 896 in the U.S.and 82 in Mexico.  During the year, the company opened 5 stores and closed 2 locations in Mexico, and further closed 22 stores in the U.S.In fiscal 2012, the company now plans to open 8 to 9 stores and close 1 to 2 stores in Mexico, and open1 to 2 stores and close 35 outlets in the U.S.

Other Financial Details

OfficeMax ended the quarter with cash and cash equivalents of $427.1 million, total long-term debt of $268.2 million, non-recourse debt of $1,470 million and shareholders’ equity of $569 million. Capital expenditures for the fourth quarter and fiscal 2011 were $28.1 million and $69.6 million, respectively. Management now expects capital expenditures in the range of $75 million to $100 million in fiscal 2012. During fiscal 2011, the company generated a cash flow of $53.7 million from operating activities. Management expects cash flow from operations to exceed capital expenditures in fiscal 2012.

Let’s Conclude

No one can predict the future but efforts to combat the tough economy are obvious. Business budget remains 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 that translates into a short-term ‘Sell’ rating.

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