Business News

OfficeMax Reports First Quarter 2011 Financial Results

Thursday 28. April 2011 - OfficeMax Incorporated (NYSE: OMX) today announced the results for its fiscal first quarter ended March 26, 2011. Total sales were $1,863.0 million in the first quarter of 2011, a decrease of 2.8% from the first quarter of 2010. For the first quarter of 2011, OfficeMax reported net income available to OfficeMax common shareholders of $11.4 million, or $0.13 per diluted share.

Ravi Saligram, President and CEO of OfficeMax, said, “First quarter sales were lower than the prior year quarter and adjusted operating income margin rate was significantly lower than the first quarter of 2010. We are disappointed with our start to the year. In recognition of current trends and upon a deeper evaluation of our existing capabilities, we have put in place strong actions, including significant cost mitigation programs to bring our expenses in-line with last year. We believe these actions should help drive improved performance.”
Consolidated Results
(in millions, except per-share amounts)
1Q11
1Q10
Sales
$1,863.0
$1,917.3
Sales growth or decline (from prior year period)
-2.8%
0.3%
Gross profit
$474.5
$505.5
Gross profit margin
25.5%
26.4%
Operating income
$28.6
$49.4
Adjusted operating income*
$28.6
$63.6
Adjusted operating income margin*
1.5%
3.3%
Adjusted diluted income per common share*
$0.13
$0.39
*There are no adjustments for 1Q11.

Adjusted operating income and adjusted diluted income per share are non-GAAP financial measures that exclude the effect of certain charges described in the footnotes to the accompanying financial statements. A reconciliation to the company’s GAAP financial results is included in this press release.
Adjusted operating income in the first quarter of 2011 was $28.6 million, or 1.5% of sales, compared to $63.6 million, or 3.3% of sales in the first quarter of 2010. Adjusted net income available to OfficeMax common shareholders in the first quarter of 2011 was $11.4 million, or $0.13 per diluted share, compared to $33.5 million, or $0.39 per diluted share, in the first quarter of 2010.
Contract Segment Results
(in millions)
1Q11
1Q10
Sales
$925.7
$963.0
Sales growth or decline (from prior year period)
-3.9%
3.8%
Gross profit margin
22.2%
22.7%
Segment income margin
1.0%
3.5%

Contract segment sales decreased 3.9% compared to the prior year period to $925.7 million in the first quarter of 2011 (a decrease of 6.2% on a local currency basis). This decline reflected a U.S. Contract operations sales decrease of 5.6% and an international Contract operations sales decrease of 0.5% in U.S. dollars (a sales decrease of 7.4% on a local currency basis).
Contract segment gross profit margin decreased to 22.2% in the first quarter of 2011 from 22.7% in the first quarter of 2010, primarily reflecting weaker gross profit margin in the International business, and to a lesser extent in the U.S. business. Contract segment operating, selling and general and administrative expenses as a percentage of sales increased to 21.2% in the first quarter of 2011 from 19.2% in the first quarter of 2010 primarily due to increased sales force payroll, higher marketing expenses, as well as costs associated with growth and profitability initiatives including managed print services, customer service centers, and business-to-business website. Contract segment income was $9.0 million, or 1.0% of sales, in the first quarter of 2011 compared to $33.8 million, or 3.5% of sales, in the first quarter of 2010.
Retail Segment Results
(in millions)
1Q11
1Q10
Sales
$937.3
$954.3
Same-store sales decrease (from prior year period)
-1.2%
-2.5%
Gross profit margin
28.7%
30.1%
Segment income margin
2.7%
4.1%


Retail segment sales decreased 1.8% to $937.3 million in the first quarter of 2011 compared to the first quarter of 2010, reflecting a same-store sales decrease of 1.2%. A modest decline in same-store sales in the U.S. was partially offset by stronger same-store sales in Mexico.
Retail segment gross profit margin decreased to 28.7% in the first quarter of 2011 from 30.1% in the first quarter of 2010, due to increased promotional activity, an unfavorable product sales mix shift within the technology category, and deleveraging of fixed expenses partially offset by reduced inventory shrinkage expense. Retail segment operating, selling and general and administrative expenses as a percentage of sales were 26.0% in both the first quarter of 2011 and in the first quarter of 2010. Lower store fixture and equipment related costs were partially offset by increased marketing expenses. Retail segment income was $25.6 million, or 2.7% of sales, in the first quarter of 2011 compared to $38.8 million, or 4.1% of sales, in the first quarter of 2010.
OfficeMax ended the first quarter of 2011 with a total of 991 Retail stores, consisting of 912 Retail stores in the U.S. and 79 Retail stores in Mexico. During the first quarter of 2011, OfficeMax closed six Retail stores in the U.S.
Corporate and Other Segment Results
The 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, selling and general and administrative expenses was $6.0 million in the first quarter of 2011 compared to $9.0 million in the first quarter of 2010. The first quarter of 2011 included $3.8 million of income related to a favorable adjustment in the cash surrender value of our company-owned life insurance policies.
Balance Sheet and Cash Flow
As of March 26, 2011 OfficeMax had total debt of $275.7 million, excluding $1,470 million of non-recourse debt related to timber securitization notes that have recourse limited to the timber installment notes receivable and related guarantees.
During the first three months of 2011, OfficeMax generated $0.9 million of cash provided by operations. OfficeMax invested $17.0 million for capital expenditures in the first quarter of 2011 compared to $9.2 million in the first quarter of 2010.
Outlook
Bruce Besanko, EVP, Chief Financial Officer and Chief Administrative Officer of OfficeMax, said, “While adverse weather impacted our results, sales declines in the first quarter were primarily the result of significantly lower spending by our existing Contract customers as well as weaker Retail store traffic. We are diligently working to address areas of concern and strengthen our core business, and therefore, are reaffirming our previous 2011 sales and operating income margin guidance.”
Based on these trends, OfficeMax anticipates that for the second quarter, total company sales will be approximately flat to the prior year’s second quarter, including the favorable impact of foreign currency translation, and the adjusted operating income margin rate will be lower than the prior year. For the full year 2011, OfficeMax anticipates that total company sales will be flat, to slightly higher than, the prior year, including the favorable impact of foreign currency translation and the benefit of a 53rd week, and the adjusted operating income margin rate will be in line with, to slightly lower than, the prior year.
The company’s outlook also includes the following assumptions for the full year 2011:
Capital expenditures of approximately $75 million, primarily related to technology, ecommerce, and infrastructure investments and upgrades
Depreciation & amortization of approximately $85-90 million
Pension expense of approximately $7-11 million and cash contributions to the frozen pension plans of approximately $4 million
Interest expense of approximately $72-77 million and interest income of approximately $41-44 million
Effective tax rate approximately in line with the effective tax rate in 2010
Cash flow from operations exceeding capital expenditures
Reduction in Retail store count for the year with approximately 15 store closures in the U.S., and approximately 8-10 store openings in Mexico.
Mr. Saligram added, “Although we expect the first half of the year to be soft, we are confident we are taking the appropriate revenue- and margin-enhancing actions to position OfficeMax to drive profitable growth. In the near-term, we will focus the entire organization on stemming the declines of the core business by strengthening the management team, executing the fundamentals better, enhancing the customer experience at our stores and optimizing the Contract pricing and margin relationship.”