OfficeMax's Balanced Approach - Analyst Blog
April 18 2012 - 8:15AM
Zacks
The change in the demand for office
supplies products and services remains one of the indicators that
describe the health of the economy. The economy has not completely
awakened from the state of hibernation, and amidst such a scenario
OfficeMax Inc. (OMX) has to walk the tight rope to
juggle with unprecedented situation that may hurt its growth
prospects.
OfficeMax provides
office supplies and paper, print and document services, technology
products and solutions as well as office furniture to business
firms, government organizations and other retail consumers.
Company’s Strategies to
Stay Afloat
As the recovery in the economy
still remains sluggish, consumers and small businesses remain
frugal about big-ticket spending like business machines and other
durables. Therefore, we believe that the demand for office products
is closely tied to the health of the economy.
Consequently, OfficeMax is
repositioning itself to stay afloat amidst a difficult consumer
environment. The company is containing costs, closing
underperforming stores and focusing on innovative products and
services, which should all contribute to margin improvements.
Further, the company also anticipates regaining operating margins
of over 3.8% by 2015.
The company also focuses on optimal
store sites in order to boost store productivity. Moreover,
OfficeMax is committed to improve sales per square foot by
increasing customer traffic and converting them into potential
buyers by targeted advertising, ongoing sales training and
customer-oriented initiatives. The company has initiated control
center technology services to assist customers with PC maintenance
or removal of viruses.
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 driving traffic as well as optimizing
selling space utilization.
Balancing Act Brings
Better Results
Amidst a tough economic
environment, OfficeMax 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.
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 fourth
quarter of 2011 included an extra week of operation in the U.S.,
excluding which, total sales edged down 0.8%.
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 than
the prior year, including the positive impact of foreign currency
translation and excluding the extra week in 2011.
Margins under Pressure,
Competition a Threat
We noticed that the gross profit
margin during the fourth quarter of 2011 remained under pressure.
Consolidated gross profit margin contracted 80 basis points to
24.5%. Contract segment gross profit margin shrunk 60 basis points
to 22.2%, reflecting a rise in delivery expense on account of
increased fuel costs and fall in customer margins. Retail segment
gross profit margin shriveled 90 basis points to 26.9%,
attributable to higher promotional activity to drive traffic,
inventory markdowns and rise in fuel expenses.
OfficeMax faces stiff competition
from office supply retailers, such as Office Depot
Inc. (ODP) and Staples Inc. (SPLS), and
wholesale clubs, discount stores, mass merchandisers, computer and
electronics superstores on attributes such as store format, pricing
strategy and in-stock consistency. This may weigh upon the
company’s results.
Let’s
Conclude
Genuine efforts are implemented to
combat the tough economy. Business budget remains tight, consumers
remain cautious than ever before and companies are trying hard to
navigate through the challenging maze.
Going by the pulse of the economy
and given the pros and cons, we prefer to maintain our long-term
“Neutral” recommendation on the stock. Moreover, OfficeMax holds a
Zacks #3 Rank that translates into a short-term “Hold” 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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