UPDATE:OfficeMax Profit Boosts Stock Despite Revenue Caution

OfficeMax Inc.'s (OMX) third-quarter profits more than tripled from a year ago on better margins that more than offset soft sales, sending its shares as much as 17% higher even though it struck a cautious tone about the rest of the year.

The office-supply chain said consumers were budget conscious during the back-to-school season, while at the same time retailers were very competitive and promotional. Customers have are more thrifty with their purchasing habits as a result of the recent recession, Chief Financial Officer Bruce Besanko said on a conference call to discuss the fiscal third quarter, and those habits may be here for the long term.

Outgoing OfficeMax Chairman and Chief Executive Officer Sam Duncan in a press release said it expects the macroeconomic environment will "remain muted" for the rest of the year, but Besanko said financial discipline will allow it to achieve its 2010 goals. Total sales for the fourth quarter have so far lagged last year, and the company anticipates that will remain the case during the balance of the period. However, Besanko said on the call, it doesn't see the U.S. facing a "double-dip" recession.

Rival Office Depot Inc. (ODP) on Wednesday reported a surprise profit where analysts expected a loss, thanks to its own cost cuts and margin improvements, but its revenue was similarly softer than views. The results suggest the sector may not yet have hit bottom, but the companies are better managing their costs in response.

Both chains are handing over the reins to new management, with OfficeMax Chairman and Chief Executive Duncan stepping aside next month per a decision announced in February. Ravi Saligram, formerly of food-service concern Aramark Corp., will become CEO and OfficeMax director Rakesh Gangwal will become chairman. Duncan on the call said Saligram was a perfect choice to head the company and predicted the new CEO will do a great job.

Office Depot Chairman and CEO Steve Odland, who along with his company recently settled alleged fair-disclosure violations with the Securities and Exchange Commission, is leaving and a longtime director will take the roles on an interim basis until a replacement is found. Office Depot on Wednesday said the mutual decision to part ways was unrelated to the SEC settlement.

For the year, OfficeMax sees a reduction in store count as it plans to open two stores in Mexico and close about 15 locations in the U.S.

Office Depot Wednesday said its Mexican business will grow in Mexico and other countries through an acquisition, but its interim leader said its U.S. store base is aging and too large.

The struggling U.S. economy has hurt both companies, but OfficeMax used the opportunity to cost cut and improve its profitability while Office Depot until recently had a hard time doing the same. Office Depot's struggles have its shares off 21% in the past year while OfficeMax has seen a 67% run up in its stock, pushing OfficeMax ahead of Office Depot to occupy the number-two spot in terms of market capitalization at about $1.44 billion. Industry giant Staples Inc. (SPLS) is far ahead at over $15 billion.

Gross-profit margins increased for OfficeMax at both its contract and retail businesses, and its overall adjusted-operating-income margin rose to 2.3% from 1.5% a year ago.

The tonic effect OfficeMax results had on its stock didn't do much for the shares of Office Depot or Staples (SPLS). OfficeMax stock pulled back from early session highs to trade up 15% at $17.09 apiece, while Office Depot was off 2.3% at $4.65 and Staples was up just 0.54% in recent Thursday trading.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com

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