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OfficeMax shunning low-cost PCs

The computer store chain says it is eschewing low-cost PCs and concentrating on its core business as a way to boost earnings.

Computer and office product superstore OfficeMax said today that it was eschewing low-cost PCs as a way to boost earnings.

OfficeMax reported today that first-quarter earnings were up 27 percent from the same period last year to 19 cents a share, up from last year's 15 cents per share.

The retailer, which has more than 850 stores nationwide, said sales in its "core business segment" increased 15 percent to a record $1.11 billion. This part of OfficeMax sales consists of office supplies, furniture, business machines, peripherals, and CopyMax printing services.

Total consolidated sales increased 11 percent to a record $1.179 billion from $1.061 billion in the first quarter of 1998, the company said.

However, sales for the "computer business segment" fell by 27 percent to $67.8 million from $92.9 million during the same period last year.

"The improvement in earnings is the result of our continued focus on enhancing gross profit margin...and the reduction in low or no margin computer promotions compared to last year," said Michael Feuer, OfficeMax's chairman and chief executive in a statement.

OfficeMax has made a "deliberate decision to continue to eliminate low-end, low, or no-profit computer promotions," the company said in a statement.

"This is not surprising, [profit] margins are so low on low-cost PCs," said Schelly Olhava, an analyst at International Data Corp. Olhava said there are two schools of thought: one says low-cost PCs bring in more customers and therefore drive sales overall; the other says they clobber earnings. "OfficeMax has chosen to focus on profits," she said.

The preponderance of low-cost PCs at other retailers such as CompUSA has also been cited as negatively impacting earnings.

The office superstore's computer sales--consisting of desktop computers, laptops, and computer monitors--registered a decrease of 27 percent to $67.8 million from $92.9 million for the same period last year. "Same-store sales" declined 40 percent for the 13-week period "resulting from an approximate 13-percent reduction in average selling prices for computers."

"OfficeMax has modified its computer assortment to increase its focus on the business customer/higher-end consumer and home office segment," the company said in a statement.

Olhava said for stores like CompUSA low-cost PCs are not as big a negative as they might appear. "They drive traffic to the stores and often people are 'upsold' to more expensive machines." She adds that PCs are often purchased with a printer, monitor, and items like scanners which help the retailer recoup the lower profits on the PC itself.

OfficeMax said that because of the deemphasis of "no-profit" computer sales schemes, computer sales recorded an improvement in gross profit of more than 80 basis points over the first quarter last year. However, the lower sales volume, "made it difficult to leverage various fixed operating expenses. As a result, this segment, as expected, incurred a net loss of $7.3 million, or ($0.06) per share versus a loss of $8.3 million, or ($0.07) per share, for the comparable period in the previous year."

OfficeMax did not return calls for comment.