OfficeMax Inc. (OMX) recently posted lower-than-expected first-quarter 2011 results. The quarterly earnings of 13 cents a share missed the Zacks Consensus Estimate of 27 cents, and dropped more than 50% from 39 cents earned in the year-ago quarter. The company in order to check the fall in the bottom-line hinted at taking cost-effective measures.
Behind the Headline
Total sales fell 2.8% to $1,863 million from the same-quarter last year but came ahead of the Zacks Consensus Estimate of $1,855 million. The drop in top-line was attributable to lower spending by Contract customers and sluggishness seen in traffic counts in stores.
The office supplies retailer now expects second-quarter 2011 sales to be approximately flat versus the comparable period, and reaffirms fiscal 2011 sales to remain flat or marginally higher than 2010. Both include the positive impact of foreign currency translation.
The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain wary on their spending. The demand for office products is closely tied to the health of the economy.
OfficeMax notified that gross profit dipped 6.1% to $474.5 million, whereas gross margin contracted 90 basis points to 25.5%. Adjusted operating income for the quarter dropped 55% to $28.6 million, whereas adjusted operating margin shriveled 180 basis points to 1.5%.
Management now expects adjusted operating margin for second-quarter 2011 to be lower than the year-ago quarter, and reiterated fiscal 2011 margin to be in line with or marginally lower than 2010.
Segment Discussion
OfficeMax Contract segment sales dropped 3.9% to $925.7 million in the quarter due to declines of 5.6% and 0.5% in Contract operations sales in the U.S. and international markets, respectively. Segment sales tumbled 6.2% in constant currency. Segment gross profit margin decreased 50 basis points to 22.2%.
OfficeMax Retail segment sales tumbled 1.8% to $937.3 million, reflecting a 1.2% decline in comparable-store sales. The fall in the U.S. comps was partially offset by healthy sales in Mexico. Segment gross profit margin fell 140 basis points to 28.7%.
At the end of the quarter, OfficeMax operated 991 retail stores, comprising 912 retail stores in the U.S. and 79 retail stores in Mexico. During the quarter under review, the company closed 6 retail stores in the U.S. For fiscal 2011, OfficeMax now plans to open 8 to 10 stores in Mexico and close 15 locations in the U.S.
Other Financial Details
OfficeMax ended the quarter with cash and cash equivalents of $444.1 million, total long-term debt of $275.7 million and shareholders’ equity of $622.3 million. Capital expenditures for the quarter were $17 million. Management now expects capital expenditures of approximately $75 million in fiscal 2011.
Currently, OfficeMax, which competes with Office Depot Inc. (ODP) and Staples Inc. (SPLS), holds aZacks #4 Rank, which translates into a short-term Sell rating.
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