OfficeMax Inc. (NYSE: OMX) reported results for the first quarter ended April 1, 2006. For the first quarter, the company reported a net loss of $25.1 million, or $.37 per diluted share, compared with a net loss of $5.3 million, or $.07 per diluted share, in the first quarter of 2005.
Results for the first quarter of 2006 include a loss from discontinued operations and charges related to previously announced store closings and our headquarters consolidation, which are not expected to be ongoing. A full description of these special items and a reconciliation to the company's reported GAAP financial results are included in this press release. For the first quarter of 2006, net income before special items was $55.7 million, or $.77 per diluted share, compared with net income before special items of $17.7 million, or $.17 per diluted share, in the first quarter of 2005.
"Our first quarter 2006 operating results were quite strong, including substantial gross margin expansion and strong expense control in both our Contract and Retail segments," said Sam Duncan, Chairman and Chief Executive Officer of OfficeMax. "In our Contract segment, through a focus on profitable growth and cost efficiencies, we achieved significant improvement in both our domestic and international operations. And in our Retail segment, we saw significant improvement through a more productive promotional strategy and effective cost control. With these first quarter results, we continue to believe that OfficeMax is positioned to achieve the 2006 goals that we outlined in our turnaround plan on January 24, 2006."
Contract Segment
OfficeMax Contract segment sales increased 9.5% in the first quarter of 2006 compared to the first quarter of 2005 reflecting increases in both U.S. and international operations. U.S. Contract sales in the first quarter of 2005 were affected by a change in the fiscal quarter end to conform to our domestic operations' fiscal reporting period. As a result, U.S. Contract sales benefited from five additional selling days in the first quarter of 2006 compared with the first quarter of 2005. Adjusting for the difference in selling days, and excluding the impact of acquisitions in the international Contract businesses, total Contract sales were flat in the first quarter of 2006 compared with the same period in 2005.
Contract segment operating profit increased to $67.0 million in the first quarter of 2006 compared to $18.4 million in the same period last year. Contract segment results in the first quarter of 2005 included a $9.8 million charge related to a legal settlement with the Department of Justice. Excluding this special item in the first quarter of 2005, operating profit increased by $38.8 million in the first quarter of 2006 due to sales growth, improved gross margin and expense controls. Contract segment gross margin increased to 23.2% in the first quarter of 2006 from 22.3% in the first quarter of 2005. Contract segment operating profit in the first quarter of 2006 benefited from targeted cost reduction programs, including the impact of our distribution center consolidation, significant improvement in our Canadian operations, and contribution from our middle market business and sales force redeployment initiatives.
Retail Segment
OfficeMax Retail segment sales decreased 0.5% in the first quarter of 2006 compared to the first quarter of 2005, with same-store sales growth of 1.2%. OfficeMax announced on January 10, 2006 our intention to rebalance our real estate portfolio, and during the first quarter of 2006 we closed 109 underperforming domestic superstores. Sales were negatively impacted by significantly lower sales from these stores as they prepared for and closed during the first quarter. Excluding these closed stores, same-store sales increased 2.2% in the first quarter of 2006 compared with the same quarter last year. Sales for the first quarter of 2006 benefited from positive same- store sales in nearly every product category, with continued strength in Print and Document Services.
Retail operating profit for the first quarter of 2006 included a charge of $98.6 million related to the 109 domestic retail store closures. Excluding this item, operating income increased by $37.7 million to $60.6 million in the first quarter of 2006 compared with the same period in 2005. The improvement in Retail segment operating profit in the first quarter of 2006 compared with the prior year was due to improved gross margin and expense controls. Retail segment gross margin increased to 28.6% in the first quarter of 2006 compared with 26.4% in the first quarter of 2005, with improvement in all major product categories. Retail operating profit in the first quarter of 2006 benefited from targeted cost reductions including reduced store labor costs and advertising and marketing expenses.
During the first quarter of 2006, OfficeMax opened 6 new retail stores and closed 109 stores, ending the quarter with 867 retail stores compared with 940 stores at the end of the first quarter of 2005.
Corporate and Other Segment
The OfficeMax Corporate and Other segment includes support staff services and certain other expenses that are not fully allocated to the Retail and Contract segments. Corporate and Other segment results in the first quarter of 2006 included expenses of $15.7 million related to the previously announced headquarters consolidation. Corporate and Other segment results for the first quarter of 2005 included a charge of $11.3 million, reflecting costs for one- time severance payments. Excluding these special items, Corporate and Other operating expense increased by $5.9 million to $21.7 million in the first quarter of 2006 from $15.8 million in the first quarter of 2005, due primarily to increased benefits expense, partially offset by reduced legacy company costs.
During the first quarter of 2006, OfficeMax generated $71.9 million of cash from operations and used $23.3 million for capital expenditures. At April 1, 2006, OfficeMax reported net debt of $383.4 million, reflecting total debt, excluding timber securitization notes, partially offset by cash and equivalents.
