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OfficeMax Inc. posted better-than-expected first-quarter 2012 results. The quarterly earnings of 23 cents a share beat the Zacks Consensus Estimate of 16 cents and rose substantially from 13 cents earned in the prior-year quarter on the back of effective cost management and marginal growth in the top line.

Behind the Headline

Total sales inched up 0.5% to $1,872.9 million from the same quarter last year, and came ahead of the Zacks Consensus Estimate of $1,867 million.

The office supplies retailer now expects second quarter sales to remain even with or marginally lower than the prior-year period, including the impact of foreign currency translation. Sales for fiscal 2012 are projected to be flat to marginally higher than the prior year, including the positive impact of foreign currency translation and excluding the extra week in 2011, which resulted in incremental sales of about $86 million.

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 innovative products and services. The company’s digital as well as technology and document solutions are also gaining traction.

OfficeMax notified that gross profit nudged up 1.7% to $482.8 million, whereas gross profit margin expanded 30 basis points to 25.8%. Adjusted operating income for the quarter surged 50.7% to $43.1 million, and operating margin grew 80 basis points to 2.3%.

Management now expects adjusted operating margin for the second quarter to be approximately in line with 1.1% in the year-ago quarter, and for fiscal 2012 to be even with or marginally higher than 1.7% in the prior year.

Segment Discussion

OfficeMax Contract segment sales grew 3.8% to $960.6 million in the quarter. The segment witnessed an increase of 5.6% in Contract operations sales in the U.S. and a marginal growth of 0.3% in Contract operations sales in international markets (down 2.4% in constant currency). Segment sales rose 2.8% in constant currency. Contract segment’s gross profit margin expanded 20 basis points to 22.4%, whereas segment income margin increased 180 basis points to 2.8%.

OfficeMax Retail segment sales dipped 2.7% to $912.3 million, reflecting a decline of 2.1% in comparable-store sales due to lower store transactions. US comparable-store sales for the quarter fell 1.7%. On the other hand, Mexico comparable-store sales rose slightly by 0.6% in constant currency, but dropped 7.5% in terms of U.S. dollars.

Retail segment’s gross profit margin expanded 60 basis points to 29.3%, whereas segment income margin shriveled 20 basis points to 2.5%.

At the end of the quarter, OfficeMax operated 958 retail stores–– 874 in the U.S. and 84 in Mexico.  During the quarter, the company opened 1 store in the U.S. and 2 stores in Mexico, and closed 23 locations in the U.S. For fiscal 2012, the company now plans to open 8 to 10 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 $501.3 million, total long-term debt of $269.3 million, non-recourse debt of $1,470 million and shareholders’ equity of $589.9 million. Capital expenditures for the quarter were $15.5 million. Management now expects capital expenditures in the range of $75 million to $100 million in fiscal 2012. During the quarter, the company generated a cash flow of $86.5 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’ recommendation on the stock. However, OfficeMax, which competes with Office Depot Inc. (ODP - Analyst Report) and Staples Inc. (SPLS - Analyst Report), holds a Zacks #2 Rank that translates into a short-term ‘Buy’ rating, and well defines the company’s consistent healthy performance in an economy, which is still in a sluggish mode of recovery.

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