Earnings Scorecard: OfficeMax

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OfficeMax Inc. (OMX), a leading distributor of office supplies and paper, print and document services, technology products and solutions, as well as office furniture, posted its second-quarter 2012 results on Thursday, August 2, 2012. Here we will discuss the company’s scorecard based on the recent announcement of its earnings, subsequent estimate revisions by analysts as well as the Zacks Rank and long-term recommendation for the stock.

Last Quarter Synopsis

OfficeMax posted better-than-expected second-quarter 2012 results. Its quarterly earnings of 12 cents a share surpassed the Zacks Consensus Estimate by 5 cents and also improved substantially from 7 cents earned in the prior-year quarter, on the back of effective cost management.

Total sales dropped 2.7% to $1,602.4 million year over year, and also fell short of the Zacks Consensus Estimate of $1,638 million.

This office supplies retailer now expects third-quarter sales to remain even with or marginally higher compared with the prior-year period, including the adverse impact of foreign currency translation. Sales for fiscal 2012 are projected to be flat with the prior year, including the negative impact of foreign currency translation and excluding the extra week in 2011, which resulted in incremental sales of about $86 million.

(Read our full coverage on this earnings report: OfficeMax Beats on Bottom Line)

Agreement of Estimate Revisions

For the third-quarter 2012, out of 10 estimates, five were revised upwards while three went down. However, for the fourth-quarter 2012, only one estimate went up and four estimates were trimmed in the last 7 days.

As for fiscal-year 2012 and 2013, the estimates were unidirectional, reflecting seven estimates (out of 10) and six estimates (out of 9) moving up, respectively, in the last 7 days.

What Drives Estimate Revisions

Following the company’s strong second-quarter 2012 financial results, most of the estimates were revised upwards for the upcoming quarter.

OfficeMax’s solid second quarter 2012 results on the back of cost containment efforts and improved gross margins, compelled the analysts to increase their estimates. Moreover, the company’s announcement of paying out dividend, after a pause of three and a half years, signified OfficeMax’s ability to generate free cash flow. This impressed the analysts to a great extent.

However, Retail segment sales fell 5.7% to $723.6 million, reflecting a decline of 1.8% in comparable-store sales due to lower store transactions and adverse impact of foreign currency translation. The U.S. comparable-store sales fell 1.3%. Subsequently, some of the analysts remained on the back foot.

For fiscal year 2012, positive sentiment among the analysts was palpable, following management’s expectation of cash flow from operations to exceed capital expenditure, which is projected to be approximately $75 million to $85 million for the year. With respect to guidance, the company now expects fiscal 2012 sales to be flat and operating margin to be in line with or slightly higher than 1.7% rate attained in the prior year.

Moreover, OfficeMax is repositioning itself to stay afloat in a difficult consumer environment. The company is containing costs, closing underperforming stores and focusing on providing innovative products and services, which should contribute to margin improvements.

The company should gain from recent growth initiatives, which include the ImPress copy and print and Ctrlcenter PC services, janitorial and sanitation supply, category management, and managed print businesses. The company’s digital as well as technology and document solutions are also gaining traction, which, we believe, will continue in the long term. Therefore, the analysts remained positive for the coming years.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the third quarter of 2012 remained unchanged at 25 cents in the last 7 days. However, for the fourth quarter, earnings fell by a penny to 13 cents per share, in the last 7 days.

For the fiscal year 2012 and 2013, the Zacks Consensus Estimate improved by 5 cents and 3 cents to 73 cents and 79 cents, respectively, in the last 7 days.

Conclusion

The company is focused on the issue of optimal store site in order to boost store productivity. OfficeMax intends to focus more on improving sales per square foot through an increase in 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, removal of viruses, etc.

However, 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.

Consequently, we maintain our long-term ‘Neutral' recommendation on the stock. However, OfficeMax carries a Zacks #2 Rank implying short-term Buy rating for the next 1-3 months.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education

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