Mark One Up for OfficeMax

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In an encouraging start to this holiday-shortened week, OfficeMax (NYSE: OMX) used its highlighter to show that retailers can manage earnings growth despite a soft consumer environment.

The company reported fourth-quarter earnings per share of $0.65, up 35% from the previous year (after adjustments for one-time items in both years). This far exceeded analyst consensus estimates of $0.52. While sales were slightly below expectations, the office-products retailer benefited from expense reductions that more than made up for the sales shortfall.

Total sales for the quarter declined 2.6%. In both segments, sales were down: In retail stores, they were off 4.5% on a 7.3% slide in comparable-store sales, while contract sales slipped 0.8%.

Management noted that consumer demand for its products was soft, but also said that it has taken a disciplined approach to pruning small, unprofitable contract customers, and intentionally reduced fourth-quarter promotional activity to improve margins.

Overall margins were flat with the previous year at 25.6% of sales. But this actually represents improved margins on products sold. OfficeMax includes store occupancy costs in its gross margin, and the lower sales brought significantly less leverage on its expenses.

The company really sharpened its pencil on operating expenses, driving them 5% lower than the previous year -- an improvement of 60 basis points. Part of the savings stems from a one-time expense last year for consolidating headquarters, but most of the savings came from ongoing operations.

I haven't favored the office-product segment for a while now, although on a P/E-multiple basis, both OfficeMax and Office Depot (NYSE: ODP) look dirt cheap. Three players, including Staples (Nasdaq: SPLS), operate about 4,000 stores in North America, and the market looks to be near saturation.

With the commodity nature of the business, it's also ripe for big discount players like Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Costco (Nasdaq: COST) to siphon off sales in key items.

Staples continues to look like the strongest play in this segment, with its dominant market position and innovative "easy button" commercials. But I have to give OfficeMax a check mark this quarter for solid management in a tough environment.

For related Foolishness:

• Last year, while the dust was settling at OfficeMax...
• ... Staples made it look easy.
• But some Fools think Costco has the best business model.