Office Superstore Chains Post Mixed First-Quarter Earnings

Office Depot, crediting gains in technology product sales, said first-quarter net income rose to $115.3 million from $114.9, while OfficeMax’s profit narrowed to $2.6 million from $59.1 million, when its business included the Boise Cascade paper products operations. OfficeMax reported a 1% decline in same-store sales as revenue fell to $2.3 billion from $3.5 billion, while same-store sales at Office Depot rose 1% as revenue rose to $3.7 billion from $3.6 billion.

OfficeMax has been under attack by investor K Capital Partners, which owns 5.7 million shares (6.2% of outstanding common) and has criticized the chain’s management, saying OfficeMax has suffered a “poor performance” since being acquired by Boise Cascade in late 2003. Boise Cascade sold off its paper products business last fall and adopted the OfficeMax name.

In a proxy filed Wed. with the SEC, K Capital said a “loss of confidence” in management prompted it to nominate former shipping executive Karl Meyer to replace Carolyn Ticknor on the chain’s 14-member board. K Capital said it has been rebuffed since late Feb. in attempts to meet with OfficeMax executives. It urged that “strategic alternatives” be considered for OfficeMax, including a possible sale. The firm hired Blackstone Group in early March to explore strategic alternatives for OfficeMax. The investment banking firm contacted 3 of OfficeMax’s independent board members to “gauge the interest” in meeting with K Capital, the filing stated.

OfficeMax, which operates 935 stores, has said shareholders wouldn’t be served by diverting “our attention and full efforts from pursuing our current strategy.” That strategy includes opening 30 net new stores this year, while consolidating warehouse operations to 30 facilities by year-end from 43. It closed 12 warehouses last year. “We're dedicated to making progress as fast as we can,” CEO Samuel Duncan, a former Shopko executive hired earlier this year, told analysts in an earnings conference call on Thurs.

K Capital also has criticized executive chmn. George Harad’s pay package, which includes total compensation of $55 million in salary, bonuses and restricted stock and options since Boise Cascade hired him in 1995. Harad received the compensation despite Boise Cascade producing a total annualized return to shareholders of 3.6% during 1994-2004, K Capital said. OfficeMax also has weathered an accounting inquiry into vendor rebates that led earlier this year to the firing of 6 employees plus the resignations of Retail Div. Pres. Gary Peterson and Pres.- CEO Christopher Miliken.

During the first quarter ended March 26, OfficeMax said its gross margin improved to 24.5% from 23.7% a year earlier as it focused promotions on drawing small business customers. The OfficeMax retail division posted an increase in operating income to $22.9 million from $16.9 million a year earlier despite a decline in revenue to $1.19 billion from $1.22 billion. Private label products accounted for 17% of total revenue during the quarter, the chain said. OfficeMax’s earnings including an $8.7 million net expense that included severance payments and a settlement gain from a previous asset sale. The balance sheet also contained a $4.29 million operating loss from a wood-polymer building materials plant in Elma, Wash.

Meanwhile, Office Depot continued to sell more technology products, resulting in a decline in gross margin during the first quarter to 31.7% from 32.4% a year earlier. Office Depot’s private label segment grew to account for 17% of total sales during the quarter, from 14% a year earlier. The private product assortment, now some 3,000 SKUs, is expected to grow to include technology products and represent 20% of total sales by year-end, a spokesman said. Private label products include recordable media and a range of office suppliers, including storage boxes, folders and color ink cartridges.

The chain projects opening 100 stores this year, including 29 in the recently-completed first quarter. A portion of the expansion will focus on the Northeast, where Office Depot remains “understored,” officials said. Office Depot entered the Boston-area market last year by acquiring 51 former Kids ‘R’ Us locations from Toys ‘R’ Us. The chain opened 36 of the locations last year as new Office Deport stores and expects to add another 15 this year, according to the company’s 10K filed with the SEC. Office Depot is expected to remodel 50 stores this year to its new M2 format, which expands the assortment of technology products. The chain has opened or converted about 150 stores to M2, a spokesman said. Office Depot ended the quarter with 995 stores in N. America, including 961 in the U.S. and 34 in Canada. It has 78 company-owned outlets in France, Hungary, Japan and Spain, and another 153 that are operated in 7 countries, including Mexico, as part of joint ventures or licensing agreements, the spokesman said.

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OfficeMax’s Duncan will receive an $850,000 annual base salary, according to an SEC filing. If Duncan’s previous employer, Shopko, rescinds a 2004 bonus of $400,557, OfficeMax also will pay that amount, the filing states. Duncan will be eligible for an annual target bonus equal to 100% of base salary and will get an option to buy 70,000 shares over 10 years… Office Depot expects by hear-end to close on an $18 million sale of property in Boca Raton, Fla., to Stiles Corp. Office Depot bought the land in 2003 for a new hq, a plan scrapped a year later. - - Mark Seavy