A Paper Jam at Office Depot, OfficeMax

Like a stubborn, broken copier, office retail chains just can't seem to be fixed. Both Office Depot (NYSE: ODP  ) and OfficeMax (NYSE: OMX  ) have lost 60% of their value in the past year. Investors can only wonder if productive paper-clip-pushing days will ever return for these two rivals.

Last quarter, Office Depot said it would cut down on expenses by cutting back on new store openings, but the effects have yet to be seen. While beating estimates, the company reported a 51% drop in first-quarter net income to $0.29 per share (on an adjusted basis). Sales decreased just 3%, and that number could have been a lot worse. International sales dropped 4%, but in dollar terms finished ahead by 6% because of the falling dollar.

A depressed housing market and lower spending by small businesses were again blamed for poor results in North America. Same-store sales dropped 9%, and the number of small to medium-sized customers in the business solutions segment dropped 12%. Office Depot gets about 26% of its sales from California and Florida, which are tough markets for any retailer these days.

Meanwhile, OfficeMax exhibited more cost discipline last quarter, but reported 10.5% lower earnings per share (excluding one-time costs) on a 5.5% sales decline. In the U.S. contract segment, sales dropped 12.4%, offset by a 14.7% increase in international sales. The retail business hardly fared better, as same-store sales decreased 8.7%.

No doubt, it's difficult for these office supply stores as small businesses cut spending and retail consumers continue to feel pinched because of a declining housing market, high gas prices, and that whole rigmarole. Even the industry leader, Staples (Nasdaq: SPLS  ) , recently cut its outlook for the fiscal year.

Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) are tough competitors for all retailers, including those in office supplies, yet they manage not to drive each other into the ground by specializing in different consumer demographics. On the other hand, OfficeMax and Office Depot offer little to distinguish themselves from any other dispenser of printer paper and paper clips.

While some investors may be interested in Office Depot or OfficeMax as value plays, I'd cast my lot with Staples, the more predictable industry leader.

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Related Tickers

4/17/2014 4:03 PM
ODP $4.05 Up +0.11 +2.79%
Office Depot CAPS Rating: *
OMX $0.00 Down +0.00 +0.00%
OfficeMax, Inc. CAPS Rating: *
SPLS $12.03 Up +0.14 +1.18%
Staples CAPS Rating: **
TGT $60.00 Up +0.09 +0.15%
Target CAPS Rating: ****
WMT $77.66 Up +0.44 +0.57%
Wal-Mart Stores CAPS Rating: ***

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