Crunch time


With OfficeMax’s announcement this week of store closures and store openings, CEO Sam Duncan says he is "optimistic" about 2006. So are things about to look up?

Last year was truly an "annus horribilis" for OfficeMax.  However, CEO Sam Duncan is obviously determined that 2006 will be different. And on Tuesday, he made his first bold move this year by announcing that 110 OfficeMax superstores would close in the US by the end of Q1 – roughly 11 per cent of ‘Max’s approximate 950 stores throughout the country – and five in Canada. The specific locations have not been announced.


The action will result in total charges of $187 million over Q4 2005 and Q1 2006, but Duncan described the move as necessary evil. On Tuesday he said: "Today’s announcement of store closings marks a difficult but necessary step toward improving our company’s overall performance." 


The closures were not a sign of defeat though. As many as 70 new stores are planned for this year. These, combined with the new design format that is being rolled out among stores in the US, are what Duncan hopes will appease shareholders.


Nevertheless, just a day later on Wednesday, K Capital, ‘Max’s largest shareholder and its major critic in recent months, has called the shake-up insufficient and once again urged the OfficeMax board to sell the company.


In a letter to the board and filed with the Securities and Exchange Commission, the Boston-based fund management company said the next step is "obvious". Abner Kurtin, portfolio manager of the firm, said: "We continue to believe that OfficeMax should be sold. We are confident that a sale will create more value for shareholders than any alternative strategy."


OfficeMax has so far declined to comment on the issue.


Dan Binder, SVP at Buckingham Research, told OPI+ that he thought most shareholders were still looking for a break-up and that he agreed a sale remained the best option for the retailer, although he praised the store closures as "a good start".


K Capital has been pushing for a sale for a while. At the end of last year, it sought to launch a public campaign against OfficeMax as a last ditch attempt to get the retailer to either boost value or sell up. In a previous letter to the board in November, it had criticised the company for its underperformance and made calls for a detailed turnaround plan.


At the time, a spokesperson for a previous shareholder, who has now sold its stock, told OPI+ that he agreed the business was problematic and the shareholders were right to be outraged. "OfficeMax keeps announcing plans to improve levels of productivity – such as the roll-out of a new store design and improvements to its delivery services – but nothing ever comes to fruition," he claimed. 


K Capital has made it clear that it will not pursue a proxy contest, so it may be up to one or more other shareholders to pick up the torch.


Binder believes that the board is unlikely to agree to a sale on its own. "Without getting new board members that favour a break-up when elections come up, it may be tough getting this company to put itself up for sale," he said. "We haven’t got the big turnaround plan yet, but my, the company has a lot of work ahead."


Duncan will certainly have a lot more work to do to keep shareholders happy in 2006.