OfficeMax posts 1Q profit improvement - A new mindset exisats at Office Max and its competitors - Brief Article

DSN Retailing Today, June 10, 2002 by Mike Troy

SHAKER HEIGHTS, OHIO -- Amid what Office Max chairman and ceo Michael Feuer considers a rational competitive environment the office superstore chain is out to achieve market share gains this year and experience improving momentum during the first quarter to get it started.

Feuer's "rational" reference stems from a new mindset that exists at OfficeMax, as well as its two key competitors, Staples and Office Depot, that generating profits is more important than seeing who can build the largest base of store in the shortest period of time.

"The office superstore industry is a rational industry," Feuer told shareholders at the company annual meeting May 21. "Today it is no longer the land grab of the Wild West that it was during the last 10 years."

The rapid expansion and acquisition activity that took place during the 1990s resulted in a base of roughly 3,000 office superstores. At the end of the first quarter, OfficeMax operated 971 stores in the United States and Mexico, Staples had 1,247 stores in the United States and Canada, and Office Depot had 857 stores in the United States and Canada.

Expansion at all three companies has slowed dramatically, however. OfficeMax plans to open fewer than 17 stores this year after opening that same amount last year and closing 29 stores.

Office Depot plans to open between 25 and 30 stores this year, which is a downward revision from an earlier plan to open 40 stores. Last year, Office Depot opened 44 stores, while closing 73 units. In 2000, the company opened 70 stores after hitting a peak of 130 openings in 1999.

The 95 stores Staples plans to open this year in the United States and Canada is still a big number, but it is a reduction from the 117 stores it opened in 2001 and the 166 stores opened in 2000. In addition, the company announced late last year that it would close 31 stores this year.

Each of the companies also has announced plans to focus expansion activities in existing markets, rather than attempt to enter new markets. This rational approach has OfficeMax feeling good about its ability to improve sales and profits.

"This is the year that we are going to deliver value to shareholders," Feuer said. "We are optimistic that we are going to be able to deliver solid positive same store sales the rest of this year and next year."

The trend toward improved results surfaced during the first quarter as Office Max's net income, excluding the positive effect of a $57.5 million tax refund, totaled $6 million, or $0.05 per share, compared with a loss of $16.6 million, or $0.15 per share, during the prior year's first quarter. Same stores sales were flat, but the company has halted a declining trend in same store sales that saw fourth quarter comps decline 3% and third quarter comps decline 8%.

According to Feuer, last year's third quarter was the most difficult in the history of OfficeMax and "[last year] was, without question, the most difficult year in the history of the company. I'm glad it is over and I hope we never have another year like it," he said.

To increase its sales and profits, OfficeMax is counting on the benefits of a new distribution system. The company spent the past several years opening large, strategically located PowerMax distribution centers in Nevada, Alabama and Pennsylvania and can now reach each of its stores within a day.

Feuer is optimistic the addition of a top-notch distribution system will enable OfficeMax to benefit from more efficient store replenishment and simplified store-level operations. Inadequacies in both areas hampered past results. Now Office Max is shipping merchandise directly to stores from its own distribution net- work whereas previously its suppliers shipped goods directly to stores. That situation made inventories more difficult to manage, while creating complexity and adding costs at store level because employees were kept busy receiving merchandise.

Because store associates are no longer preoccupied with receiving merchandise from numerous different trucks each day, they can increase their focus on providing customer service and selling merchandise. It is enabling a cultural transformation from a task-oriented environment to a seek-and-sell culture, according to Feuer. That, in turn, has helped reduce turnover considerably, as some of the frustration and menial duties of working in an OfficeMax store have been removed.

"We are in a position to radically and dramatically increase revenues," Feuer said.