OfficeMax Inc.OMX

Morningstar Rating

Stock Research and Analysis

by R. J. Hottovy, CFA

We believe a shakeout among office product retailers is inevitable. Several industry participants, including OfficeMax, have struggled to remain profitable amid intense competition and a chaotic consumer environment. In our view, aggressive measures Read more

Bulls Say

Merchandise margins should improve with increased private-label products, which presently represent about 24% of sales, and direct merchandise procurement through a new sourcing office in China.

An increased emphasis on higher-margin small and midsize business contract customers and the elimination of certain unprofitable large corporate accounts should improve profitability.

A recently announced alliance with Lyreco, a leading global distributor of office products in 36 countries, should create additional selling opportunities. A partnership to distribute cobranded office products through 1,600 Safeway SWY grocery stores should also be modestly additive to the top line.

Higher-volume consumable office products such as paper, ink, and toner cartridges are somewhat more resilient during difficult economic times.

More-efficient delivery and inventory management practices have helped offset cost pressures to an extent. Management estimates the elimination of 245 corporate staff and field management positions could further reduce operating costs by $20 million annually. Read more

Bears Say

OfficeMax lacks the scale advantages and distribution efficiencies to compete with larger industry participants. Market share gains will be difficult without low-cost advantages.

Prolonged economic weakness may pressure business customers of all sizes, dampening top-line growth and increasing store rent and labor expense deleverage.

With more than 4,000 collective stores, the North American office product retail marketplace nears saturation. Approximately 80% of OfficeMax's stores are within five miles of a competing office supply superstore.

Increased copy and print services from Staples, Fedex Office FDX, and UPS Stores UPS have eroded OfficeMax's traditional strength in the pay-for-print service category. Staples has also taken significant market share from OfficeMax in its primary Chicago market.

A financial relationship with Lehman Brothers, which filed for bankruptcy in September 2008, will likely require severe write-downs and a modest loss in annual interest income. Management also expects a material increase in the unfunded status of its pension plan. Read more

Strategy

OfficeMax remains focused on reversing sluggish fundamentals. In the retail segment, the firm has increased its emphasis on higher-margin service offerings and expanding its private-label penetration. Read more

Management

In our view, OfficeMax's executive team has done an admirable job improving fundamentals over a relatively short timeframe, alleviating some of the concerns from the prior management team. Sam Duncan was named CEO in April 2005 following the resignation Read more

Profile

OfficeMax is a leading supplier of office products worldwide. Through a direct salesforce, the Internet, and catalogs, the contract segment provides business-to-business Read more

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