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OfficeMax Earnings Fall, Merges with Office Depot

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Sluggish economic conditions coupled with reduced sales of technology products and soft margins in the Contract business resulted in lower-than-anticipated third-quarter 2013 results at OfficeMax Incorporated (OMX) that merges with Office Depot Inc. (ODP). The quarterly earnings came in at 15 cents a share, missing the Zacks Consensus Estimate of 22 cents, and dropping substantially from 25 cents earned in the prior-year quarter.

Including one-time items, this Zacks Rank #3 (Hold) company reported earnings of 34 cents a share compared with $4.92 in the year-ago quarter.

OfficeMax posted total sales of $1,664.9 million that dropped 4.6% year over year, and also fell short of the Zacks Consensus Estimate of $1,680 million. However, excluding the impact related to foreign currency translation, store plans and difference in days of business operations, sales declined 3.4%.

OfficeMax’s gross profit declined 9.3% year over year to $417.5 million during the quarter, while gross profit margin contracted 130 basis points to 25.1%. Adjusted operating income plummeted 33.5% to $28.4 million, whereas adjusted operating margin declined 70 basis points to 1.7%.

Segment Discussion

OfficeMax Contract segment sales dipped 4.4% year over year to $841.9 million in the quarter, reflecting a 3.6% decline in U.S. Contract operations sales and a 6.5% fall in Contract operations sales in international markets (down 0.8% in constant currency basis). On account of the decline in consumer margins in the International Contract and the U.S. Contract, Contract segment’s gross profit margin softened 210 basis points to 20.7%. Segment income margin contracted 200 basis points to 1%.

OfficeMax Retail segment sales fell 4.7% year over year to $823 million, reflecting a decline of 2.8% (in constant currency) in comparable-store sales due to lower traffic and soft sales of technology products. U.S. comparable-store sales fell 2.8%, whereas comparable-store sales in Mexico declined 2.2% in constant currency. Retail segment’s gross profit margin contracted 40 basis points to 29.6%. Segment’s income margin remained flat at 3.2% during the quarter.

At the end of the quarter, OfficeMax operated 921 retail stores – 828 in the U.S. and 93 in Mexico. During the quarter, the company opened 1 store in the U.S. and 3 stores in Mexico, and closed 15 stores in the U.S.

Merger Details

OfficeMax and Office Depot recently announced the completion of the merger, whereby both the companies will be combined under the name Office Depot, Inc. and will trade at the New York Stock Exchange under the symbol “ODP”. For the time being, Neil Austrian, Chairman and CEO of Office Depot and Ravi Saligram, President and CEO of OfficeMax, will together spearhead the new entity.

The all-stock merger agreement, which involves 2.69 Office Depot shares for each share of OfficeMax, would result in cost synergies in the upper half of $400 million to $600 million by the end of the third year following the conclusion of the deal.

Earlier, in February OfficeMax and Office Depot 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.

The new company with total revenue of about $17 billion for the 12 months ended Sep 28, 2013 has a headcount of approximately 66,000 globally, and offers service in 59 countries and operates over 2,200 retail outlets.

Other Financial Details

OfficeMax ended the quarter with cash and cash equivalents of $504.2 million, long-term debt of $225.7 million, non-recourse debt of $735 million and shareholders’ equity of $966.7 million.

During the first-nine month period of 2013, the company generated cash flow of $85.2 million from operating activities and incurred capital expenditures of $65.3 million.

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