OfficeMax Misses, Earnings Plunge (AMZN) (ODP) (OMX) (SPLS)

Zacks

Soft economic conditions coupled with a sluggish demand for technology products resulted in lower-than-anticipated first-quarter 2013 results at OfficeMax Incorporated (OMX). The quarterly earnings came in at 11 cents a share that missed the Zacks Consensus Estimate of 23 cents, and dropped 50% from 22 cents earned in the prior-year quarter.

Including one-time items, the company reported earnings of 64 cents a share compared with 6 cents in the year-ago quarter.

Alongside, this Zacks Rank #4 (Sell) company declared a special dividend of $1.50 per share, which will be paid on Jul 2, 2013 to shareholders of record as of Jun 12.

Total sales dropped 5.7% year over year to $1,766.7 million, and also fell short of the Zacks Consensus Estimate of $1,842 million. However, excluding the impact related to foreign currency translation, store plans and difference in days of business operations, sales declined 4.3%.

Management hinted that sales trend in April remained soft, but portrayed a marginal improvement from the first quarter. The company now forecasts sales for the second quarter of 2013 to be lower than sales of the comparable prior-year quarter, including the favorable impact of foreign currency translation.

Sales for 2013 are also projected to be lower than the prior year, including the positive impact of foreign currency translation. Management further stated that sales will continue to decline in the coming quarters but at a rate lower than the first quarter.

OfficeMax’s gross profit declined 5% year over year to $458.9 million during the quarter, while gross profit margin expanded 20 basis points to 26%. Adjusted operating income plummeted 45.4% to $22.4 million, whereas adjusted operating margin shriveled 90 basis points to 1.3%.

Management expects adjusted operating margin for second-quarter 2013 to be positive but considerably lower than the prior-year quarter, whereas for 2013 it is expected to remain lower than the prior year but up from adjusted operating margin for the first quarter.

Segment Discussion

OfficeMax Contract sales dipped 4.1% year over year to $921.3 million in the quarter, reflecting a 3.5% decline in U.S. Contract operations sales and a 5.4% fall in Contract operations sales in international markets (down 5.2% in constant currency basis). On account of increased customer margins, Contract segment’s gross profit margin strengthened 30 basis points to 22.7%. However, segment income margin contracted 110 basis points to 1.7%.

OfficeMax Retail sales fell 7.3% year over year to $845.4 million, reflecting a decline of 5.4% (in constant currency) in comparable-store sales due to lower traffic and soft sales of technology products. U.S. comparable-store sales fell 5.7%, whereas comparable-store sales in Mexico declined 2.1% in constant currency. Retail segment’s gross profit margin expanded 30 basis points to 29.6%, reflecting favorable sales mix. Segment’s income margin decreased 60 basis points to 1.9% during the quarter.

At the end of the quarter, OfficeMax operated 936 retail stores: 846 in the U.S. and 90 in Mexico. During the quarter, the company opened 1 store in Mexico and closed 5 stores in the U.S. and 1 in Mexico.

During 2013, the company expects to downsize and relocate stores as well as open smaller format stores in the U.S. The company also plans to close 15 to 20 outlets. Moreover, the company plans to open 4 stores and shutter 1 in Mexico.

Merger Details

OfficeMax and Office Depot, Inc. (ODP) decided to merge their businesses in order to better compete with the industry bellwether, Staples Inc. (SPLS) and online rivals such as Amazon.com Inc. (AMZN).

The decision augurs well for both the companies, which have been grappling with soft sales as business budget remains tight, consumers and small businesses remain frugal about big-ticket spending on items such as business machines and other durable products.

The all-stock merger agreement, which involves 2.69 Office Depot shares for each share of OfficeMax, would result in cost synergies of $400 to $600 million yearly by the third year from the time of closing of the transaction. The transaction is expected to be concluded by the end of 2013.

Other Financial Details

OfficeMax ended the quarter with cash and cash equivalents of $579.2 million, long-term debt of $226.6 million, non-recourse debt of $735 million and shareholders’ equity of $1,093.4 million.

During the quarter, the company generated cash flow of $32.9 million from operating activities and incurred capital expenditures of $28.4 million. Management expects cash flow from operations to exceed capital expenditures in 2013. The company projects capital expenditures in the range of $80–$90 million in 2013.

AMAZON.COM INC (AMZN): Free Stock Analysis Report

OFFICE DEPOT (ODP): Free Stock Analysis Report

OFFICEMAX INC (OMX): Free Stock Analysis Report

STAPLES INC (SPLS): Free Stock Analysis Report

To read this article on Zacks.com click here.

Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.

Be the first to comment

Leave a Reply