The rebound at OfficeMax poised to strengthen - An industry in transition - Boise Cascade Corp. acquisition of OfficeMax

DSN Retailing Today, Nov 10, 2003

OfficeMax is at the center of the most intriguing development the office products industry has seen since Staples tried to buy Office Depot a little more than seven years ago.

As was the case then, the recent combination of Boise Cascade Corp. and OfficeMax brings a large amount of uncertainty to the marketplace, both from the perspective of suppliers eager to understand the structure of the combined company and the personnel responsible for making decisions, as well as competitors who undoubtedly will be impacted by what are believed to be enhanced prospects for the combined organization.

Unlike the Staples and Office Depot combination, the Federal Trade Commission did not oppose Boise's acquisition of OfficeMax announced back in July 2003. The only remaining hurdle to this transaction is approval from shareholders at the respective companies. Shortly thereafter, most likely in December, the deal is expected to close, resulting in the creation of an $8.3 billion multichannel reseller of office supplies. At that point, a flurry of details about the combined organization are expected to be released.

"The long-term management structure of the combined company has not been determined," OfficeMax chairman and ceo Michael Feuer wrote in the September issue of an employee newsletter. "Boise is expected to make announcements about the businesses' management at about the time of the closing." He also noted that the name and brand positioning of the combined company had not been determined and would also be announced by Boise around the time of the closing.

So far, OfficeMax and Boise have formed a joint task force to plan and implement a strategy to integrate the two companies, with OfficeMax vp of strategic planning Vance Johnson and Boise Office Solutions cfo Jim Balkins heading the group. As these two executives and other senior executives plot integration strategy, suppliers can count on feeling an immediate impact. The two companies identified annual cost savings and revenue growth opportunities of $160 million due primarily to synergies in areas such as logistics, purchasing, paper sales and marketing efforts. However, the biggest of those is the opportunity to reduce the cost of goods sold, which means suppliers can expect to see terms of their contracts revisited once the deal closes. Boise and OfficeMax projected the merger would allow the combined company to save $60 million annually on purchasing costs.

Those cost savings come as OfficeMax was already experiencing improved business trends. OfficeMax reported positive same-store sales growth for the past five quarters and in four out of five quarters its same-store sales were higher than the gains made by Staples. OfficeMax also easily outpaced Office Depot, which continued a three-year run of negative quarterly same-store sales. The company also indicated the number of customers visiting its stores and the amount they spent per trip had increased. Much of the improvement is attributed to an efficient new supply chain, the closing of underperforming stores, a reduction in new store openings and an emphasis on the remodeling of existing units. OfficeMax, as is the case with other superstore operators, has opted for a 20,000-square-foot store design and this year expects to remodel 250 stores to the new format. The reduced square-footage design was made possible by the construction of a network of distribution centers that more efficiently flow merchandise to stores, thereby eliminating the need for large amounts of overstock space. The prototype design also features reduced shelf heights, enhanced navigational signage and increased visibility of the Copy-Max department.

While Boise's acquisition of OfficeMax was viewed as a positive development for a company already experiencing improved business trends, the combined company will have a lot of work ahead of it to narrow the performance gap that still exists between itself and Staples and Office Depot.

For starters, Boise was marginally profitable last year, generating net income of just $11.3 million on total sales of $7.4 billion. Boise's $3.5 billion Office Solution division is the company's most profitable, producing an operating profit of $123 million, but that is nearly half the $236 million operating profit reported two years earlier.

By comparison, OfficeMax generated a net income of 73.7 million on sales of approximately $4.8 billion. On a pro forma basis, last year the combined company would have produced a net loss of $10 million on sales of $12.1 billion. And this is considering that a one-time tax refund of $57.5 million aided the profit picture last year at OfficeMax. So far this year, sales at OfficeMax have increased 4% to $2.27 billion during the first six months of the year. The company also reported a loss compared to a profit during the first six months of last year when the income Lax benefit was realized. OfficeMax reported a net loss of $16.9 million compared to a profit of $30.1 million last year. However, if the benefit of the one time $57.5 million tax refund is backed out of last year's results and a consistent tax rate is applied to both periods, OfficeMax would have reduced its net loss to $10.2 million from $16.5 million the prior year.