In conjunction with these closings, OfficeMax expects to report a one-time, after-tax charge to its fiscal 2000 fourth quarter earnings in the range of approximately $69 million for store closings, lease dispositions and fixed asset impairments, which equates to a $111 million pre-tax charge. The reserve for lease dispositions is somewhat higher than originally estimated because of a significant increase in the number of store closings announced during the past month by other retailers. As a result, the Company said it has increased the expected time it will take to dispose of these properties because of a potential glut of sites on the market at one time.
OfficeMax said it plans to reduce fiscal 2001 new store openings from approximately 50, as announced last October, to less than 25. Michael Feuer, the Company’s chairman and chief executive officer, said, In light of the significant and widespread economic slowdown the country is currently experiencing, OfficeMax has elected to reduce its new U.S. store openings to focus on anticipated productivity gains from existing stores. The vast majority of this year’s new stores will be located in existing OfficeMax markets, some of which will be in improved locations in the same major metropolitan areas where OfficeMax closings are occurring, such as Los Angeles. This strategy is designed to solidify our market position, maximize advertising and distribution effectiveness, and reduce supervision expenses. The 25 stores eliminated from this year’s plan will be scheduled to open in fiscal 2002.
OfficeMax said the lower number of store openings, combined with a substantial reduction in capital expenditures and a stringent cost-and-expense control program implemented as a result of the slowing economy, are expected to significantly increase free cash flow to more than $150 million by the end of this fiscal year.
Precipitous Fourth Quarter Slowdown in Consumer Spending
OfficeMax said, similar to the vast majority of retailers in the United States, its fourth quarter ended January 27, 2001, which included the important Holiday selling season, was adversely affected by the precipitous, far-reaching consumer slowdown, along with negative effects of major winter storms that plagued the Midwest and Northeast. Although difficult to quantify, the Company believes that in select markets affecting approximately 200 stores, it is experiencing a temporary sales impact resulting from the inventory liquidation promotions of Office Depot’s 65 stores closings in markets where OfficeMax also operates. Although the quarter just ended Saturday, in light of these recent developments the Company’s preliminary expectation is a loss for the fourth quarter in excess of five cents per share, which is the low end of analysts’ current estimates.
Company Ends Fiscal Year with Strong Financial Position
The Company ended its fiscal year with lower than expected borrowings, net of cash, of less than $100 million, compared with $284 million six months earlier. OfficeMax has $750 million in liquidity through a bank facility and letters of credit and expects to report year-end assets of over $2.2 billion, with liabilities and shareholders’ equity of approximately of $1.2 billion and $1.0 billion, respectively.
OfficeMax Sees Major Long-term Benefits from Office Depot Store Closings
Mr. Feuer stated, We believe once the Office Depot liquidations are concluded, OfficeMax will capture a substantial share of additional business on a sustained basis. Approximately 20 OfficeMax markets are expected to benefit from this competitor’s closings. The biggest benefits will come from Office Depot completely exiting three markets where OfficeMax has the dominant position: Phoenix, Columbus, Ohio and Cleveland.
Industry Growth Opportunities
Mr. Feuer stated, The office products superstore industry has experienced one of the most meteoric growth cycles in retail history. The industry is now entering a new stage of what we believe will be more rational growth. OfficeMax’s plan is to focus on store productivity, return on invested capital, cash flow and becoming a single-source service provider to our primary target markets of small- to medium-sized businesses and home offices. The halcyon days of growth are now behind us but sustained store expansion will continue for many years to come on a strategic and opportunistic basis. OfficeMax intends to solidify its position in its dominant markets and grow its store base in other cities where the Company is second in terms of number of stores. Another focal point of OfficeMax’s growth strategy will be the total integration of all of its channels including e-commerce and catalog with its ‘brick & mortar’ operations.
Results of Real Estate Evaluation
OfficeMax said even after this year’s store closings, the Company will continue to have the greatest domestic geographic breadth with nearly 950 locations in 49 states, Puerto Rico and the U.S. Virgin Islands. The stores being closed represent those that are no longer economically viable for a variety of reasons including changes in retail trading areas. OfficeMax has recently adopted a very stringent, disciplined methodology to monitor stores on an on-going basis and act upon those sites that in the future do not meet the Company’s performance criteria.
Mr. Feuer added that, in relative terms, the Company believes closing 50 under-performing stores on a base of almost 1,000, is not excessive. In future years, the Company anticipates closing or relocating approximately 5 to 10 superstores annually.
Fiscal 2001 and Future Outlook
OfficeMax said that the fiscal year just ended was the most difficult in its history, primarily because of the economic slowdown in the second half of the year, combined with the expenses and efforts associated with the implementation of a myriad of major infrastructure development programs, including a supply-chain management program, an SAP enterprise resource planning system and its category profit improvement initiative, which focuses on a new vendor purchasing operating model.
Mr. Feuer added, The bottom line is the Company stayed the course during this past year even though it meant a deliberate sacrifice of immediate profitability in order to ensure long-term growth. The good news is that a majority of our costly infrastructure initiatives are either completed or will be wrapped up in the first half of this year. We have attempted to put as much of the costs for these undertakings behind us in fiscal 2000. We believe our opportunities to resume accelerated growth lie just ahead, beginning as early as the third quarter of this year depending on overall consumer and business spending. The Company plans to announce fourth quarter and year-end results including the final charges for store closings during the week of March 5th.
