The morning's spirit lifter: This little ditty I finished last Thursday about OfficeMax. Of course, some of the story was edited, but largely, and for the first time, the artilce was published as is.

This story will most definitely be usable as a clip. Thank heavens for the Daily Herald.

By the way: Front page, suckas!

Growth opportunities
By Frosty
Medill News Service
Posted Thursday, May 19, 2005

Following months of instability and a shaky first-quarter performance at Itasca-based OfficeMax Inc., analysts are divided into two distinct camps on the future of the big-box retailer.

“They seem to be doing all the right things,” said Ivan Feinseth, director of research for New York-based Matrix USA LLC, who rates OfficeMax a strong buy. “The market is growing. We like the company, and think it has the best growth prospects among the (office products) group.”

But Anthony Chukumba, an analyst at Morningstar Inc. in Chicago, disagrees.

“From a competitive standpoint, from a management standpoint and even just from a future growth standpoint, it’s really hard to get excited about OfficeMax,” Chukumba said. “They haven’t really grown much, and they don’t have very much room to grow with Staples and Office Depot standing in the way.”

Indeed, in its most recent 10-Q filing, the company stated that “some of our competitors are larger than we are and have greater financial and other resources available to them, and there can be no assurance that we can continue to compete successfully with them.”

OfficeMax trails industry leader Staples Inc. and No. 2 Office Depot Inc. in annual revenues.

An accounting scandal, a corporate restructuring, a strategy change, a new corporate name, a headquarters move, and a newly appointed turnaround expert as chief executive are among the drastic changes at OfficeMax.

Of six analysts, three rate the stock a buy and three others call it a hold, according to Bloomberg.

On the plus side, OfficeMax is planning to grow its sales through a moderate expansion, enlarging its highly-profitable contract sales segment, and developing a new focus on small business customers.

The company opened seven stores so far this year, and plans to open 40 more by year-end. It is unclear whether the company plans any further expansion in the Chicago area.

“We’ve seen great growth from our contract business to date, but there are certainly more opportunities right now in the small business market,” said Bill Bonner, director of marketing communications. “I expect to continue seeing our emphasis to be in that market.”

Feinseth of Matrix USA, likes the focus on small business customers, and the recent hiring of former ShopKo Stores Inc. turnaround expert Sam Duncan as new chief executive.

“He’s a perfect fit for the company in many ways,” Feinseth said. “This is a company going through the transition of a major turnaround, and he fits the bill. It was a good choice.”

Chukumba of Morningstar, on the other hand, said the change, while necessary, paled in comparison to competitor Office Depot’s.

“While Depot was out there hiring (Steve Odland), who did a great job at AutoZone, OfficeMax gets Duncan, whose only claim to fame was selling ShopKo,” Chukumba said.

Odland, while at the helm of AutoZone Inc., oversaw a near-quadrupling of the stock from around $20 a share to more than $80 a share. “The entire time Duncan ran ShopKo, margins got worse and top-line growth stagnated. The only way he created shareholder value was by getting the company sold,” Chukumba continued.

Duncan replaced interim CEO George Harad, who remains chairman of the board until June 30 when Duncan is to take that spot, too. Harad supplanted embattled former Chief Executive Michael Milliken, who resigned in February after an internal probe found the company fabricated $3.3 million in rebates billed to suppliers.

The scandal resulted in a restating of profits for the first three quarters of last year, in which the company trimmed $2.6 million from earnings, or 3 cents a share.

“The good news is that this issue was relatively contained, and there are now measures in place to prevent things like this to take place in the future,” said Feinseth of Matrix USA. “We’re looking at this from an investment standpoint, and as such, this is history; we like to look at the future.”

The company was Boise Cascade Corp. until last November, when it sold off its paper mills and timberland assets, changed its name to OfficeMax and relocated to Itasca from Boise, Idaho, with a new focus on office products and solutions.

But the new focus has generated new problems.

Sales at OfficeMax stores open at least a year declined 1 percent in the first quarter, and costs increased as the company added sales staff to cater to small and mid-size business customers.

After reporting a profit for the quarter, the company announced unexpectedly on May 3 that it changed the result to a loss of $5.3 million, or 7 cents a share, earmarking $9.8 million for a reserve for continuing litigation stemming from an unspecified legal dispute in 2003.

The quarterly loss is in sharp contrast to last year, when the company reported first-quarter profits of $59.1 million, or 61 cents a share. Last year, the company reported revenues of $13.2 billion, with net income of $173.1 million, or $1.66 a diluted share.

Despite the first-quarter loss, the company paid a 15 cent dividend on March 30 and plans to pay another 15 cents in July. Its stock trades around $31, up from a three-month low of $29.04 on Jan. 24. OfficeMax announced on May 10 that it will repurchase 23.5 million shares of its common stock at $33 per share.

With industry leader Staples planning a massive expansion program, opening four stores and planning nine more in the Chicago area this year — a traditional stronghold for OfficeMax — the company figures to have its hands full.

Chukumba from Morningstar said it’s going to be tough for OfficeMax to climb out of the cellar and compete with Office Depot and Staples.

“They’re either going to continue to limp along as a No. 3 player, or they’re going to be broken up into separate pieces and peddled off,” Chukumba said. “And that doesn’t inspire a lot of confidence for investors.”

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