The Zacks Analyst Blog Highlights: OfficeMax, Office Depot, Staples, Rite Aid and Wal-Mart Stores

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Dec 28, 2011, 09:30 ET

CHICAGO, Dec. 28, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include OfficeMax Inc. (NYSE: OMX), Office Depot Inc. (NYSE: ODP), Staples Inc. (Nasdaq: SPLS), Rite Aid Corporation (NYSE: RAD) and Wal-Mart Stores Inc. (NYSE: WMT).

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Here are highlights from Tuesday's Analyst Blog:

OfficeMax Walks the Tightrope

We have a long-term Neutral recommendation on OfficeMax Inc. (NYSE: OMX) with a price target of $4.75. The company provides office supplies and paper, print and document services, technology products and solutions as well as office furniture to business firms, government organizations and other retail consumers.

The Balancing Act

As the economy continues to be sluggish, consumers and small businesses remain frugal about big-ticket spending like business machines and other durables. Therefore, we believe that the demand for office products is closely tied to the health of the economy.

Consequently, OfficeMax is repositioning itself to keep afloat in a difficult consumer environment. The company is containing costs, closing underperforming stores and focusing on innovative products and services, which should all contribute to margin improvements. Further, the company also anticipates regaining operating margins of more than 3.8% by 2015.

The company also focuses on optimal store sites in order to boost store productivity. OfficeMax is also committed to improving sales per square foot by increasing customer traffic and converting it into potential buyers by targeted advertising, ongoing sales training and customer-oriented initiatives. The company has initiated control center technology services to assist customers with PC maintenance or removal of viruses.

Bottom-Line Better than Forecast

OfficeMax posted better-than-expected third-quarter 2011 results. The quarterly earnings of 25 cents a share beat the Zacks Consensus Estimate by a penny, and rose 8.7% from 23 cents earned in the year-ago quarter despite witnessing a low-single-digit drop in the top-line. The company's active management of costs provided the much-needed bottom-line cushion.

Economy Remains a Headwind

The recovery in the economy still lacks luster. As a result, consumers and small businesses still remain wary of spending. Challenging macroeconomic conditions are making business difficult for office suppliers such as OfficeMax, Office Depot Inc. (NYSE: ODP) and Staples Inc. (Nasdaq: SPLS). These companies are still seen to be grappling with soft demand.

OfficeMax experienced a decline in the top-line during the third quarter of 2011. Total sales dropped 2.1% to $1,774.8 million from the same-quarter last year, and also fell short of the Zacks Consensus Estimate of $1,808 million, a reflection of the tough economy. Management now expects sales for fiscal 2011 to be marginally lower than the last year.

Let's Conclude

No one can predict the future, but genuine efforts are being implemented to combat the tough economy. Business budgets remain tight, consumers remain cautious and companies are trying hard to navigate through the challenging maze. Going by the pulse of the economy and given the pros and cons, we prefer to have a long-term Neutral rating on the stock. However, OfficeMax holds a Zacks #4 Rank that translates into a short-term Sell rating.

Rite Aid Retained at Neutral

We have maintained our long-term Neutral recommendation on Rite Aid Corporation (NYSE: RAD). Headquartered in Camp Hill, Pennsylvania, the company is the third largest retail drugstore in the U.S. based on revenues and number of stores. With 4,714 stores, the company operates in 31 states across the country and in the District of Columbia.

A recent trend in the U.S. is a growing demand for generic drugs. Generic (non-brand) drugs are less expensive but generate higher gross margin. The company is expected to expand its generic drug portfolio in order to boost its top-line as well as market share. Besides, Rite Aid has an edge over its competitors as it is the third largest retail drugstore in the U.S.

Moreover, strong top-line performance and lower operating expenses boosted Rite Aid to post a better third-quarter 2012 results. The quarterly loss of 6 cents per share not only improved from the prior-year loss of 9 cents but also outpaced the Zacks Consensus Estimate loss of 12 cents.

The company also registered a marginal revenue growth of 1.8% from the prior-year period. Consequently, Rite Aid now expects net loss in fiscal 2012 to be in the range of 37 cents to 50 cents per share, instead of 40 cents to 56 cents forecasted earlier.

Further, in an effort to expand its pharmacy and clinical services, Rite Aid has applied additional resources such as Wellness+ program for diabetes and Flu Immunization program. These programs will enable the company to increase its customer base as well as long-term profitability.

In addition, the company took several cost-cutting initiatives including centralized indirect procurement of drugs, reducing supply chain costs, reducing debt, etc., which will certainly benefit the company to boost its bottom-line.

However, in the United States, pharmacy sales growth has slowed down due to longer FDA approval process, drug safety concern, loss of individual health insurance resulting from unemployment and an increase in the use of non-brand drugs, which are less expensive but generate higher gross margin. These factors may undermine the company's future growth prospects and profitability.

Additionally, Rite Aid is a highly leveraged company (with approximately 162% debt-to-capitalization ratio in fiscal 2011), limiting cash flow availability and its ability to obtain additional financing. The debt burden from the Brooks Eckerd acquisition has increased interest expense, which has been weighing upon its bottom-line. This has put the company at a competitive disadvantage relative to its competitors with less indebtedness.

Furthermore, Rite Aid's generic drug sales are negatively affected by Wal-Mart Stores Inc.'s (NYSE: WMT) strategy of entering the retail generic drug market. Due to Wal-Mart's broad array of manufacturers in India, Israel, and the U.S., the mass merchant can offer generic drugs at a discounted price compared with the average $10 generic drug co-pay.

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