UPDATE:Office-Supply Chains Offer Mixed, Modestly Upbeat, Views

NEW YORK (Dow Jones)--Office-supply chains still operate in a tough industry, but none of the three major players see a worst-case scenario, providing views Wednesday that caused their stocks to outpace the broad market recovery.

Staples Inc. (SPLS) Chief Executive Ron Sargent, speaking at the Goldman Sachs retail conference in New York, said the U.S. economy remains in "purgatory," but he doesn't see "any risk at all of another recession or any kind of double dip."

Later at the same conference, Office Depot Inc. (ODP) CEO Neil Austrian said he believes 2012 will feature an even softer economy than this year, but initiatives the No. 2 player is making to drive sales and margins will "more than offset" any "midsingle-digit" revenue declines a weakening economy might otherwise have brought. Office Depot has 300 stores coming up for lease renewal over the next three years, and it intends to aggressively move its larger locations into a smaller format that has 15,000 square feet.

The CEO of No. 3 OfficeMax Inc. (OMX), Ravi Saligram, told listeners the economy isn't providing the company any help, but he is "confident" and "optimistic." Saligram said he doesn't see any "doomsday" scenarios, but neither does he see the future through "rose-colored glasses."

Each of the executives painted a different picture of the back-to-school season, a critical time of year for the office-supply retailers which has almost drawn to a close.

Sargent described the back-to-school season as "OK," neither "robust" nor "a downer." OfficeMax's Saligram said its back-to-school season was "softer" and "a little bit later" than it had planned, which caused it to lower current quarter sales views in a press release earlier in the day. Kevin Peters, recently installed as the president of a newly combined unit that oversees both its retail and contract-delivery business in North America, said Office Depot was "tickled to death" by its back-to-school performance, which he attributed to ordering its inventory earlier and advertising to lure customers in earlier, coupled with better arrangement of the products in its stores.

Peters said it has been tinkering with improved "visual merchandising" in some stores with positive results, and Office Depot intends to roll out the changes to 300 stores by the end of this year and the rest of its roughly 1,100 U.S. stores next year.

Office Depot shares jumped 13.6% to $2.59 apiece in Wednesday afternoon trading, while OfficeMax rose 8.2% to $5.69 and behemoth Staples added 5.1% to $14.33 each. Indicative of the beleaguered sector, suffering from what many view as a glut of stores and better outside competition, OfficeMax is down by more than two-thirds this year, while Office Depot's stock price has more than halved and Staples is down 37% or so.

Staples didn't provide new guidance for its fiscal third quarter, and Sargent said he continues to expect earnings for the fiscal year to grow 10% to 15% over last year. OfficeMax said it still sees sales for the second half higher than last year, partially due to favorable foreign currency effects and having an extra week compared with the year-ago period. Office Depot said its third quarter will see comparable-store sales fall but margins improve, the result of eliminating popular but lower margin products like entry-level laptop computers.

Both Office Depot and OfficeMax focused on margin expansion, and Office Depot's Austrian said it can get back to earnings before, interest, taxes, depreciation and amortization margins of to 3% or 4% margins by the end of 2013. OfficeMax's Saligram said operating margins will return to their peak, around double that of today, by the 2015.

Staples' dividend yield of 2.9% is attractive at the stock's current prices, Sargent said. The CEO said Staples expects to raise the dividend in line with earnings and, at current prices, share repurchases might be the "best investment" it can make with its free cash flow.

Sargent didn't provide any new views for industry consolidation, but he recently said the sector will eventually have two or fewer participants. Saligram said OfficeMax always evaluates its strategic opportunities, but is focused on running its business.

Office Depot's Austrian, however, played down the need to consolidate, as well as the odds of any mergers meeting antitrust scrutiny and the benefits of doing so outweighing the costs. There are "significant costs" in a merger with OfficeMax, he told Dow Jones Newswires in an interview before speaking at the conference, including severance for executive redundancies and remodeling the stores that remain open under one brand, and said Office Depot would rather invest in other endeavors.

Austrian told listeners that many people still work at the Federal Trade Commission who in 1997 quashed the planned merger of Staples and Office Depot, and he isn't sure even an Office Depot and OfficeMax combination, the only possibility of getting government clearance, would pass muster. He said Office Depot hasn't even hired lawyers to investigate the antitrust issue and noted that before anything else happens it would need a willing merger partner.

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

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