Finding the Office Supply Retailer With Upside

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Each of the three major office supply store companies is struggling to gain headway, all having taken asset impairment charges to various degrees within this year. In fact, the two largest players will both reduce their footprint 15% over three or four years. They are also all aiming to alleviate slowing sales through improved online strategies. Assuming the employment picture continues to get better, there should be hope for at least one or two of the companies.

OfficeMax’s (NYSE: OMX) store rationalization plan is working rather well, and it intends to cut another 15% of its square footage from 2012 through 2015. The closing, relocating, and downsizing of unprofitable locations is resulting in margin expansion. Besides this, OfficeMax is ratcheting up its print and document services. Additionally, a smaller, likely more efficient store prototype will be launched in early 2013. Finally, it is revising its technology offerings to focus more intently on the small business customer. As far as the Internet goes, it is achieving double-digit sales growth from online sources, and continues to perfect its website.

The $0.27 a share profit earned in the September quarter was a modest year-over-year advance. OfficeMax is on track for a solid profit increase for 2012 despite flattish to lower sales. Even after a 122% jump during the course of this year so far, OMX shares might well hold some promise for their near-term potential.

Staples (NASDAQ: SPLS) is closing a small number of stores as part of a restructuring plan aimed at boosting productivity. Its earnings are basically treading water. While not looking to build the store base, management does have some growth initiatives in place that may help it turn the corner:

● expanding into new categories to drive store traffic; in fact, it believes it will triple its product assortment this year. Slashing prices has been necessary within this framework. Still, the extension beyond just office products could bring positive effects.

● accelerating the growth of its online sales, along with the broadening of its mobile advertising and customer acquisition activities.

● creating new sales channels, i.e. kiosks, a tablet-focused website.

● like OMX, bolstering its copy and print offerings further.

● A cost reduction plan encompassing product costs, procurement and supply chain processes, as well as a European restructuring.

● The three-year, 15% reduction in square footage.

SPLS shares have sunk to levels not seen in many years. An upturn in sales would likely be needed to jumpstart the stock. Productivity measures, as currently planned, do not seem sufficient to fuel profit gains.

Office Depot (NYSE: ODP) will reduce in size, relocate, or close a significant number of stores and take further impairment charges. It is suffering under excess costs and may just eke out a small profit for this fiscal year. Similar to its counterparts, it is experiencing same-store sales declines. The culprit, though, is cost overruns. Other than the real estate rationalization, management may not make severe cost reductions, stating that the spending is aimed at improving performance in future periods.

OMX shareholders are unlikely to gain much on a short-term basis as the industry undergoes a transition. Former asset restructurings at OMX have allowed for turnarounds within two years and onward. Thus, there could be some meaningful improvement on the horizon. Only aggressive investors probably ought to consider the shares.

Overall, OfficeMax seems best situated at this juncture, while Staples, as the largest firm, is potentially worthwhile.

dctotal has no positions in the stocks mentioned above. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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