OfficeMax Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMX)") else Response.Write("(NYSE: OMX)") end if %>

3605 Warrensville Center Road

Shaker Heights, OH 44122

(216) 921-6900

AOL -- Keyword: OfficeMax

OfficeMax

http://www.officemax.com

UNION CITY, Ca., August 21, 1996/FOOLWIRE/ --- OfficeMax reported Q2 1996 earnings August 13th. Net income doubled to $2.4 million from $1.2 million a year ago and earnings per share were $0.02 versus $0.01 per share a year ago. Earnings were in line with consensus estimates. For the first half, net income was up 62% to $14.9 million or $0.12 per share compared to $9.2 million or $0.08 a year earlier. Sales for the quarter were up 28.9% to $622.1 million and same store sales were up 13.3% on top of the 15.2% a year earlier. For the first half sales climbed 30% to $1.4 billion, up from $1 billion a year ago and same store sales at 6 months stood on a comp basis at 14.4% on top of 15.9% a year ago.

Q2 is typically the slowest time of the year for OfficeMax primarily because of vacation, daylight savings time, etc. They took advantage of the slower time period to do some things to position the company effectively for the second half of the year in terms of remodels, etc. They experienced a 25-30% decline in major categories of paper compared to a year ago which affected their comp store number. In fairness, it helped their comp store number a year ago, so things tend to equal out. Another thing that has been discussed in the media was the record-breaking TV audiences associated with the Summer Olympic Games and OfficeMax found themselves affected by this, particularly during the last 9 days of the quarter where, especially in the evening hours, they lost a lot of traffic. That trend continued during the first week of Q3, but that is a phenomenon that has affected everyone, not just OfficeMax.

They found that the trend continued in terms of computer sales and they had a very strong demand for computers, upgrading of computers, and items in the overall computer category. The higher-end computers now, 100-166 mHz Pentium-based systems, are really exceeding expectations. In July, as a point of reference, the 100 mHz and higher represented 85% of the volume in their computer category. So there has been a dramatic shift and that portends well for the future as people start to upgrade to stronger computers because most of the stuff out there is far below the 100 mHz and higher category. They have 83% of their computer inventory in the 100 mHz and higher category, pretty much in line with the sales trend.

The stronger computer sales were partially offset by the effects of lower paper price, so everything evened out. In terms of putting the paper decline or the retail prices of paper into some type of perspective, they are saying that it looks like the effect to comp stores with paper and certain of the heavy categories (the cut sheet) as well as the ripple effect of paper through all departments where the company sells paper, there is about a 3% decline on a real basis.

Despite higher than planned sales of lower margin computers, gross margin for the quarter declined only 21 basis points to 21.65% and that reflects the continuing good news of focusing on their occupancy costs and their people did a good job in terms of focused inventory management and controlling costs in every part of the business. For the first half, gross margins declined only 30 basis points to 21.84%.

On a store operating and selling expense basis for the quarter there was a nice improvement of 24 basis points to 18.16% of sales and that is again a reflection of their very strong store-level controls. They spend their effort controlling essentially all of the economic decisions, thus giving their people in the field the time and ability to deal with the most important component which is getting the goods on the floor, presenting them, and customer service and selling. And they continue to make some dramatic improvements in that area. For the first half, these same expenses improved 39 basis points to 17.59% of sales.

G&A were better than planned at the beginning of the year. For the quarter they were pretty much flat at 2.45% of sales versus last year. One of the things they want to make sure they don't do, as a multi-billion-dollar marketing and retail company, is add layers of bureaucracy. At the same time they are a big company with a lot of operating groups so they are adding to their staff with significant strengthening of their management team. They have added new people in the areas of Marketing and Advertising, Information Systems, and Merchandising and they have also promoted some of the younger people in the organization to new positions of greater authority. So they are continuing to strengthen the management team by recruiting outside and promoting from within. They still think they will be at the flat G&A level compared to a year ago.

For the quarter, operating income increased 49.4% to $2.3 million from $1.5 million last year. Four-wall operating basis (operating income before you apply interest expense and income or loss in subsidiaries) improved to 3.49% of sales from 3.45%. That reflects the continued maturation of their young base of stores and the leveraging of store operating and selling expenses over their increased store volumes and they expect that to continue to happen for the foreseeable future -- into the next couple of years as these stores start to throw off better volume and the chain starts to mature. And one of the added plusses will be, as they introduce one of the new initiatives whether it is CopyMax or BatteryMax or whatever, as these come online they start to have a positive benefit. For the first half, operating income rose 48% to $20.3 million from $13.7 million. On a four-wall operating basis, income improved 9 basis points to 4.25%.

BALANCE SHEET HIGHLIGHTS

They ended the quarter with a cash position of $202 million compared to $39 million a year ago. They continue to have one of the strongest balance sheets in retail. The cash balance which is at the low point for the year reflects the normal seasonal factors. Expenditures are relatively high during the first six months compared to the cash generated from the business and they continue to expect to finish the year with a strong cash position.

On the inventory front, they finished the quarter with inventories of $781 million, up about 39% from a year ago. The 39% inventory growth is about 9% higher than their actual sales increase and there are a couple of factors behind that. First, they peaked somewhat earlier this year for the Back-to-School business. This is not unlike the situation last year when they beefed-up the inventories for the upcoming holiday season. Another factor is that this year they have 15 delivery centers open compared to 5 delivery centers a year ago. Also, they opened 8 stores in Los Angeles and a delivery center in the final week of the quarter.

They ended the quarter with total assets of $1.6 billion and shareholders equity of $1.01 billion.

RETAIL STORE OPERATIONS

In terms of expansion, particularly remodels and conversions, Q2 tends to be the busiest for OfficeMax. Their program is designed to take advantage of this seasonal slow period. Remodels and CopyMax conversions temporarily affect a store's upward sales trend, but yet it is important to get these remodels accomplished so they can prepare themselves for the all important second half and, in particular, Q4. They achieve an immediate increase over previous sales trends which have benefits of high volume and profitability that they enjoy over the second half of the year.

They have accelerated their store remodels during the quarter and completed an additional 48 stores, bringing their total to 78 for the first half. Their remodels are paying off. They are performing better than they originally thought and, as a result, they are now expecting that their remodel, which was previously announced at 150 stores for the year, will actually be exceeded.

During the quarter they opened a record 18 Office Products superstores versus 16 in the prior year. They opened 6 new stores in existing markets, 4 new stores in single-store markets, and entered Los Angeles -- a new major multi-store market -- with a new delivery center and the soft opening of 8 TriMax supercenters which feature a FurnitureMax and a CopyMax within an OfficeMax store. They recently visited the new Los Angeles area stores and were very pleased with what they saw and continue to make improvements during the soft opening period. Initial consumer response is better than what they hoped for. And they were very excited about simultaneously grand-opening 20 stores this Fall.

They ended the quarter with 493 stores and 15 delivery centers in 194 markets in 43 states and Puerto Rico.

Next month, they will celebrate opening their 500th store and plan to open their first store in Mexico City later this Fall. They expect to open another 55 stores in the second half and they will hit their target of approximately 80 stores for the year. Additionally, they plan to open 2 more delivery centers during Q3.

They also opened 9 new FurnitureMax stores during Q2 and they are encouraged by what they have been experiencing lately in furniture, as sales continue on an upward trend. They believe that they are moving further ahead on the learning curve within this industry. They are continuing to introduce better-moving SKUs from their FurnitureMax program into regular OfficeMax stores.

Barely a year ago, on July 11th, they opened their first CopyMax print-for-pay facility. Today, they have 268 CopyMaxs which include 218 that were opened during Q2. They are extremely pleased in what they are seeing from their many CopyMax conversions which are providing significant increases in sales trends. They expect to open 155 CopyMaxs in the second half which include 90 conversions from their traditional business service center to their branded CopyMax concept. They are well on their way to achieving their goal of being the largest print-for-pay provider in the country before the turn of the century.

OTHER QUARTER HIGHLIGHTS

In terms of real estate, they are very proud of their real estate group and are happy to announce that they are further along at this mid-year point in the company's expansion program than any other comparable time in their history. All 80 1996 leases are signed and secured and they have 80+ deals already signed for 1997, either in completed lease or letters of intent in final form. They are on track to open a record 18 stores in next year's first quarter, many of them early in the quarter and that is going to have a significant benefit. It has taken them about 18 months to 2 years to get ahead of the curve on this and they have a good start going into next year. What they are finding in terms of real estate is that, because their balance sheet is among the strongest in retailing today, they get a high percentage of wins on the properties they want. They are finding an abundance of build-to-suit locations in the best strip centers and power centers in the country and they are now being sought out and approached to build, so they haven't incurred any problems finding the quality locations they want.

An update on the first two weeks of the fiscal third quarter, there was some effect from the Olympics, particularly in the evening hours and the West Coast was hit worse than the East Coast because of the time difference. In terms of Back-to-School, it really hasn't kicked in yet. What they have found with seasonal events is that it is coming later and later to the target date every year. Christmas has become that way in the last two years and Back-to-School is also now that type of situation. They are ready for business and were much more aggressive this year. Back-to-School is going to be a very narrow window.

Just as a point of reference, they generally historically generate 60% of their sales and about 80% of their yearly profits in the second half of the year. And, their aggressive expansion program, including remodels and conversions, were completed even with some deliberate sacrifice of revenue to provide them with real incremental sales opportunity particularly in Q4. They get two Christmas selling seasons, the regular one and then January, the strongest month of the year, where they get the "back to basics" business. In that quarter they generate about 30% of their sales and 50% of their profits.

They are planning a meet management TriMax invitational portfolio and analyst meeting the first week in October in Los Angeles at which time they will show analysts what they have done out there in terms of the different configurations of TriMax.

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* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Transmitted: 8/22/96

Copyright 1996, The Motley Fool
All Rights Reserved. This material is for personal use only.
Republication and redissemination, including posting to news groups,
is expressly prohibited without the prior written consent of The Motley Fool.