OfficeMax Remains Cautious Heading Into Q4

| About: OfficeMax Incorporated (OMX)

Despite posting better-than-expected third-quarter 2010 results, OfficeMax Inc. (NYSE:OMX) forecasted soft sales for fourth-quarter and fiscal 2010, as it remains cautious about the macroeconomic environment and sluggish job market.

Quarterly Discussion

The quarterly earnings of 23 cents a share beat the Zacks Consensus Estimate of 12 cents, and portrayed a strong turnaround from 8 cents earned in the prior-year quarter, on the heels of effective cost and inventory management that offsets the fall in the top-line.

Total sales fell marginally by 1% to $1,813.4 million from the same-quarter last year, and fell short of the Zacks Consensus Revenue Estimate of $1,818 million. The office supplies retailer hinted that it now expects fourth-quarter and fiscal 2010 sales to be marginally lower versus the comparable period based on the positive impact of foreign currency translation.

The recovery in the economy still lacks luster. 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. Following this, a negative sentiment may be palpable among the analysts covering the stock, and we could witness a fall in the Zacks Consensus Estimate in the coming days.

OfficeMax notified that gross profit climbed 8.2% to $470.4 million and gross margin expanded 220 basis points to 25.9%. The higher margin was mainly the result of lower cost of goods sold (down 3.9%). Adjusted operating income for the quarter soared 53.2% to $40.9 million, whereas adjusted operating margin expanded 80 basis points to 2.3%.

Management now expects adjusted operating margin for the fourth quarter to be higher than the prior-year quarter, and for fiscal 2010 the margin improvement will be in line with or marginally higher than the 120-basis point margin improvement achieved in the first-nine months of 2010.

Segment Discussion

OfficeMax Contract segment sales dropped 2.5% to $877.3 million in the quarter due to a fall of 2.9% at U.S. Contract operations sales and 1.4% at International Contract operations sales. Segment sales tumbled 4.3% in constant currency. Segment gross profit margin expanded 280 basis points to 22.8%.

OfficeMax Retail segment sales grew 0.4% to $936.1 million driven by a 0.4% rise in comparable-store sales. The fall in U.S. comps was offset by healthy sales in Mexico. Segment gross profit margin increased 150 basis points to 28.9%.

At the end of the reported quarter, OfficeMax operated 998 retail stores, comprising 920 retail stores in the U.S. and 78 retail stores in Mexico. During the quarter, the company closed three stores in the U.S. For the full year, the company plans to open two stores in Mexico and close 15 stores in the U.S.

Other Financial Details

OfficeMax ended the quarter with cash and cash equivalents of $587.9 million, total long-term debt of $294 million, reflecting a debt-to-capitalization ratio of 33.9%, and shareholders’ equity of $572.5 million. The company also has $570 million available under its revolving credit facilities. Capital expenditures for the quarter were $21.6 million. Management now expects capital expenditures for fiscal 2010 in the range of $80 million to $90 million.