Business News

OfficeMax Reports Fourth Quarter and Full Year 2007 Financial Results

Wednesday 20. February 2008 - OfficeMax(R) Incorporated (NYSE:OMX) today announced the results for its fourth quarter and fiscal year ended December 29, 2007. Total sales decreased 2.6% in the fourth quarter of 2007 to $2.2 billion compared to the fourth quarter of 2006, while total sales increased 1.3% for the full year 2007 to $9.1 billion compared to the full year 2006.

Net income increased in the fourth quarter of 2007 to $71.5 million, or $.92 per diluted share, from $58.0 million, or $.76 per diluted share, in the fourth quarter of 2006. Net income for the full year 2007 increased to $207.4 million, or $2.66 per diluted share, compared with net income of $91.7 million, or $1.19 per diluted share, reported in 2006.

Results for the fourth quarter and full year 2007 included items which are not expected to be ongoing. All financial measures designated in this release as “adjusted” are non-GAAP financial measures that exclude the effect of certain special items. A detailed description of these special items, and a reconciliation to the company’s GAAP financial results, are included in this press release. Adjusted net income in the fourth quarter of 2007 increased 37% to $51.1 million, or $.65 per diluted share, from $37.2 million, or $.48 per diluted share, in the fourth quarter of 2006. For the full year 2007, adjusted net income increased 18% to $188.1 million, or $2.41 per diluted share, from $159.1 million, or $2.10 per diluted share, in 2006.

“We demonstrated progress on our turnaround plan in the fourth quarter and for the full year 2007,” said Sam Duncan, Chairman and CEO of OfficeMax. “In the fourth quarter, we were able to generate further operating income margin improvement, while we navigated a weaker economic environment. In our Contract segment, we experienced declining gross margin rates, but we lowered expenses. In our Retail segment, we adjusted our promotional strategies for improved gross margin rates and invested in new stores. For the full year 2007, by lowering costs and managing margins, we enabled operating income margin expansion and bottom-line earnings growth.”

Contract Segment Results

OfficeMax Contract segment sales decreased 0.8% to $1.2 billion in the fourth quarter of 2007 compared to the fourth quarter of 2006, reflecting U.S. Contract sales decline of 7.8%, partially offset by International Contract operations sales growth of 20.4% in U.S. dollars, or 3.4% in local currencies. U.S. Contract sales declined in the fourth quarter compared to the prior year period primarily due to lower sales from existing customer accounts, to the company’s initiative to be more disciplined in account acquisition and retention, and to lower sales from small market customers. For the full year 2007, Contract segment sales increased 2.2% to $4.8 billion compared to the prior year, reflecting U.S. Contract sales decline of 1.2%, offset by International Contract operations sales growth of 12.3% in U.S. dollars, or 2.8% in local currencies.

Contract segment gross margin decreased to 21.7% in the fourth quarter of 2007 from 22.5% in the fourth quarter of 2006, primarily due to lower vendor income levels compared to the fourth quarter of 2006. For the full year 2007, Contract segment gross margin decreased to 21.8% from 22.5% in 2006. Contract segment operating expense as a percent of sales in the fourth quarter of 2007 improved to 17.3% from adjusted operating expense as a percent of sales of 18.2% in the fourth quarter of 2006. The improvement was primarily due to targeted cost controls, including the reorganization of U.S. Contract, expense leverage in International Contract operations, as well as reduced incentive compensation expense. For the full year 2007, Contract segment operating expense as a percent of sales improved to 17.5% from adjusted operating expense as a percent of sales of 18.1% in 2006.

Contract segment operating income increased to $52.0 million, or 4.4% of sales, from adjusted operating income of $50.8 million, or 4.3% of sales, in the fourth quarter of 2006. For the full year 2007, Contract segment operating income of $207.9 million, or 4.3% of sales, was consistent with adjusted operating income of $208.0 million, or 4.4% of sales, in 2006.

Retail Segment Results

OfficeMax Retail segment sales decreased 4.5% to $1.03 billion in the fourth quarter of 2007 compared to the fourth quarter of 2006, reflecting a same-store sales decrease of 7.3% partially offset by sales from new stores. Retail same-store sales for the fourth quarter of 2007 declined across all major product categories due to weakness in consumer and small business customer purchases, as well as the company’s more targeted promotional activity during the holiday season. For the full year 2007, OfficeMax Retail segment sales increased 0.3% to $4.27 billion compared to 2006, reflecting a same-store sales decrease of 1.2% partially offset by sales from new stores. Adjusted for the company’s initiative to eliminate mail-in rebates, and to provide instant rebates in lieu of national, vendor-sponsored mail-in rebates, same-store sales decreased 0.5% for the full year 2007.

Retail segment gross margin increased to 30.0% in the fourth quarter of 2007 from 29.1% in the fourth quarter of 2006, primarily due to more effective promotional strategies that drove a sales mix shift to a higher percentage of core office supplies category sales, partially offset by occupancy costs for new stores. For the full year 2007, Retail segment gross margin increased to 29.5% from 29.3% in 2006. Retail segment operating expense as a percent of sales increased to 26.2% in the fourth quarter of 2007 from 25.1% in the fourth quarter of 2006, primarily due to expense deleveraging from new stores and the same-store sales decrease, partially offset by reduced incentive compensation expense. For the full year 2007, Retail segment operating expense as a percent of sales increased to 25.4% from adjusted operating expense as a percent of sales of 25.2% in 2006.

Retail segment operating income decreased to $39.1 million, or 3.8% of sales, from $42.3 million, or 3.9% of sales, in the fourth quarter of 2006. For the full year 2007, Retail segment operating income decreased to $173.7 million, or 4.1% of sales, from adjusted operating income of $175.8 million, or 4.1% of sales, in 2006.

During the fourth quarter of 2007, OfficeMax opened 41 retail stores in the U.S., closed 2 retail stores in the U.S., and opened 3 retail stores in Mexico. During 2007, OfficeMax opened 59 new retail stores in the U.S. and 15 stores in Mexico. OfficeMax ended 2007 with a total of 976 retail stores, consisting of 908 retail stores in the U.S. and 68 retail stores in Mexico.

Corporate and Other Segment Results

The OfficeMax Corporate and Other segment includes support staff services and certain other expenses that are not fully allocated to the Retail and Contract segments. Corporate and Other segment operating expense decreased to $3.2 million in the fourth quarter of 2007 from adjusted operating expense of $17.0 million in the fourth quarter of 2006, primarily due to lower incentive compensation costs, reduced legacy-related costs, and targeted cost controls. For the full year 2007, Corporate and Other segment operating expense decreased to $37.4 million from adjusted operating expense of $71.6 million in 2006.

The company’s effective tax rate was 35.4% in the fourth quarter and 37.1% for the full year 2007, both benefiting from the resolution of certain tax matters.

As of December 29, 2007, OfficeMax reported total debt of $398.4 million, excluding $1.470 billion of timber securitization notes which have recourse limited to the $1.635 billion of timber installment notes receivable. During the fourth quarter of 2007, OfficeMax generated $39.2 million of cash from operations, an increase of $3.3 million from the fourth quarter 2006. For the full year of 2007, OfficeMax generated $70.6 million of cash from operations, a decrease of $305.1 million from 2006, primarily due to the termination of the company’s accounts receivable securitization program in July 2007 and a reduction in accounts payable. OfficeMax invested $39.5 million and $140.8 million for capital expenditures in the fourth quarter of 2007 and full year 2007, respectively.

“In 2008, we look forward to continuing to implement our turnaround plan initiatives and realizing benefits from our efforts even as we expect to be impacted by a weaker U.S. economy,” Mr. Duncan concluded. “We continued to experience pressure on sales in January and early February 2008, but we expect to pursue margin and cost management initiatives throughout 2008. Overall, we remain steadfast in pursuing additional opportunities to create long-term shareholder value.”

As previously announced, OfficeMax intends to hold its 2008 Investor Day on Wednesday, March 19, 2008. The company plans to provide additional details of initiatives driving its performance in 2008 and beyond at the Investor Day. Details for accessing a webcast of the Investor Day will be announced at a future date.

Forward-Looking Statements

Certain statements made in this press release and other written or oral statements made by or on behalf of the company constitute “forward-looking statements” within the meaning of the federal securities laws, including statements regarding the company’s future performance, as well as management’s expectations, beliefs, intentions, plans, estimates or projections relating to the future. Management believes that these forward-looking statements are reasonable. However, the company cannot guarantee that it will successfully execute its turnaround plans or that its actual results will be consistent with the forward-looking statements and you should not place undue reliance on them. These statements are based on current expectations and speak only as of the date they are made. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of future events, new information or otherwise. Important factors regarding the company which may cause results to differ from expectations are included in the company’s Annual Report on Form 10-K for the year ended December 30, 2006, under Item 1A “Risk Factors”, and in the company’s other filings with the SEC.