After being the lagging sister of the office supply superstore industry, could it be that OfficeMax (NYSE:OMX - news) is
getting ready to once again compete? Today the company announced that Q1 earnings jumped 27% from the prior year.
Before jumping over to your online broker, however, you will probably want to look a little deeper at the company. (But you
know that; you're Foolish and always take time to consider a company before making a transaction.)
As the market for office superstores has surged, OfficeMax's stock has been left in the dust. Over the past three years,
OfficeMax shareholders have endured a 30% loss in value, whereas market leader Staples (Nasdaq:SPLS - news) has
surged over 200%. Here is a chart showing the performance of the two companies.
What has caused the discrepancy in stock price performance? No big surprise here... earnings. Staples grew its bottom line
70% between fiscal 1997 (ends in January) to fiscal 1999. Earnings for the current year are expected to jump up another
28%. OfficeMax, on the other hand, only saw a 45% growth in earnings during the same time period. While such growth
over two years is impressive in most industries, the performance pales in comparison to Staples' results. Even worse for
stockholders, analysts are expecting slower growth from OfficeMax. Since the value in most growth stocks lies in future
results, this has hampered (to put it mildly) OfficeMax's stock price. For the current year, OfficeMax earnings are only
expected to grow 15%, although the long-term growth rate is projected to be 20%. (Staples has a 30% estimated growth
rate.)
Where has OfficeMax gone wrong? One of the big problem areas has been computers. The company got caught up in this
promotional, low margin business in an attempt to boost sales. While sales jumped up, profits didn't see a commensurate
gain since margins were so low. As computer price declines accelerated, the company couldn't increase the number of units
sold to offset the lower prices, causing a decline in same-store sales. Realizing that the company didn't have a significant
advantage in this market (a situation competitors had already recognized), management decided to decrease its emphasis on
computer sales. |
