UPDATE: OfficeMax Swings To 2Q Profit; Sales View Weak

OfficeMax Inc. (OMX) posted an unexpected second-quarter profit, but the office products retailer reversed its position that the economy will improve in the second half of this year.

Reflecting the shift in sentiment, OfficeMax said it now sees third-quarter sales slightly lower than the prior year's $1.83 billion and reduced its 2010 sales view, sending the company's stock lower. Analysts' average estimate was for third-quarter sales of $1.86 billion.

"Customers are still very budget conscious, and we don't see that changing," Chief Financial Officer Bruce Besanko told Dow Jones Newswires. Besanko has said as recently as late June that OfficeMax was expecting the economy to begin improving in the back half of this year.

Coupled with a "very value-oriented consumer," OfficeMax expects steep competition during the back-to-school period, one of the biggest selling seasons of the year at office products stores, Besanko said. OfficeMax competes against other office products retailers like Staples Inc. (SPLS) and Office Depot Inc. (ODP) for school supplies business. The companies are also up against the likes of Wal-Mart Stores Inc. (WMT), Target Corp. (TGT) and dollar stores.

"Retailers are going to be very competitive, very active," Besanko said.

The comments suggest something of a dust-up is brewing as retailers try to wring all they can from what is traditionally the second biggest buying season behind the Christmas holiday. The National Retail Federation estimates the average U.S. family will spend $606.40 on clothing, shoes, supplies and electronics for children in K-12 through around Labor Day, with bargain-hunting a priority.

OfficeMax shares were down 11% to $13.20 recently.

OfficeMax, which is the No. 3 office products supplier by sales behind Staples and Office Depot, has been spending to position itself for better sales, Besanko said. The company is hiring salespeople for its unit that sells to businesses and is also working on improving its call centers.

OfficeMax is also redesigning its marketing to include catalogs with brighter color and more attractive presentations to appeal to women, who the retailer said make 70% of office-supplies purchase decisions. The moves are part of a five-year plan to raise sales without adding stores, although OfficeMax is adding nontraditional outlets such as grocery and convenience stores.

The office products sector has been struggling owing to high unemployment rates, especially among white-collar workers.

Office Depot last week posted a narrower second-quarter loss than expected, as cost cutting more than made up for weaker-than-expected sales.

OfficeMax reported a second-quarter profit of $12.4 million, or 14 cents a share, compared with a prior-year loss of $16.9 million, or 23 cents. The latest quarter had 2 cents a share of gains. Analysts polled by Thomson Reuters had forecast break-even results.

Sales edged down 0.3% to $1.65 billion. The company in April projected a slight gain.

Gross margin rose to 25.9% from 23.8%.

OfficeMax's contract segment -- its business-to-business office-products distributor -- saw sales edge down 0.1% compared with a 21% drop a year earlier.

Retail business sales eased by 0.5%, reflecting a same-store sales decline of 0.3% and fewer stores. However, the sales decline was an improvement over the prior-year drop of 12%.

The businesses' sizes are nearly the same by sales.

OfficeMax now expects annual sales will be flat to slightly lower than 2009 sales of $7.21 billion, compared with its prior view for a slight increase.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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