UPDATE: OfficeMax Swings To Profit; Outlook Disappoints

OfficeMax Inc.'s (OMX) cost cutting helped it deliver profitability in the face of declining sales, but it issued cautious guidance for the current quarter and year that spooked Wall Street.

Several factors, including bad weather in many parts of the U.S. and rising fuel costs, along with heavy promotional activity, led to January sales trends that compared unfavorably with the fourth quarter, Chief Financial Officer Bruce Besanko said in an interview. The company's outlook for the U.S. economy this year will offer "very little support" to the OfficeMax business, he said.

OfficeMax shares plunged in Wednesday premarket trading but rebounded slightly during the regular session to $16.11, down 5.6%. Besanko said he didn't know whether investors were more disappointed with the company's sales guidance for the year of flat to slightly higher, or its expectation that adjusted operating income margin this year may be no better than flat with last year. First-quarter sales are expected to be lower than in 2010, and adjusted operating income margin will be "significantly lower" than last year.

For the first quarter, OfficeMax expects total sales to be lower than the roughly $1.92 billion reported in last year's period, even with a favorable impact from foreign currency translation. Meanwhile, total sales for 2011 are expected to be flat to slightly higher than last year, despite the tonic effect of foreign currency rates and the benefit of a 53rd week this year.

Analysts polled by Thomson Reuters expected first-quarter revenue of $1.93 billion, up 1%, and full-year revenue of $7.29 billion, up 2%.

OfficeMax has reported lower full-year sales in each of the last three years, as it continues to operate in a challenging economic environment and grapple with a U.S. store base that is too large. Still, OfficeMax's bottom line has benefited from cost cutting, and it is focused on boosting its shrinking contract business and expanding its retail business, especially in Mexico. It also hopes to gain momentum through its managed-print and print-on-demand services.

This year, OfficeMax plans to close another 15 of its 918 U.S. stores, after closing the same number last year. It intends to open another five stores in Mexico, after opening two last year, to bring the Mexican total to 79 stores.

OfficeMax reported earnings of $12.7 million, or 14 cents a share, compared with a year-earlier loss of $2.58 million, or 4 cents a share. Analysts polled by Thomson Reuters most recently expected earnings of 10 cents a share.

Revenue decreased 2.4% to $1.77 billion. In October, the company predicted sales would be "slightly lower" than the prior year's fourth quarter.

For 2011, OfficeMax expects to spend about $100 million on capital expenditures, roughly in line with what it spent last year following years of a more bare-bones capex budget. Operating cash flow is expected to approximate the company's capex target, or slightly exceed it. However, Besanko noted it will move its capex target "dynamically," and may raise or, more likely, lower the figure to match the prospects of its business.

Besanko said the company's largest foreign currency impacts come from Mexico, where it has a growing retail business, and Canada. The strengthening of the Mexican economy should provide a currency benefit this year, and the company has a "very modest" hedging program in place to deal with fluctuations in the Canadian dollar. OfficeMax prefers to do its currency hedging "naturally," Besanko said, by purchasing its supplies opportunistically in local currencies.

Shares of OfficeMax's slightly larger rival, Office Depot Inc. (ODP), recently were up 0.7%, at $5.99, while industry behemoth Staples Inc. (SPLS) was down about 1% to $22.

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

-Lauren Pollock and Jenny Roth contributed to this article.

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