Summary
-With little or no viable indicators that the US economy will rebound in the back half of FY 2007, OfficeMax faces tremendous pressure to quickly "right the ship" in its contract segment which is currently negating gains being made in its retail same store comps. -Weakness in contract further highlights the disparity in Brand image between OMX and chief rivals, Staples and Office Depot and the difficulty they are experiencing in luring new small and midsize business customers into their fold. -Topline company revenues are almost evenly split between retail store and contract which further necessitates the need for a nearly instantaneous turnaround in the contract segment and facing the risk of share declines to its competition which is growing share in this segment each quarter. -Business model in contract relies too heavily on large business which produces significantly lower margin levels. Ongoing challenge/opportunity remains as increasing penetration of this particular base.
Analysis
Although there is more to celebrate in Q2 vs Q1 earnings for OMX, they are far from being out of the woods given the current economic slowdown and their own internal woes in Contract, still very much in disarray despite the departure of Mike Rowsey. Retail same store comps, although positive in two successive fiscal quarters are most likely benefitting from sales of a broader assortment of big ticket CE goods such as high end laser printers, CPU's and laptops that were assorted in about one third of the stores LY, but in all stores TY. Underscoring this is the fact that expense austerity, shaving of advertising, store payroll and other general operating expenses has more to do with the positive impact on EPS than does increasing footsteps, topline revenues, market share gains and bolstering a generally weak brand image when compared to archrivals, Staples and Office Depot. The concern, both near and long term, is that without a bona fide strategy of driving sales, finding new customers from consumer through small and midsize businesses, distancing themselves backwards from competition due to less dollars spent on marketing, advertising and simply put, presence, OfficeMax will ultimately run out of ways, means and dollars to further drive down expense lines without negatively impacting store execution, delivery timeliness and overall customer service levels. It's a self-fulfilling prophecy that if you do things that drive the cost of doing business down to enhance the P/L bottom line, if done long enough and often enough, you'll eventually control your own destiny and drive sales down, customers away into the arms of competition, further alienate your brand and ultimately cause you to fail even though your initial intentions to save money were good. Unfortunately, for OfficeMax, this has been their primary positioning for 6 consecutive quarters and unless the silver bullet of elevated sales and new customers are found in both contract and retail stores soon, the private equity vultures may soon be circling the skies over Itasca, Illinois looking for prey!
