In retail segment, the first quarter was impacted by a weaker US economy as well as pursuit of long term turnaround initiatives.

- Retail sales declined as the impact of deleveraging both fixed cost of sales as well as operating costs.
- The result was retail operating margin decreased to 2.7% which includes the 20 basis points impact from an unusual item, compared to operating income margin of 5.5% last year. Same store sales decreased 8.7%, primarily reflecting the weaker US economy and the Easter shift.
- The Easter shift resulted in about 1% lower retail sales in this year’s first quarter as the Easter holiday fell in the first quarter this year versus the second quarter last year. However the most significant factor driving retail same store sales is the US economy.

- Independent third party data indicates that the lower sales trend impacting many core electronics and furniture categories for OfficeMax are consistent with broader retail performance.

Sales were harder hit for technology and furniture than supply categories.

- In technology which represented 53% of retail sales, the company experienced double digit negative same store sales declines in business machines as well as PCs and laptops, that performed relatively well in the first quarter last year due to the Microsoft Vista rollout.
- One relatively strong technology subcategory was ink and toner, which generated positive same store sales, benefitting from targeted marking programs and enhanced in store presentations. Furniture category which represented 9% of total retail sales experienced the largest same store sales decline, reflecting slower consumer and small business spending for these discretionary higher average ticket purchases.

- Supplies and paper category which includes ImPress represented about 38% of retail sales. Supplies and ImPress sales were impacted by lower customer traffic counts as well as some ImPress promotional and advertising events in the first quarter of last year. This still outperformed technology and furniture in same store sales.
- Retail segment gross margin decreased to 28.5% from 29.3% last year, due mostly to higher fixed occupancy costs and lower vendor income levels, partially offset by a sales mix shift.
Higher fixed cost and gross margin were due to deleveraging occupancy costs for new stores and same store sales decline. Retail generated lower vendor income levels in the first quarter versus last year due to lower inventory purchases to manage the lower sales levels and more efficient inventory management.

- The mix shift was to a higher percentage of supply category sales at typically higher gross margin rates and a lower percentage of technology categories which typically carry lower gross margin rates. As a result of more targeted promotional strategy and the mix shift, the company improved point of sale gross margins with increases across all major product categories.
- Retail operating expenses as a percent of sales increased to 25.8% from last year. The 20 basis points of increase due to unusual items related to severance for the restructuring of retail field and ImPress management organization. The remainder of the increase was due to deleveraging of fixed operating costs for new and existing stores, partially offset by reduced incentive compensation expense.

The company completed the conversion to a single inventory forecasting system which has continued to improve ability to forecast demand across businesses.

- In-store stock metrics have improved even while the company has reduced inventory per store. To offset the higher fuel costs across businesses, the company has improved truck cube utilization and it is driving fewer miles for retail store fulfillment.
- Additionally, improved delivery model is enabling reduced routes and trucks, reducing overall delivery miles for contract. In merchandising the company is utilizing customer research to develop appropriate product offerings.
- Private label sales represented 26% of total sales, up from 23% in total in the first quarter last year.

P&L net income was $63.3 million or 81 cents per share compared with net income of $58.5 million or 76 cents per share for the same period last year.

- Results for the first quarter 2008 and 2007 include some unusual items not related to core operating activities.
- Three unusual items improved income by $16.3 million before taxes and $9.8 million after taxes or 13 cents per share.
- Consolidated net income decreased by 5.5% to $2.3 billion from $2.44 billion in the first quarter of 2007.

- Retail segment sales decreased by 5.5% to $1.11 billion compared to the first quarter of 2007.
- Gross margin was 25.5%, down 10 basis points from the first quarter last year reflecting higher contract segment gross margins, offset by lower retail segment gross margins.

- Contract segment sales decreased by 5.5% to $1.2 billion compared to the first quarter of 2007 reflecting a 12.4% sales decline in US contract and a 14.7% sales increase from international contract operations. In local currencies, international contract sales decreased by 0.9%.
- Contract segment gross margins were 22.7%, up 60 basis points and retail segment gross margins was 28.5%, down 80 basis points from the same period last year.
- Operating expense increased to 22.1% of sales, up 100 basis points from the same period last year. The increase in operating expense includes two unusual items totaling $4.2 million or 0.2% of sales. One item is related to a $2.4 million expense recorded in contract segment for the consolidation of manufacturing facilities in New Zealand operations. The other item is a $1.8 million expense recorded in retail segment related to employee severance for restructuring retails field and ImPress management organization.

- Contract and retail segment operating expense increased as a percentage of sales, while the company reduced corporate and other segment expense. Corporate and other segment expense decreased by $4 million to $10.4 million compared to the first quarter of 2007.
- Corporate and other segment expense benefitted from a combination of lower incentive compensation costs and lower legacy company costs, along with a variety of targeted cost savings compared to the same period last year. The other unusual item recorded was income before taxes of $20.5 million related to investment in Boise Cascade LLC.

- Recorded as other income on P&L, this income from Boise Cascade LLC is primarily related to their sale of a majority interest in their paper, packaging and newsprint business that they completed. Investment in Boise Cascade LLC remained on balance sheet as an investment and affiliate of $175 million.
- Effective tax rate decreased to 29.8% from 39% in the first quarter of last year, benefiting from the resolution of certain tax matters, including the release of some tax reserves from the settlement of tax audits.

The company ended the first quarter 2008 with inventory of $33.7 million lower than at the end of the first quarter 2007.

The decrease is primarily related to lower inventory per location in both retail and US contract, partially offset by store growth and an increase in international contract inventory mostly due to foreign currency exchange rates.

- Inventory per store decreased by approximately 15% compared to the same period last year, benefitting from supply chain and inventory management initiatives. Inventory turns decreased to 6.4 times from 6.7 times in the same period last year, primarily due to lower turns from new stores as they ramp up productivity.
- Accounts payable at the end of the first quarter of 2008 were $9.6 million lower than the same period last year, primarily reflecting the timing of vendor payments and lower inventory levels. Accounts receivable at the end of the first quarter of 2008 were $123.8 million higher than the same period last year, primarily as a result of terminating accounts receivable securitization program on July 12, 2007, with the simultaneous restructuring of a revolving credit facility.

- By amending and restating revolver, the company expects improved financing terms and lower total cost. At the end of the first quarter of 2008, under amended $700 million revolver, the company had $582 million available reflecting available borrowing base of $652.6 million, no borrowings and $70.5 million of letters of credit issued under the revolver.
- At the end of the first quarter of 2008, the company had total debt excluding the timber securitization notes of $368.3 million and cash and cash equivalents of $211.4 million. The company calculates total debt excluding the $1.47 billion of timber securitization notes, since recourse on the notes is limited to $1.635 billion of timber installment notes receivable.
- The company generated $142.4 million of cash from operations, an increase of $223.3 million from the first quarter of 2007, primarily due to improved inventory and accounts payables levels. Capital expenditures totaled $33.8 million.

Fiscal 2008 Outlook