The OfficeMax management team says it is "confident" that the strategies it has laid out in its 2006 turnaround plan will provide the company with the required boost.
The plan centres around three main cornerstones: improving the corporate infrastructure through key initiatives in supply chain and information systems; boosting operating performance in the retail and contract businesses; and delivering financial performance through a combination of cost-cutting and allocating capital for growth.
Chairman and CEO Sam Duncan, who in his opening address described 2005 as "a challenging year coupled with distractions", said the secret to creating shareholder value is in "driving top line sales" in both ‘Max’s contract and retail channels – which account for one-third and two-thirds of its sales respectively – through a more effective supply chain.
Review
In 2004, OfficeMax posted a mere 1 per cent consolidated return on sales, compared to a 4 per cent return at Office Depot and an 8 per cent return at Staples. But Duncan is keen to blame this "performance gap with peers" on "historical execution rather than structural issues".
So how will ‘Max aim to boost sales? Just a few weeks ago, the firm announced plans to close 110 stores in the US and five in Canada. Duncan said at the time that the decision to close the US stores, which was "based on a comprehensive review of the real estate", has not changed the company’s optimistic outlook, because the stores earmarked for closure were unproductive and there are plans for 70 additional stores in strategic site locations that are scheduled to open in 2007.
The new store prototype, called Advantage, which will come in "multiple store sizes", is also expected to increase sales productivity by store. Within these stores, of which there are eight or nine already, there are plans to grow print and document services, ink refill centres and, eventually, to expand product portfolios to include less consumer-focused and more business-focused products, and a bigger amount of private label. The "more loyal and less costly" small business segment will be the principal target of the expansion.
On the contract side, division president Mike Rowsey outlined plans to continue the focus on the middle market and other high-growth, high-return customers; extend the product range; and evaluate international operations, expanding sales operations by over 100 people, while lowering costs significantly. "We are not pleased with the performance of our contract business in 2005," says Rowsey. "There is plenty of opportunity in 2006, which will put us in a position to build in 2007 and beyond…if a process does not add value, it must be eliminated."
OfficeMax has not disputed that a turnaround will take time. This year will be the "transition year", it claims, when the company hopes to get somewhere between "breaking even" to "slightly positive".
If OfficeMax is able to break even with its shareholders this year, this in itself will be an achievement, given the turbulent relationship it has enjoyed with its largest shareholder K Capital of late. But while many shareholders are likely to welcome the clear goals laid out by ‘Max in the turnaround plan, others will remain sceptical.
Challenging
After the webcast in which ‘Max detailed its plan, a former shareholder told OPI that he was not at all impressed. He claimed: "OfficeMax did not allow shareholders to ask questions, it was sell-side analysts."
Dan Binder, SVP of Buckingham Research, echoed the voice of many industry observers when he said that he believed the presentation hit on key issues that OfficeMax needs to address, but that questions over execution still linger. "I don’t know the new management well enough to know if they can pull it off, but I expect as is the case with a lot of turnarounds, there is probably a lot of "low hanging fruit" to go after," he says.
Whatever the outcome, this year will be a challenging year for the company if it is to achieve the goals laid out in the plan. If it doesn’t, shareholders may not give the retailer many more chances. Binder adds: "I don’t think the competition is easing up and ultimately there is probably only a need for two in the industry. I think eventual consolidation would still be welcomed by shareholders."
Duncan, who says the retailer has already made "significant progress" since he joined the OfficeMax team, is convinced the company is moving in the right direction. He said: "Two issues I was concerned about when I joined ‘Max ten months ago were the IT systems that were not structured in the best way to run the business and the poor supply chain. Our lead times were longer than our competitors by a significant amount. We are already making headway and next year will be much better."
