Back to top

OfficeMax Slides to Neutral

Read MoreHide Full Article

We recently downgraded our recommendation on OfficeMax Incorporated to Neutral with a price target of $10.00, following its soft third-quarter 2012 top-line performance. Earlier, we had an Outperform view on the stock.

We remain concerned about the macroeconomic environment, with small businesses and consumers remaining watchful on their spending. We adopted a cautious view on the stock given the company’s struggling top line that dropped for the second consecutive quarter.

After declining 2.7% in the second quarter of 2012, OfficeMax’s total revenue dropped 1.7% year over year to $1,744.6 million in the third quarter and also fell short of the Zacks Consensus Estimate of $1,781 million. Contract segment sales dipped 0.3%, whereas Retail segment sales declined 3.1%.

Sales for 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. 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.

However, we observe that OfficeMax’s bottom line continues to perform well. With respect to earnings surprises, the company has topped the Zacks Consensus Estimate over the last four quarters in the range of 3.9% to 71.4%. The average remained at 31.3%, suggesting that OfficeMax has outpaced the Zacks Consensus Estimate by that magnitude in the trailing four quarters.

OfficeMax posted third-quarter 2012 earnings of $0.27 per share that beat the Zacks Consensus Estimate by a penny, and rose 8% from the prior-year quarter on the back of effective cost management and improved operating margins.

The company is repositioning itself to keep afloat in a difficult consumer environment. OfficeMax is containing costs, closing underperforming stores and focusing on providing innovative products and services, which should all contribute to margin improvement. The company should gain from recent growth initiatives, which include the ImPress copy and print and Ctrlcenter PC services, janitorial and sanitation supply, category management, and managed print businesses. The company’s digital as well as technology and document solutions are also gaining traction.

Given the pros and cons, we prefer to have an unbiased view on the stock. Moreover, OfficeMax, which competes with Office Depot Inc. (ODP - Free Report) and Staples Inc. , holds a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

Office Depot, Inc. (ODP) - free report >>

More from Zacks Analyst Blog

You May Like