OfficeMax Numbers are Far From Stationary

Thursday saw OfficeMax OMX release its fourth quarter FY11 financial results. According to Market Watch, the leader in office supplies, technology and services reported total sales of $1,835.8 million, which is an increase of 3.9 percent from 4Q10. Total sales for the year came in at $7,121.2 million, a decrease of 0.4 percent compared to FY10. For 4Q11, OMX reported income available to shareholders of $2.9 million, or $0.03 per diluted share, compared to $12.1 million, or $0.14 per diluted share, in 4Q10. For FY11, OMX reported net income available to shareholders of $32.8 million, or $0.38 per diluted share. However, 4Q and FY11 results include an additional week of business compared to 2010, so the comparison is not exactly sound. Total sales for that additional week were approximately $86 million, resulting in an incremental operating income of about $8 million and $0.06 of earnings per diluted share. "We closed out a challenging 2011 by continuing to streamline our operations and strengthen the core business," said Ravi Saligram, President and CEO of OfficeMax. "We are making progress in executing the strategic plan we announced in November." Sales in the retail segment rose 5.7 percent to $901.0 million in 4Q11 compared to the fourth quarter of 2010, reflecting a same-store sales increase of 0.2 percent. Retail segment gross profit margin fell to 26.9 percent in 4Q11 from 27.8 percent in 4Q10. This is largely down to an increase in promotional activity to drive Holiday season traffic, inventory markdowns, and the impact of higher fuel costs. OMX ended last year with a total of 978 Retail stores, including 896 Retail stores in the U.S. and 82 Retail stores in Mexico. For the full year 2011, OfficeMax Retail closed 22 stores in the U.S., and opened 5 stores and closed 2 stores in Mexico. Bruce Besanko, EVP, CFO and Chief Administrative Officer of OfficeMax, said, "Sales trends improved in the fourth quarter but remain soft. Consequently, we will continue to streamline our cost structure, enabling us to make strategic investments in initiatives that will jump start growth." On Wednesday, Citi had reported that it remains on the sidelines with OMC on increased competitive pressures, uncertainty regarding timeline on sales growth and LT goals of returning to historical OM%, and lack of catalysts over the next 12 months. “After several years of cutting costs and driving margin improvement in 2010, the company is highly dependent on top line growth which is unlikely to accelerate meaningfully until the macro environment improves, in our view.” Citi also said that it rates OfficeMax High Risk because it has weaker operating metrics vs. peers and continues to operate in a cyclically challenged environment. “Risks to the stock reaching our target price include: 1) weaker operating metrics versus its peers; 2) it has a smaller international retail presence and may be less diversified; 3) there is less visibility due to a lack of specific comp and EPS guidance; 4) operating in a highly competitive and commoditized industry; and 5) over expansion of private label which could alienate vendors.”