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WIKI ANALYSIS
OfficeMax Inc. (NYSE: OMX) is the third largest office supply retailer in the United States. The company operates two main divisions: one that sells office supplies in retail stores and another that deals directly with mid-size and large businesses via contract sales. OfficeMax's $9.1 billion in total sales in 2007, a 1.3% increase from 2006, was nearly equally split between the two divisions.
OfficeMax substantially trails market leaders Staples (SPLS) and Office Depot (ODP) in terms of sales, $19.4 billion and $15.5 billion, respectively. However, OfficeMax surpassed Office Depot in operating margin for the first time in 2007, as OMX saw an operating margin of 4.0% while Office Depot's fell to 3.1%. Still, OfficeMax still trails Staples considerably in operating margin, as the industry-leader earned a 8.0% operating margin in 2007.
OfficeMax has embarked on a two-pronged strategy to trim its least-performing assets and grow its high-margin businesses. In particular, the company has closed a significant number of its under-performing retail stores and contract distribution centers. At the same time, OfficeMax has emphasized its print and document services offerings, a business that generates operating margins more than ten times higher than its office supply business.
Services
OfficeMax opened its first retail store in 1988 in Cleveland, Ohio. In December 2003, the Boise Cascade Corporation, a paper and building products company, acquired OfficeMax and the following year sold the rest of its assets and adopted the name OfficeMax Inc. OfficeMax currently has two divisions of business that provide similar services to different customers: contract and retail. Total revenue of $9.1 billion in 2007 was split almost equally between these two divisions.
OfficeMax Contract
OfficeMax Contract sells products and services directly to mid-sized and large businesses such as Target (TGT), General Motors (GM), and Verizon Communications (VZ). OfficeMax provides these businesses with office supplies, paper, technology, furniture and printing services. Sales from OfficeMax Contract made up 53% of total revenue in 2007.
Office supplies and paper accounted for over half of Contract's revenue in 2006. However Contract sales of office supplies and paper in 2006 decreased 1% from 2005, while technology sales increased 5% and furniture sales increased almost 6%. Overall, Contract sales increased 2% between 2005 and 2006.
Office Max Retail
OfficeMax operates over 900 retail stores in the United States. These stores sell the same products as the Contract division but are directed at consumers and small businesses. In 2007, sales at Office Max retail stores made up 47% of OfficeMax's total revenue. Retail sales were virtually flat between 2006 and 2007.
Technology products accounted for over half of retail sales in 2006. During the 3% decrease in retail sales between 2005 and 2006, sales for all three product segments with retail sales declined.
Trends and Forces
Retail Stores
Same store sales growth is a major measure of success in the retail industry. It measures the growth of sales in stores that have been in operation for one year or more. In 2005, OfficeMax Retail had slightly negative same store sales growth of -1%. For the fiscal year of 2006, OfficeMax had increased its same store sales growth to 0.1%, a net positive change of 1.1%. However, the trend turned downwards again in fiscal 2007 as the retail segment experienced a same store sales decrease of 1.2%. At the end of 2007 OfficeMax operated 976 retail locations, spread between 908 stores in the U.S. and 68 stores in Mexico.
Contract Sales
OfficeMax's Contract division makes up about 53% of total revenue. However, OfficeMax's operating margin in the Contract division is well below the industry average, with OfficeMax's contract division operating margin around 4.3%, compared to the estimated industry average of 7.7%. However, this figure has improved as it grew from 3.7% in 2006 to 4.3% in 2007.
The main reason that OfficeMax's Contract division is less profitable than its competitors is that OfficeMax's Contract division is not as efficient as its competitors. The company saw fewer sales per distribution center than both of its main competitors in 2006, Staples and Office Depot. While Staples has an average of $177.8 million per distribution center and Office Depot has $201.9 million per distribution center, OfficeMax averaged only $148.2 million per distribution center. As a result, OfficeMax closed 12 of its distribution centers between 2005 and 2006. If OfficeMax can find a more effective set of assignments for fulfilling Contract orders, profitability in its Contract division could increase.
Impress: Print & Document Services
One of OfficeMax's attractive prospective areas for growth and increased profits is in Print & Document Services (PDS), or its copy centers. OfficeMax recently finished rolling out its revamped copy centers called Impress, in all of its retail stores.
Through Impress, OfficeMax provides printing and distribution of a variety of business documents, such as training manuals, technical publications, marketing materials and newsletters. Across the office supply industry, PDS has margins approximately twice as large as overall company margins. OfficeMax's Impress is estimated to have generated an operating margin as high as 16% in 2007, which could increase OfficeMax's overall profitability in the long term.
Competition
OfficeMax has struggled to keep up with its two main competitors, Staples (SPLS) and Office Depot (ODP) in recent years, although it did surpass Office Depot in terms of operating margin for the first time during 2007.
- International Revenue: OfficeMax ranks far behind the market leaders in terms of revenue, largely due to its lack of an independent international division. Staples and Office Depot reported international revenues in 2007 of $2.73 and $4.19 billion, respectively.
- Same Store Sales: OfficeMax ranks third in SSS with 2006 growth of 0.1%. In comparison, Office Depot and Staples reported growth rates of 2.0% and 3.3% respectively.
- Operating Margin: After increasing its operating margin from 1.9% in 2006 to 4.0% in 2007, OfficeMax surpassed Office Depot in the metric (ODP had an operating margin of 3.1% in FY 07), but still lags Staples (8.0% in FY 07).
Staples is currently the faraway industry leader with sales and profits substantially above both OfficeMax and Office Depot. Their higher operating margin can be attributed to Staples' higher productivity, efficiency and use of private label products. Also Staples is a much larger company than Office Depot or OfficeMax--in terms of both stores and total revenue--and thus has greater economies of scale in terms of purchasing power.
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