OfficeMax Beats, Remains Cautious - Analyst Blog
February 24 2012 - 5:45AM
Zacks
Amidst a tough economic
environment, OfficeMax Inc. (OMX) posted
better-than-expected fourth-quarter 2011 results. The quarterly
earnings of 17 cents a share beat both the Zacks Consensus Estimate
and the prior-year quarter earnings by a penny, on the back of low
single-digit growth in the top line and effective cost
management.
Behind the
Headline
Total sales climbed 3.9% to
$1,835.8 million from the same quarter last year, and also came
ahead of the Zacks Consensus Estimate of $1,812 million.
The office supplies retailer now
expects first quarter sales to remain even with the comparable
period, including the impact of foreign currency translation. Sales
for fiscal 2012 are projected to be flat to marginally higher
compared with the prior year, including the positive impact of
foreign currency translation and excluding the extra week in
2011.
The fourth quarter of 2011 includes
an extra week of operation in the U.S., excluding which, total
sales edged down 0.8%. The additional week resulted in incremental
sales of about $86 million, operating income of approximately $8
million and earnings of 6 cents a share. The additional benefit
from an extra week was derived principally from the Retail
Segment.
The recovery in the economy still
lacks luster. As a result, consumers and small businesses still
remain wary on their spending. OfficeMax is repositioning itself to
keep afloat in a difficult consumer environment. The company is
containing costs, closing underperforming stores and focusing on
providing innovative products and services. The company’s digital
as well as technology and document solutions are also gaining
traction.
As part of its strategic retail
partnership initiative, OfficeMax commenced a pilot program with
RadioShack Corporation (RSH) in January 2012,
under which the employees of the latter are selling mobile products
and accessories and offering services in some of OfficeMax stores
in San Francisco. On the other hand, RadioShack is helping
OfficeMax to enhance its consumer electronics offering. The
initiative in a way is assisting in driving traffic as well as
resulting in optimum utilization of selling space.
OfficeMax notified that gross
profit inched up 0.9% to $449.9 million, whereas gross profit
margin contracted 80 basis points to 24.5%. Adjusted operating
income for the quarter fell 1.3% to $30.4 million, whereas
operating margin remained flat at 1.7%.
Management now expects adjusted
operating margin for the first quarter and fiscal 2012 to be in
line with 1.7% in the corresponding prior-year periods.
Segment
Discussion
OfficeMax Contract segment sales
grew 2.3% to $934.8 million in the quarter. The segment witnessed
an increase of 5.3% in Contract operations sales in the U.S. but a
decline of 4% in Contract operations sales in international
markets. Segment sales rose 2.1% in constant currency. Segment
gross profit margin contracted 60 basis points to 22.2%.
OfficeMax Retail segment sales
climbed 5.7% to $901 million, reflecting a marginal increase of
0.2% in comparable-store sales. The healthy comparable-store sales
in Mexico were partly offset by a marginal fall in the U.S.comps.
Segment gross profit margin shriveled 90 basis points to 26.9%.
At the end of fiscal 2011,
OfficeMax operated 978 retail stores–– 896 in the U.S.and 82 in
Mexico. During the year, the company opened 5 stores and
closed 2 locations in Mexico, and further closed 22 stores in the
U.S.In fiscal 2012, the company now plans to open 8 to 9 stores and
close 1 to 2 stores in Mexico, and open1 to 2 stores and close 35
outlets in the U.S.
Other Financial
Details
OfficeMax ended the quarter with
cash and cash equivalents of $427.1 million, total long-term debt
of $268.2 million, non-recourse debt of $1,470 million and
shareholders’ equity of $569 million. Capital expenditures for the
fourth quarter and fiscal 2011 were $28.1 million and $69.6
million, respectively. Management now expects capital expenditures
in the range of $75 million to $100 million in fiscal 2012. During
fiscal 2011, the company generated a cash flow of $53.7 million
from operating activities. Management expects cash flow from
operations to exceed capital expenditures in fiscal 2012.
Let’s Conclude
No one can predict the future but
efforts to combat the tough economy are obvious. Business budget
remains tight, consumers remain more cautious than ever before and
companies are trying hard to navigate through the challenging
environment. Consumers and small businesses remain frugal about
big-ticket spending on items such as business machines and other
durable products. We believe that the demand for office products is
closely tied to the health of the economy. Currently, we maintain
our long-term ‘Neutral’ rating on the stock. However, OfficeMax,
which competes with Office Depot Inc. (ODP) and
Staples Inc. (SPLS), holds a Zacks #4 Rank that
translates into a short-term ‘Sell’ rating.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
RADIOSHACK CORP (RSH): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
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