OfficeMax Stays at Neutral - Analyst Blog
March 05 2012 - 11:14AM
Zacks
We have a long-term Neutral recommendation on OfficeMax
Inc. (OMX) with a price target of $6.00. The company
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.
How the Company Balances
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 keep afloat
in 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 more than 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 observe 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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