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On Tuesday, OfficeMax Inc. posted third-quarter 2012 adjusted earnings of 27 cents a share, surpassing the Zacks Consensus Estimate by a penny and rising 8% from 25 cents earned in the prior-year quarter, on the back of improved profitability.

However, total sales dropped 1.7% to $1,744.6 million year over year, and also fell short of the Zacks Consensus Estimate of $1,781 million.

The office supplies retailer now expects fourth quarter sales to remain even with or marginally down compared with the prior-year period, including the favorable impact of foreign currency translation. Sales for fiscal 2012 are projected to be lower than 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.

OfficeMax’s gross profit inched up marginally to $460.4 million during the quarter, whereas gross profit margin expanded 50 basis points to 26.4%. Adjusted operating income for the quarter increased 8.7% to $44.9 million, and operating margin expanded 30 basis points to 2.6%.

Management expects adjusted operating margin for the fourth quarter to be a tad bit lower than the prior-year quarter’s 1.7% and for fiscal 2012 it is expected to be marginally higher than 1.7% reported in the prior year.

Segment Discussion

OfficeMax Contract segment sales dipped 0.3% to $880.9 million in the quarter. The segment witnessed an elevation of 3.9% in Contract operations sales in the U.S. and a decrease of 8.9% in Contract operations sales in international markets (down 7.2% in constant currency). Contract segment’s gross profit margin strengthened 10 basis points to 22.8%, whereas segment income margin increased 40 basis points to 3%.

OfficeMax Retail segment sales fell 3.1% to $863.7 million, reflecting a decline of 2.1% in comparable-store sales due to sluggish sales witnessed in technology product category, primarily in PC category.  U.S. comparable-store sales fell 2.6%, whereas, comparable-store sales in Mexico rose 2.2% in constant currency. Retail segment’s gross profit margin expanded 100 basis points to 30%, reflecting favorable sales mix and decline in occupancy and delivery costs. Segment’s income margin remained flat at 3.2% during the quarter.

At the end of the quarter, OfficeMax operated 960 retail stores–– 872 in the U.S. and 88 in Mexico.  During the quarter, the company opened 3 stores 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 store and close 45 outlets.

Other Financial Details

OfficeMax ended the quarter with cash and cash equivalents of $506 million, long-term debt of $226.5 million, non-recourse debt of $735 million and shareholders’ equity of $1,044.4 million. Capital expenditures for the first nine months of 2012 were $48.2 million.

Management now expects capital expenditures in the range of $70 million to $80 million in fiscal 2012. During the first nine months of 2012, the company generated a cash flow of $157.8 million from operating activities. Management expects cash flow from operations to exceed capital expenditures in fiscal 2012.

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.

Currently, we maintain our long-term ‘Outperform’ recommendation on the stock. Moreover, 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.
 

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