Office supply retailer OfficeMax (NYSE:OMX) came through yesterday with a treat for the Halloween season, beating third-quarter earnings estimates by a penny. The company's been in turnaround mode for two years, closing stores and cutting costs while suffering through a year of losses at the bottom line.
Management's turnaround plan appears to be bearing fruit (you can check out third-quarter results in our Fool by Numbers), yet already the stock has nearly doubled for the year. Would it be Foolish to hop on board at this point?
Perhaps I'm a bit leery of struggling retailers after being stood up by Pier 1 Imports (NYSE:PIR), but for now, this one looks like more of a gamble than an investment. For one, competition is heating up among these retailers. While OfficeMax reported flat same-store sales and Staples (NASDAQ:SPLS) has struggled of late, it's Office Depot (NYSE:ODP) that seems to be winning market share. However, one can only reason that OfficeMax and Staples will not stand on the sidelines for long.
Meanwhile, OfficeMax needs to continue cutting costs in a big way. Selling, general, and administrative (SG&A) expenses accounted for 13% of sales, while Staples only spends 4% of sales on the same category. If OfficeMax can't become the lean, mean machine that Staples is, it doesn't stand much of a chance at competing in the long run.
If analysts' estimates of $0.39 come through for the fourth quarter, OfficeMax will earn $2.01 a share for current year. At its current level, the stock is trading for 23.8 times 2006 earnings. Despite its recent struggles, I would likely prefer shares of Staples at 21.5 times earnings because of its excellent long-term record. Yet the value investor in me questions if even that multiple could be a little rich, given the current risks.
Further Foolishness:
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Fool contributor Jason Ramage holds no financial interest in the companies mentioned here.
