Updated from 9:18 a.m. EDTOfficeMax ( OMX) narrowed its quarterly loss Tuesday, helped by strong comparable-store sales that held up despite an extensive store remodeling program. More difficult same-store comparisons loom in the second half and the company, which is in the midst of being acquired by forest products giant Boise Cascade ( BCC), will need the economy to cooperate if it wants the performance to continue. In the quarter ended July 26, the Cleveland-based retail chain lost $26.7 million, or 21 cents a share, compared to last year's loss of $33.4 million, or 27 cents a share. The results don't reflect a normalized tax benefit due to the required accounting treatment of deferred tax assets and related valuation allowance. Assuming a 40% tax rate and including an after-tax impact of a penny a share, the company said it would have lost $16.2 million, or 13 cents a share. On that basis, analysts were expecting a loss of 12 cents a share. The results compare to a loss of $20.2 million, or 16 cents a share, in the year-ago quarter. Total sales rose to $1.05 billion from $1.01 billion. Strong categories included electronics, ink and toner, shredders, office labels and digital imaging. The strength should continue for the rest of the year, OfficeMax predicted. Consolidated same-store sales increased 4% and domestic same-store sales rose 5%, helped by both higher traffic and a higher average purchase. Also, the amount of out-of-stock merchandise fell from the year earlier, the company said. Last year, comparable-store sales rose 3% in the second quarter. Analysts praised the domestic results. "Not many retailers have posted 5% comps in the second quarter," said analyst Todd Kuhrt of Midwest Research-Maxus. But comparable-store sales in the company's Mexico segment fell 20% because of devaluation in the Mexican peso against the U.S. dollar. Sales of certain larger items, such as computers, also fell, OfficeMax said.
"Our second-quarter summer months are traditionally the slowest of the year, as customers turn to more outdoor activities and spend less time in the office and, as a result, buy and use fewer office products," Michael Feuer, chief executive, said in a written statement. Second-quarter inventory fell to $943 million from $949 million last year. Gross margins, which rose to 24.9% from 24.5% last year, along with the better same-store results led to the narrowed loss, said Kuhrt. Kuhrt also said the company's remodeling program is going well. "Remodeling without a hiccup is always good," Kuhrt said. In the quarter, the company said it remodeled 121 stores, bringing the total number of remodeled stores to 205 year to date, on the way to its goal of remodeling 250 stores by year-end. The remaining 45 stores in the remodeling program will be completed before the holiday selling season begins, the company said. The true test will be in the back half of the year, according to A.G. Edwards analyst Brian Postol, who owns no OfficeMax shares. "If they weren't being bought out, the stock wouldn't be where it is. They're up against more difficult comparisons in the third and fourth quarters as well." On July 14,
Boise Cascade agreed to buy OfficeMax for $1.5 billion and the deal should close in the fourth quarter. The company's shares were recently down about 5 cents at $8.98 on the New York Stock Exchange. If an economic recovery and attendant job creation don't materialize in the latter half of this year, Postol believes comparable-store sales at OfficeMax could deteriorate. "They won't have those remodels left to finish but still they're at gross margin levels that I think it will be hard to push forward. Things could get challenging on a gross margin basis," said Postol.
OfficeMax is optimistic on its back half of the year, where the majority of its earnings are seen, thanks in part to back-to-school season. The company said that's why it used the second quarter to complete most of its remodels. "We've seen customers are shopping much closer to the actual target date," Feuer said. "That has manifested itself in back-to-school and Christmas. We have every reason to be positive and believe back-to-school will be strong." As a result, the company said it expects comparable-store sales to gain in the mid-single-digits in the third and fourth quarters. In last year's third quarter, domestic comparable-store sales rose 7.7%, and they increased 8% in the fourth quarter. On an EPS basis, analysts forecast the company to swing to a profit in the third quarter with earnings of 13 cents a share and 19 cents a share in the fourth quarter.