OfficeMax Inc.
(
OMX
) posted better-than-expected second-quarter 2012 results. The
quarterly earnings of 12 cents a share surpassed the Zacks
Consensus Estimate by 5 cents and rose substantially from 7 cents
earned in the prior-year quarter, on the back of effective cost
management. The company also reinitiated its dividend payout after
suspending it three and a half years ago.
Behind the Headline
Total sales dropped 2.7% to $1,602.4 million year over year, and
also fell short of the Zacks Consensus Estimate of $1,638
million.
The office supplies retailer now expects third quarter sales to
remain even with or marginally higher than the prior-year period,
including the adverse impact of foreign currency translation. Sales
for fiscal 2012 are projected to be flat with the prior year,
including the negative impact of foreign currency translation and
excluding the extra week in 2011, which resulted in incremental
sales of about $86 million.
The recovery in the economy, however, continues to remain
lackluster. As a result, consumers and small businesses still
remain cautious regarding 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 innovative products and services. The company's
digital as well as technology and document solutions are also
gaining traction.
OfficeMax's gross profit fell 3.7% to $409.5 million, whereas
gross profit margin contracted 20 basis points to 25.6%. Adjusted
operating income for the quarter surged 29.1% to $23.1 million, and
operating margin expanded 30 basis points to 1.4%.
Management expects adjusted operating margin for the third
quarter to be approximately in line with 2.3% in the year-ago
quarter, and for fiscal 2012 to be even with or marginally higher
than 1.7% in the prior year.
Segment Discussion
OfficeMax
Contract
sales dipped 0.2% to $878.8 million in the quarter. The segment
witnessed an increase of 2.6% in Contract operations sales in the
U.S. and a decrease of 6% in Contract operations sales in
international markets (down 2.3% in constant currency). Segment
sales rose 1% in constant currency. The segment's gross profit
margin remained flat at 22.3%, whereas segment income margin
increased 90 basis points to 2.9%.
OfficeMax
Retail
segment sales fell 5.7% to $723.6 million, reflecting a decline of
1.8% in comparable-store sales due to lower store transactions and
adverse impact of foreign currency translation. U.S.
comparable-store sales fell 1.3%.
On the other hand, Mexico comparable-store sales rose 3.5% in
constant currency, but dropped 6.9% in terms of U.S. dollars.
Retail segment's gross profit margin shriveled 40 basis points to
29.5%, whereas segment income margin contracted 60 basis points to
0.4%.
At the end of the quarter, OfficeMax operated 957 retail stores
-- 872 in the U.S. and 85 in Mexico. During the quarter, the
company opened 2 stores in Mexico, and closed 2 locations in the
U.S and 1 in Mexico. For fiscal 2012, the company plans to open 8
to 10 stores and close 1 to 2 stores in Mexico, while in the U.S.
it plans to open 1 to 2 stores and close 35 outlets.
Other Financial Details
OfficeMax ended the quarter with cash and cash equivalents of
$444.5 million, long-term debt of $227.3 million, non-recourse debt
of $1,470 million and shareholders' equity of $593.2 million.
Capital expenditures for the first six months were $32.6 million.
Management now expects capital expenditures in the range of $75
million to $85 million in fiscal 2012.
During the first six months of 2012, the company generated cash
flow of $82.1 million from operating activities. Management expects
cash flow from operations to exceed capital expenditures in fiscal
2012. The company also reinstated a quarterly dividend of 2 cents a
share to be paid on August 31 to shareholders of record as of
August 15.
In Conclusion
Although the future remains uncertain, the efforts to combat the
tough economy are obvious. Business budget remains tight, consumers
remain more cautious than ever before and companies are working to
navigate through the challenging environment.
Consumers and small businesses remain prudent regarding
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 recommendation on
the stock. Moreover, OfficeMax, which competes with
Office Depot Inc.
(
ODP
) and
Staples Inc.
(
SPLS
), holds a Zacks #3 Rank, which translates into a short-term Hold
rating.
OFFICE DEPOT (ODP): Free Stock Analysis Report
OFFICEMAX INC (OMX): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment
Research