OfficeMax Remains Cautious - Analyst Blog

Despite posting better-than-expected second-quarter 2010 results, OfficeMax Inc. (OMX) projected weaker sales for third quarter and fiscal 2010, as it remains cautious about the macroeconomic environment and a sluggish job market that may weigh upon the results.
 
Quarterly Discussion
 
The quarterly earnings of 12 cents per share share, showed a sharp improvement from a loss of 4 cents delivered in the prior-year quarter, on the heels of effective cost and inventory management that offset the fall in the top line. The Zacks Consensus Estimate for the quarter was break-even.
 
On a reported basis, including one-time items, earnings came in at 14 cents per share, reflecting a drastic improvement from a loss of 23 cents posted in the year-ago quarter.
 
Total sales fell marginally by 0.3% to $1,653.2 million from the same quarter last year, and also missed the Zacks Consensus Revenue Estimate of $1,668 million. The recovery in the economy is still lackluster. As a result, consumers and small businesses still remain cautious on their spending. The demand for office products is closely tied to the health of the economy.
 
The office supplies retailer hinted that it now expects third quarter sales to be slightly lower than the year-ago quarter, and fiscal 2010 sales to be flat to marginally lower than 2009, both including the positive impact of foreign currency translation.  

OfficeMax notified that gross profit climbed 8.3% to $427.7 million, whereas gross margin expanded 210 basis points to 25.9%. The higher margin was mainly the result of lower cost of goods sold (down 3%). Adjusted operating income for the quarter soared to $25.3 million from $0.8 million in the prior-year quarter, whereas adjusted operating margin increased to 1.5% from 0.1% in the year-ago quarter.
 
Management now expects adjusted operating margin for the third quarter to be lower than the prior year, and for fiscal 2010 to be higher than 2009, but the margin improvement will be drastically lower than the 140-basis points margin improvement achieved in the first half of 2010.
 
Segment Discussion
 
OfficeMax Contract segment sales dropped marginally by 0.1% to $880.5 million in the quarter due to a fall of 3.6% at U.S. Contract operations sales, offset by an 8.7% increase at International Contract operations sales. Segment sales tumbled 4.1% in constant currency. Segment gross profit margin expanded 210 basis points to 22.7%.
 
OfficeMax Retail segment sales slipped 0.5% to $772.7 million due to a 0.3% decline in comparable-store sales and fewer stores. The fall in comps was due to a sluggish consumer environment, partly offset by healthy sales in Mexico. Segment gross profit margin increased 200 basis points to 29.5%.
 
At the end of second quarter 2010, OfficeMax operated 1,001 retail stores, comprising 923 retail stores in the U.S. and 78 retail stores in Mexico. During the quarter, the company closed three stores in the U.S. and opened one store in Mexico.
 
Other Financial Details
 
OfficeMax ended the quarter with cash and cash equivalents of $521.2 million, total long-term debt of $295.6 million, reflecting a debt-to-capitalization ratio of 35.6%, and shareholders’ equity of $535.9 million. The company also has $568.9 million available under its revolving credit facilities. Capital expenditures for the quarter were $19.4 million. Management now expects capital expenditures for fiscal 2010 in the range of $80 million to 100 million.