Positive signals for the power channel

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It’s a busy time for all three of the biggest retailers in office products.
Take a tour around the east side of the US and you’ll discover interesting news from the big boxes that has set tongues wagging throughout the channel.
Staples has reported strong sales in its international division, Office Depot has been given a clean bill of health by analysts and, to cap it off, OfficeMax is the subject of renewed speculation about a takeover.
The journey begins in Massachusetts where we find Staples announcing a total company sales increase of eight percent to $4.6 billion, compared to the first quarter of 2006, with net income rising 12 percent year-over-year to $209 million.
This was despite another flat performance in North America where sales only grew three percent, in contrast to the firm’s North American delivery business and its international segment. Profits abroad grew 47 percent, reflecting sustained progress in the firm’s improvement efforts in Europe and continued investment in Asia and South America.
The company opened 24 new stores in the US, three new stores in Europe (in Germany, Portugal and Belgium) and added 17 stores in China – including those in the recent Pei Pei acquisition. The company now operates 1,927 stores worldwide, meaning the fast-growing firm is surely only a few months away from hitting the 2,000 mark.
Elsewhere, in sunny Florida, Citigroup and Depot shared a table once more in their latest round of meetings. It seems the analysts have renewed confidence in the retailer’s financial prospects.
Analyst Bill Sims and his colleagues recently met with members of Depot’s management team including EVP and CFO Pat McKay and director of investor relations Ray Tharpe. Sims said: "While we believe the second quarter selling environment is nearly as challenging as the first, we walked away from the meetings even more confident in Office Depot’s ability to achieve at least 300 basis points of margin expansion over the next four to five years."
He continued: "We are maintaining our ‘buy’ rating and $52 target. While the stock could be dead-money in the near term, Depot is positioned for a solid second-half recovery. Second quarter sales weakness is likely already discounted in the shares. We see downside risk limited to the $33-$34 range."
And the Citigroup retailing hardlines analysts are predicting more rational store growth in 2007. According to Sims: "It sounds like management may be slowly backing away from their 150 store growth plans for 2007. Management indicated that they have only officially committed to 100 stores so far."
He added: "We believe a slowdown in unit growth would be viewed positively by the market."
That being said, after Odland commented on a softening in small business spending during Q1, Citigroup found no evidence of a recovery being underway in Q2. Sims said: "Small and medium business spending doesn’t sound like it has recovered from the first quarter, however pricing in both contract and retail appears rational."
Citigroup also suggests that Depot might be preparing for industry consolidation. "Depot continues to maintain an unlevered balance sheet to be nimble enough to pursue a ‘transformational event’ should the opportunity present itself."
Which leads us neatly to Illinois and recent speculation about a potential takeover of OfficeMax. The company reported Q1 net income of $58.6 million, or diluted EPS of $0.76, compared with a net loss of $25.1 million, or diluted EPS $0.37 in 2006.
Contract segment sales increased by 2.7 percent to $1.3 billion, which is said to reflect sales growth in both US and international contrac t operations. The firm’s retail segment saw sales decrease by 1.8 percent to $1.2 billion, which is blamed on 109 strategic store closings completed during the period.
The company said that its Q1 results were affected by a $1.1 million loss on the sale of the company’s contract operations in Mexico to its 51 percent-owned Mexico joint venture.
Whispers of an acquisition by Staples or Depot can be heard doing the rounds, with Credit Suisse analyst Gary Balter suggesting on the AP newswire that the "time might be ripe for acquisitions in several hardline retail sectors".
Balter believes an OfficeMax acquisition by its rivals Depot or Staples could help cut infrastructure and purchasing costs and speculated that such a takeover could already have been considered by the firm’s leading competitors.
Balter said: "Depot management has commented on ‘maintaining balance sheet flexibility’, while OfficeMax has taken what we see as an overly pessimistic view of its own business leading to a sharp sell of its shares."
He added: "We have already seen consolidation in the most mature segments of retailing, including supermarkets and department stores, and we believe that we are on the verge of this spreading to at least three hardline sub-sectors: office products, automotive products and bookstores."
The gossip boosted OfficeMax shares by almost eight percent, but Citigroup put a dampner on things by telling OPI that while it understands the winds of change that are driving the rumour mill it doesn’t see any deal actually happening.