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ITASCA, IL-The divesture of its paper business and slumping sales in its retail outlets led Office Max to post a $21.5 million net loss, or 28 cents per diluted share, during the second quarter of 2005.

The nation’s third-largest office-products retailer had profits of $47.9 million, or 53 cents per share, during the same quarter last year but company officials said lower sales in all retail categories, including its downscaled catalogue division, and the divestiture of its paper and forest products business drove second quarter numbers for 2005 into the red.

“Overall, Office Max operations are strong but we do have our challenges,” Sam K Duncan, the company’s president and chief executive officer told investors and analysts in a conference call Wednesday.

Sales for the three months ending June 25 were $2.1 billion, compared with $3.4 billion for the same period a year earlier. The sales decline was largely due to the inclusion of sales from the company’s Boise Building Solutions and Boise Paper Solutions segments, which the firm sold off in October, 2004.Duncan blamed the lackluster sales in Office Max’s retail division on a decline in advertising which was implemented in order to reduce costs and focus the company on its small business clients.

While the firm’s print and document services division showed strong growth and long-term potential, Duncan said its contract business, which outpaced second quarter expectations, suffered from flat operating margins compared to prior years. Catalogue sales also declined, he said, due to a reduction in the company’s catalogue distribution while corporate sales of special items remained flat.

But there was some good news. New and renewed contracts brought growth to Office Max’s contract service business and international contracts in Australia and New Zealand continued to perform well. Canadian operations, however, continue to be challenged by gross margin contract pressure.

“Despite the challenges facing OfficeMax, we feel positive about our goal of improving execution and the direction for the company,” said Duncan. He noted that new initiatives are currently in the works to streamline operations and enhance productivity and customer service in the firm’s nearly 1,000 stores. Those changes, along with a review of its real estate portfolio and the opening of approximately 20 new stores in 2005, should help the numbers improve, the company said.

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