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OfficeMax Beats on Bottom Line

ODP SPLS

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OfficeMax Inc. posted better-than-expected second-quarter 2012 results. The quarterly earnings of 12 cents a share surpassed the Zacks Consensus Estimate by 5 cents and rose substantially from 7 cents earned in the prior-year quarter, on the back of effective cost management. The company also reinitiated its dividend payout after suspending it three and a half years ago.

Behind the Headline

Total sales dropped 2.7% to $1,602.4 million year over year, and also fell short of the Zacks Consensus Estimate of $1,638 million.

The office supplies retailer now expects third quarter sales to remain even with or marginally higher than the prior-year period, including the adverse impact of foreign currency translation. Sales for fiscal 2012 are projected to be flat with the prior year, including the negative 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, however, continues to remain lackluster. As a result, consumers and small businesses still remain cautious regarding 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’s gross profit fell 3.7% to $409.5 million, whereas gross profit margin contracted 20 basis points to 25.6%. Adjusted operating income for the quarter surged 29.1% to $23.1 million, and operating margin expanded 30 basis points to 1.4%.

Management expects adjusted operating margin for the third quarter to be approximately in line with 2.3% 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 sales dipped 0.2% to $878.8 million in the quarter. The segment witnessed an increase of 2.6% in Contract operations sales in the U.S. and a decrease of 6% in Contract operations sales in international markets (down 2.3% in constant currency). Segment sales rose 1% in constant currency. The segment’s gross profit margin remained flat at 22.3%, whereas segment income margin increased 90 basis points to 2.9%.

OfficeMax Retail segment sales fell 5.7% to $723.6 million, reflecting a decline of 1.8% in comparable-store sales due to lower store transactions and adverse impact of foreign currency translation. U.S. comparable-store sales fell 1.3%.

On the other hand, Mexico comparable-store sales rose 3.5% in constant currency, but dropped 6.9% in terms of U.S. dollars. Retail segment’s gross profit margin shriveled 40 basis points to 29.5%, whereas segment income margin contracted 60 basis points to 0.4%.

At the end of the quarter, OfficeMax operated 957 retail stores -- 872 in the U.S. and 85 in Mexico. During the quarter, the company opened 2 stores in Mexico, and closed 2 locations in the U.S and 1 in Mexico. For fiscal 2012, the company plans to open 8 to 10 stores and close 1 to 2 stores in Mexico, while in the U.S. it plans to open 1 to 2 stores and close 35 outlets.

Other Financial Details

OfficeMax ended the quarter with cash and cash equivalents of $444.5 million, long-term debt of $227.3 million, non-recourse debt of $1,470 million and shareholders’ equity of $593.2 million. Capital expenditures for the first six months were $32.6 million. Management now expects capital expenditures in the range of $75 million to $85 million in fiscal 2012.

During the first six months of 2012, the company generated cash flow of $82.1 million from operating activities. Management expects cash flow from operations to exceed capital expenditures in fiscal 2012. The company also reinstated a quarterly dividend of 2 cents a share to be paid on August 31 to shareholders of record as of August 15.

In Conclusion

Although the future remains uncertain, the efforts to combat the tough economy are obvious. Business budget remains tight, consumers remain more cautious than ever before and companies are working to navigate through the challenging environment.

Consumers and small businesses remain prudent regarding 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. Moreover, OfficeMax, which competes with Office Depot Inc. (ODP - Analyst Report) and Staples Inc. (SPLS - Analyst Report), holds a Zacks #3 Rank, which translates into a short-term Hold rating.

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