We recently downgraded our recommendation on
) to Neutral with a price target of $10.00, following its soft
third-quarter 2012 top-line performance. Earlier, we had an
Outperform view on the stock.
We remain concerned about the macroeconomic environment, with
small businesses and consumers remaining watchful on their
spending. We adopted a cautious view on the stock given the
company's struggling top line that dropped for the second
After declining 2.7% in the second quarter of 2012,
OfficeMax's total revenue dropped 1.7% year over year to $1,744.6
million in the third quarter and also fell short of the Zacks
Consensus Estimate of $1,781 million. Contract segment sales
dipped 0.3%, whereas Retail segment sales declined 3.1%.
Sales for 2012 are projected to be lower than 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 office supplies retailer now
expects fourth quarter sales to remain even with or marginally
down compared with the prior-year period, including the favorable
impact of foreign currency translation.
However, we observe that OfficeMax's bottom line continues to
perform well. With respect to earnings surprises, the company has
topped the Zacks Consensus Estimate over the last four quarters
in the range of 3.9% to 71.4%. The average remained at 31.3%,
suggesting that OfficeMax has outpaced the Zacks Consensus
Estimate by that magnitude in the trailing four quarters.
OfficeMax posted third-quarter 2012 earnings of $0.27 per
share that beat the Zacks Consensus Estimate by a penny, and rose
8% from the prior-year quarter on the back of effective cost
management and improved operating margins.
The company is repositioning itself to keep afloat in a
difficult consumer environment. OfficeMax is containing costs,
closing underperforming stores and focusing on providing
innovative products and services, which should all contribute to
margin improvement. The company should gain from recent growth
initiatives, which include the ImPress copy and print and
Ctrlcenter PC services, janitorial and sanitation supply,
category management, and managed print businesses. The company's
digital as well as technology and document solutions are also
Given the pros and cons, we prefer to have an unbiased view on
the stock. Moreover, OfficeMax, which competes with
Office Depot Inc
), holds a Zacks #3 Rank that translates into a short-term 'Hold'
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