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Office Depot Inc (NASDAQ:ODP)
Q2 2020 Earnings Call
Aug 5, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the ODP Corporation's Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would like to introduce Tim Perrott, Vice President, Investor Relations. Mr. Perrott, you may now begin.

Timothy J. Perrott -- Vice President, Investor Relations

Good morning, and thank you for joining us for the ODP Corporation's second quarter 2020 earnings conference call. This is Tim Perrott and I'm here with Gerry Smith, our CEO. I'm also happy to announce that we are joined by Anthony Scaglione, our newly appointed Executive Vice President and CFO, who will provide additional details on our financial results. We're also joined by David Centrella, our Senior Vice President of Financial Planning and Analysis.

During today's call, Gerry will provide an update on the business, focusing much of his commentary on our accomplishments in the second quarter and highlighting how the strength of our platform, financial position and strategy is helping to address the challenges posed by the pandemic and positioning ODP for future growth. Additionally, Gerry will outline and discuss the progress we made in the quarter on our B2B pivot and the key drivers of our business. Anthony will then review the Company's financial results, including highlights of our divisional performance and following Anthony's comments we will open up the line for your questions.

Before we begin, I need to inform you that certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the Company's current expectations concerning future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially. A detailed discussion of these risks and uncertainties are contained in the Company's filings with the U.S. Securities and Exchange Commission.

During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release, presentation slides that accompany today's comments and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investor.theodpcorp.com. Today's call and slide presentation is being simulcast on our website and will be archived there for at least one year.

I will now turn the call over to ODP's CEO, Gerry Smith. Gerry?

Gerry P. Smith -- Chief Executive Officer

Thank you, Tim, and good morning to everyone joining our call today. We appreciate you joining us during what we expect has been a challenging time for most. We hope that all of our listeners and their families are safe and healthy. I'm happy to be here today with you to discuss results for the second quarter and the significant progress we've made on our B2B pivot, however, before I do I'd like to introduce you to a new member of our team, Anthony Scaglione who has joined us as Executive Vice President and CFO.

We are thrilled that Anthony has joined our team. He brings a wealth of experience and expertise in the B2B space, previously leading the the finance function of -- as CFO of ABM Industries, a leading enterprise facility services company. Among the attributes that was extremely attractive to us was Anthony's leadership role in developing and executing ABM's long-term strategic transformation. We are excited to have Anthony as a senior member of our team and we look forward to his leadership in executing our transformation. Welcome, Anthony.

As I begin my discussion on our accomplishments for the quarter, I'd like to start off with our continued commitment to safety. Safety of our associates, customers and families in our communities continue to remain our top priority. We have continued the actions we took in the early stage of the outbreak to enhance the safety protocols to help protect our employees and create a safer work environment for our customers. Having been classified as an essential business operation, our businesses remained open throughout the pandemic.

In our retail stores, we've installed counter shields and require employees to use masks and gloves to help protect customers and employees during interactions. We have continued our curbside pickup option at nearly all of our locations. We also sanitize our facilities and required our employees in our supply chain and distribution operations to wear Personal Protective Equipment and continue to promote social distancing by staggering shifts and increasing space in common areas.

Our tech support teams at CompuCom transitioned to a work-from-home environment very early in the crisis as they continue to provide uninterrupted support for many of our customers who transitioned to a distributed workforce. Taking these actions in leveraging our various channels allowed us to meet our customer needs across the platform. We're also proud of our support for our local communities during this challenging times.

We donated $1.5 million to Feeding America's COVID-19 Response Fund, supporting local food banks across the country as they distribute food to communities in need. We also kicked off our Keep School Going campaign, connecting students with the tools or resources they need to learn from anywhere and teachers with the supplies they need to continue to engage and inspire students.

Turning to 2Q highlights. As expected, the business environment during the quarter was very challenging due to the impacts of the COVID-19 outbreak. While the effects of the pandemic negatively impact our results, the power of our B2B platform and diverse routes- to-market helped us offset some of these impacts enable us to deliver positive adjusted operating results, preserve cash and maintain a strong balance sheet and liquidity position.

We continue to expand our value proposition with new product offerings and continue to win new business in the quarter. We also made significant progress on our B2B transformation plan, improving our foundation and building our capabilities to drive long-term profitable growth. As we all witnessed the COVID-19 pandemic has caused significant disruption for businesses and has created unique challenges in the daily lives of our consumers. State and local ordinances and stay-at-home orders have resulted in many businesses and schools pausing or restricting operations during the quarter or switching to a remote environment for activities.

Employees and consumers have adhered to stay at home and restricted travel orders, making every day life a challenge. While this has created one of the most difficult business and social environments in our nation's history, our teams have risen to meet the unique challenges the situation has presented. Our actions ensured businesses and consumers were able to procure the products and services they need across our platform.

The combination of strong execution and the power of our ecosystem along with our balanced channel approach and low-cost model helped us drive the results in the quarter. I'm very proud of our entire team for their efforts in safely servicing customers, leveraging our supply chain and service delivery capabilities to meet our customers' needs and giving back to the community during this time of need.

Aligned with our strategic objectives, we made significant progress across our platform on a number of fronts. First, we completed our holding company reorganization, created a new publicly traded company named the ODP Corporation. This action simplifies our corporate structure and begins to better align our assets with respective operating channels creating more flexibility for the future. We initiated our Maximize B2B restructuring plan, a multi-year plan designed to enhance growth in our B2B platform, reduce retail exposure, while continuing to drive a variable, low-cost model.

We also strengthened our senior management team with the appointment of new team members with significant experience in managing transformation efforts in the B2B space. In addition to Anthony, we also appointed a Chief Technology Officer, Terry Leeper, who has led the technology functions at Amazon Business and Microsoft. Terry will help accelerate our digital transformation, both at the core of who we are today, into the development of new channels and markets. We're excited about the addition of both these leaders and look forward to their help in executing our strategy.

We also continue to expand our value proposition through expanding our product offerings and leverage our global sourcing and supply chain capabilities, resulting in expanding our customer base and positioning us for future growth. Let me now give some additional insight on our execution in the quarter and how our ecosystem and balanced routes-to-market approach help us address the challenges in a difficult environment.

I will start by highlighting this as shown on Slide 5. We have built a powerful and agile platform of assets to meet the needs of our customers, which has helped us achieve balance during the challenging business environment in 2020. This ecosystem is a driving force behind our company and the foundation of the B2B platform that we are enhancing and positioning to drive profitable growth in the future.

It all starts with our global sourcing and distribution presence and capabilities built upon the relationships that have been developed over decades. We source and work with vendors around the globe to procure cost effect [Technical Issues] to meet the needs of our customers. Our capabilities are extremely agile, having the flexibility to adjust to the most cost effective sourcing scenarios, allowing us to capture new opportunities very quickly. At the heart of our ecosystem is our unique and expansive supply chain and services capabilities.

As one of the larger in North America, our supply chain consists of multiple distribution centers, cross-docks, a private fleet of close to 1,000 vehicles and established multitude of third-party and national freight arrangements. Our supply chain has a unique capability to reach nearly all of our customers the next day and directly to the desktop for enterprise customers. Few supply chains in North America have this capability, enabled us to consistently and reliably serve customers no matter what channel they choose for our products and services.

To expand upon that we combined our sourcing supply chain capabilities with balanced routes-to-market to reach our customers, we created a platform that our customers can access to most appropriately satisfy their needs. We have direct supplies serving our large enterprise customers, a robust e-commerce platform serving both businesses and consumers, many retail locations supporting those products and services and about 6,500 technologies support personnel including our tech field force serving the technology and service support needs of our customers.

We also continue with our strategy of acquiring small regional distributors with attractive business customer bases and assets increasing our reach in the marketplace. This broad diverse channel approach is proving to be a very important asset during the unusual business environment we find ourselves in this year, providing our customers with options in helping us balance revenue performance.

Our sourcing and supply chain capabilities also provide us with ability to quickly expand the sets of products and services we offer to our customers. Our customers have come to depend on this for the categories such as technology products, cleaning and breakroom, workspaces and furniture, school supplies, copy and print and technology services with CompuCom, we continue to evaluate launching new products and service categories leveraging our capabilities and customer relationships.

In fact, we expanded into a new category during the quarter, Personal Protection Equipment or PPE quickly launching this category meeting our customer needs. This all points to our underlining sourcing and supply chain strength and I'm proud of the team's execution during the quarter. Lastly, we have a very large sales marketing presence throughout North America and has forged strong relationships with business enterprise customers creating strong brand recognition with the consumers built on a reputation for quality and service.

We have an established, high quality customer base including the most well-recognized brand names in the world with about 200,000 large enterprise customers, including many of the Fortunate 500, nearly 10 million business customers and a total customer base of approximately 29 million customers. The combination of all these components gives us a balancing confidence as we navigate the current challenges in front of us as well as we continue to invest in building upon our B2B platform to pursue higher growth in the future.

Now turning to how this is helping us navigate one of the most challenging business environments in our nation's history, please turn to Slide 6 for business highlights. As I mentioned, the outbreak of COVID-19 has created one of the most challenging business environments in recent memory. Business operations and many of our customers have been impacted, along with school closures and stay-at-home orders implemented. As expected, these dynamics created revenue headwinds in each of our divisions as business volumes and consumer activity in general were lower. Traditional enterprise sales volumes dropped on our contract channel related to business and school closures, retail traffic trends were lower and service volumes and project-related work at CompuCom were negatively impacted.

In total, we generated $2.2 billion of revenue, down about 17% in the quarter relative to last year almost entirely due to the effects of COVID. Much of this impact we felt early in the quarter followed by improving trends in May and June. Facing these tough conditions, strong execution by our team helped us mitigate some of the revenue declines and drive positive operating results on an adjusted basis. And I am pleased to say that trend has continued as we sit here today.

In terms of revenue generation our increasingly diverse product portfolio and multiple routes-to-market helped us offset some of the conditions caused by the COVID pandemic. For example, in our BSD division, the COVID-19 outbreak resulted in many temporary business and school closures resulting in a significantly lower sales in our contract channel. However, our diverse channel approach helped us offset some of this impact. At sales our e-commerce channel was up double-digits versus last year as business customers and consumers recognized the convenience of our online presence and supply chain capabilities to safely procure the products to help maintain their business operations.

Our product breadth and diverse channel presence also helped generate demand to help offset some of the impacts from the pandemic. Our retail division continued to drive reasonably strong demand for the quarter for essential products for businesses in homes. Our retail division remained open and operational during the pandemic, generating continued demand for essential products including cleaning and breakroom as well as products to set up home offices and remote learning, including technology and furniture. Buy online, pickup in store or BOPIS sales were up about a 150% year-over-year showing the value of this channel option in the quarter.

While our B2C division saw the largest impact from COVID, we were able to grow certain adjacency categories in the quarter relative to last year. Cleaning and breakroom and technology products all sporting double-digit increases in sales relative to last year, helping to offset lower demand in other categories. In total, our adjacency categories comprised 48% of our total revenue in our BSD division, highlighting again the success of our strategy increase our value proposition to customers and the benefit of a diverse channel mix.

And as I highlighted earlier, our sourcing and supply chain strengths allowed us to quickly identify, initiate and launch a new product category for our business. The PPE category, which includes face masks, face shields, gloves and other personal protective gear. Remarkably, we initiated the launch of this new category within one quarter and have quickly grown sales to about $100 million to-date. I'm very proud of our team in accomplishing this in such a short period of time and the takeaway here is the strength of our platform and the sourcing and execution capabilities we have.

And our team has continued to win new business. Despite the challenges, our value proposition continues to resonate with new customers. In our BSD division, we continue to win customers in both traditional and new areas of business. We have net new customer wins in the quarter and a significant amount of renewals. We also added new customers for our PPE category as well as CompuCom new business wins continue for both service contracts and products, adding about $250 million in expected lifetime contract value during the quarter.

While it takes time to realize this revenue is a strong indication of CompuCom's value proposition but we look forward to returning to growth over the next several quarters. Additionally, our continued focus on driving the low cost business model helped us deliver positive adjusted operating results while we continue to prudently manage cash, maintaining our very strong balance sheet liquidity position. Before I turn it over to Anthony, I want to make a few comments about our focus and position going into the second half of the year.

As discussed, the team has done an amazing job to navigate the challenges created by the pandemic. We have our fingers on the pulse of the business activity and are monitoring across our channel, so we stay agile and continue to leverage our supply chain, our product breadth and our routes-to-market, particularly e-commerce help us continue to drive the business and revenue growth. While we are encouraged by the improving month-to-month performance that we drove throughout the second quarter and quarter-to-date, there continues to be a lot of uncertainty on the overall systemic pace of back-to-work and back-to-school scenarios.

For example, back-to-school season's upon us in Q3, which typically generates an additional 5% or more demand on the top line. As we have witnessed, we are seeing a variety of scenarios playing out regarding school reopenings with some systems electing to lay opening while others opening or deploying a hybrid model. This is uncharted territory for the market and we may have an impact on buying patterns with scenarios ranging from an increase in demand for certain school products, supplies and technologies to establish remote learning to some scenarios showing less demand in certain categories, backpacks for example, if there are prevalent delays in openings.

Outside of back-to-school, we continue to work with our business customers to help them in any scenario when they return to work in a more normal fashion or if they remain remote. As with our successful launch of PPE, we are evaluating new product and service offerings to help support work-from-home and learn-from-home business environments. We believe this bodes well for our BSD business in the long run as we work to expand our value proposition and use our supply chain and distribution capabilities to drive long-term profitable growth.

And in our CompuCom division, despite the near-term impacts from COVID, which continue to the second half of the year, we believe that CompuCom is in the right place, at the right time to leverage their ability to support remote workforces to help maintain business continuity for our customers. Because of this uncertainty across many of our channels, we remain cautious as we head into the second half of year and our guidance for 2020 remains withdrawn. That said we remain in a position of strength to not only continue to address these challenges but also to position us for future growth. On the foundation of a very strong balance sheet, we will continue to drive our low cost business model and manage cash on investing and leveraging our B2B platform to drive long-term growth and stakeholder value.

With that, I will turn the call over to Anthony for overview of our financial results.

D. Anthony Scaglione -- Executive Vice President, Chief Financial Officer

Thank you, Gerry, and good morning, everyone. I appreciate the warm welcome and happy to be part of the ODP family. I think ODP has tremendous opportunity to create value for shareholders and I'm excited about being part of the team that will make this happen. Before reviewing the financial results, I'd like to take a few moments to share with you why I joined ODP.

Perhaps the most significant aspect that attracted me was the company's very large market presence, B2B platform and expansive reach. Very few companies have the scale and portfolio of assets to drive their business. From the supply chain and unique distribution assets to the multitude of customers across B2B and B2C, our platform creates a significant opportunity to expand our value proposition and deliver a broader set of products and services, growing our customer base and driving long-term value.

Of course, being a CFO, I quickly recognized the strength of our balance sheet and the flexibility that affords us in terms of capital allocation as we transform the business, pursue growth and create value for shareholders. The strength of these assets along with strong free cash flow growth and the ability to generate substantially higher EBITDA growth over time was very compelling and I believe there is a tremendous opportunity to create significant value at ODP, expand our multiple and deliver substantial long-term growth.

Now turning to the highlights of our financial results, as shown in Slide 9. Consistent with previous quarters, we have provided our results on both a GAAP basis and on an adjusted basis. Total revenue of $2.2 billion in the second quarter was down 17%, largely driven by the effects of the COVID-19 outbreak resulting in lower sales throughout our divisions as well as 60 fewer stores in service relative to last year. Partially offsetting the negative impact due to COVID was an increase in our online sales and strong demand for essential items such as cleaning and breakroom and products that supported the work-from-home and learning-from-home environment.

During the quarter, we recorded charges totaling $456 million, consisting of $401 million of non-cash asset impairment charges and $65 million of restructuring cost, primarily associated with our business acceleration plan and recently announced Maximize B2B program, which I will go into more detail shortly.

Included in the non-cash asset impairment charges was an impairment related to goodwill and intangibles at CompuCom and in our contract business, mostly related to the COVID-19 impact to overall business conditions. For context, we assess whether there are indicators of impairment every quarter but traditionally perform an annual assessment of goodwill during the fourth quarter. However, as a result of the impact that COVID-19 has had on our business conditions within our segments, we performed an assessment of goodwill and intangible values in the second quarter.

With the assistance of third-party valuation experts and factoring in the impact that COVID-19 has had on our end markets, as well as higher overall discount rates, we recorded a non-cash impairment charge of $363 million related to goodwill in our CompuCom and contract businesses and other intangibles. Therefore, along with the restructuring charges on a GAAP basis, we reported a loss from operations of $456 million. Excluding these items and other items, our adjusted operating income for the second quarter was $10 million compared to $71 million in the prior year period.

Unallocated corporate expenses were $25 million in the quarter, basically flat with last year. Adjusted EBITDA was $59 million for the quarter compared to $125 million in last year's second quarter. This includes adjusted depreciation and amortization expense of $47 million and $51 million in the second quarter of 2020 and 2019, respectively. Excluding the after tax impact from the items mentioned earlier, adjusted net loss for the second quarter was $4 million or $0.07 per diluted share compared to adjusted net income of $37 million or $0.68 per diluted share in the prior year.

Despite the very challenging conditions and significant contraction in top line, our team maintained the focus on cash in the quarter. Operating cash used in the quarter was $8 million, which included $4 million in integration costs and $16 million of restructuring costs. Capital expenditures in the quarter were $15 million compared to $45 million in the prior-year period, reflecting lower investment in our retail operations, while continuing our investments in our B2B platform, distribution network and e-commerce capabilities. Adjusting for cash charges was $16 million associated with the company's restructuring plan, adjusted free cash flow used in the quarter was $7 million.

Let's now turn to Slide 10, which highlights the performance of our BSD division. As a reminder, BSD is the largest component of our B2B integrated distribution platform serving customers from the Fortune 500, the small and medium-sized businesses. The business consists primarily of serving customers through both our contract and e-commerce channels. The outbreak of COVID-19 caused significant business disruption for our B2B customers and many schools.

Many businesses had to pause operations, transition into remote work settings and many schools were forced to cease in-class operations and shut down early. Clearly, this is not a business as usual situation and the effect of the outbreak, most notably impacted top line results in our BSD division. Because of this reported sales in the quarter for BSD were $1.02 billion, a decrease of 23% compared to the prior year period. Our channel mix and products set helped to offset some of the negative impacts.

Sales increased over 20% in our e-commerce channel and demand increased for products supporting work and learn-from-home and essential products with technology sales up 17% and cleaning and breakroom sales up 20% versus last year. Our total adjacency categories grew relative to last year and comprised approximately 48% of total revenue in our BSD division. The launch of PPE added to this performance. This balance helped to partially offset the negative impacts related to the COVID-19 pandemic.

As Gerry mentioned, sales improved in each month throughout the second quarter and has thus far continued per quarter-to-date, as business activity increased and companies began to adjust their needs for the work-from-home environment. We are continuing to monitor the pace of business and school reopenings as this will have impact to the speed of our top line recovery.

Operating income was $13 million in the second quarter compared to $86 million in the prior year period. The decrease in operating income versus last year was related to the impact of COVID impacting sales, product mix and higher overall distribution costs. We experienced higher distribution cost early in the quarter as we are making more deliveries directly to residences instead of corporate offices. We have implemented strategies to address including working with our distribution partners and evaluating delivery schedules and fees, all of which are helping control delivery costs going forward.

Looking at Slide 11, we highlight the performance of the CompuCom division. The immediate effects related to the COVID outbreak also impacted sales performance at CompuCom in the quarter. Sales were $214 million, down 17% versus the prior year period. The decrease was largely due to customer imposed project delays and lower service volumes as the COVID-19 pandemic impacted our customers' business operations.

Adding to this, was our deliberate effort to reduce certain unprofitable accounts to improve future profitability. The CompuCom division reported operating income of $4 million in the second quarter of 2020 compared to operating income of $1 million in the prior year period. BAT cost efficiency measures and other cost reduction efforts helped to drive the year-over-year increase. These cost reduction efforts helped offset the expense incurred in anticipation of supporting the implementation of new future service contracts, as CompuCom continues to win new service contracts and project work during the quarter.

As Gerry addressed earlier, CompuCom support for its customers during the pandemic has been stellar. Combined with our core competency in supporting enterprises in a distributed environment, we believe that CompuCom remains in an excellent position going forward.

Turning to Slide 12. Reported sales in the quarter for our retail division declined 9% to $912 million. The decline in sales was related to the impact of store closures over the past 12 months, as we had 60 fewer stores compared to a year ago as well as lower store traffic due to COVID. Higher average order volumes and sales per shopper along with our diverse product mix and channel availability helped offset some of the negative impact to store traffic. We drove an increase in demand for essential products to support work and learn-from-home environments as well as essential cleaning products including PPE to address customers' needs posed by the pandemic.

Our buy on-line pick-up in store offering or BOPIS experienced a 152% increase in demand as customers chose the convenience of this option to limit time spent in the store. In my quick analysis, I was truly impressed at the agility of the team in scaling BOPIS during the quarter helping to meet our customer needs in ways that work for them.

Moving to mix. While product revenue held its own and was down 4% compared to last year, service revenue was down 38% as copy and print services and subscription offerings were negatively impacted by the COVID-19 pandemic. Operating income was $18 million in the second quarter, up 100% over the same period last year or as a percentage of sales, a 110 basis points improvement in margins. This increase was largely related to lower SG&A from cost efficiency initiatives and an improvement in distribution and inventory management costs as well as lower operating lease cost recognized as a result of the new lease accounting standard.

Turning to the balance sheet and cash flow highlights on Slide 13. We ended the quarter with total liquidity of over $1.5 billion. Total debt at the end of the quarter was approximately $672 million. Considering our recent refinancing of our credit facilities, our maturity profile is attractive with our ABL not maturing until 2025. Our balance sheet remains a source of strength and provides us flexibility as we execute our strategy and pursue growth.

I covered cash flow in my earlier remarks however, given the challenges caused by the pandemic and generally tough overall operating conditions, we still prudently managed cash in the quarter resulting in adjusted free cash flow use of $7 million versus a use of $48 million in the prior year period. Regarding capital allocation, considering the uncertainty of the COVID outbreak on the current environment, we remain focused on preserving liquidity and maintaining our financial flexibility. Our stock buyback program and quarterly dividend remain suspended and we will reevaluate these programs when appropriate. Aside from preserving liquidity, our capital priorities will continue to focus on investing in our business to further enhance our B2B platform to pursue profitable growth and expand our distribution network and capabilities.

Moving to Maximize B2B. Our recent announcement regarding Maximize B2B continues our strategic pivot to becoming a platform that our customers can rely on for their business needs. We plan to accomplish this across all channels, including maximizing the value of our retail presence by continuing to rationalize the footprint, reducing our longer-term lease exposure and improving the overall cash flow and earnings profile of the business going forward. We will also continue to make strategic investments in our supply chain and B2B capabilities.

The pace of the program's restructuring, investments and other costs will be dependent on overall business conditions and shifting customer dynamics as the effects of COVID-19 continue to be managed and understood. Finally, let me wrap up with some of my priorities. Over the next few quarters, I plan to focus my time on a few key areas. Number one is to continue supporting the key initiatives across our platform that will drive long-term growth accelerating our B2B pivot.

Number two, continue to drive a low cost business model. While I believe that a company can't cut its way to greatness, I will work with the businesses and corporate teams to ensure that G&A dollars are invested in the right places and are aligned to best support our field associates and clients. Number three, continue to leverage our assets across supply chain and procurement, expanding the product and services that we offer our customers, driving value and building upon our sourcing capabilities. Our network touches many customers and we will be focusing on delivering even more value for our customer base across all of our channels.

Number four, reviewing our overall capital allocation program to ensure the right long-term balance for growing shareholder value. And finally, continue to promote our 5C Culture across associates and the finance team. In my few short weeks at the company, I've been very impressed with the company's strong and innovative culture, creating the foundation to drive our mission and reach our goals with all of our stakeholders at the core.

With that, operator, we will now open up the line for questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from the line of Chris McGinnis. Please state your company name then proceed with your question.

Christopher McGinnis -- Sidoti & Company -- Analyst

Thank you. Sidoti. Chris McGinnis from Sidoti & Company. Thanks for taking my questions. Can you maybe just -- I know you talked a little bit about improving trends throughout the quarter. Can you maybe just provide a little bit more granularity in maybe where you exited the quarter, whether it's on a consolidated or across the three segments. And then, just any kind of indication in terms of what you're thinking for the back half of the year, is obviously -- I know there's a lot of uncertainty, but anything that could help a little bit around demand trends? Thanks.

Gerry P. Smith -- Chief Executive Officer

Thanks, Chris. This is Gerry, so I appreciate the question. So as we said in the script we -- obviously, the early part of Q2 was very, very tough. We saw like April was, it was very difficult, May was improved and June was even better. And as we said in the script, we continue to see improvement across all our routes-to-market. And so -- but as I said in my part, there is so much uncertainty in the back half, which is why we pulled guidance going forward but we do think we are in a very good position.

If you look at how we exited the quarter versus where we started, our cost model's in the right place and really proud of the team from an ability to derive cash. We're going to continue to look for new categories like we did in PPE, work-from-home, learn-from-home is all kinds of different innovations going on there. But -- and we're obviously we have a lot more confidence today than we did early in Q2 and to be honest, with Q2 we produced the results we did in this, to be honest, the worse economic times in the country's history. I'm pretty darn proud of the team for adjusted operating profitability as well as a pretty much net cash neutral from that perspective.

So a lot of confidence with the model we have, the team in place, the direction we're going and really using the routes to market. And most importantly, we think we have this ecosystem platform in place to bring products and services to B2B customers whether that's SMBs or retail and online, whether it's mid-sized customers or CompuCom in our contract business or through our large enterprise customers, we think we can serve all routes-to-market and all our customers.

Christopher McGinnis -- Sidoti & Company -- Analyst

Great. I appreciate that. And can you maybe just touch a little bit on the remote status in terms of the work-from-home and the cost to serve there and just how you're kind of driving that down and how you see that? Has that transitioned a little bit since we've seen some economies start to reopen?

Gerry P. Smith -- Chief Executive Officer

Yeah. I think it's -- again this very emphasizes the value of the routes-to-market. We did see early in the quarter. We adjusted real quickly our finance and supply chain and our merchandising teams of how we serve those customers. So we did do some -- we worked with some of our distribution partners in our own fleet to adjust that from an operational execution perspective. And we adjusted some from a cost structure perspective as well. So we feel good about that.

I think that you saw us -- from a merchandising perspective, we've seen tremendous growth in furniture and tech, a number of sort of printers etc.,etc. And so, I think we're very, very well positioned to continue that. We're seeing that strength to continue. And I think that whether it's a hybrid model, whether it's, I'll say, continuous work-from-home I think we are well positioned with our broader product offerings to go out and be successful.

What I'm most proud of, as you look at, this is our ability to really emphasize and confirm our strategy, we can be more than an office supply company and we would -- look what we did with PPE from zero to a $100 million in 90 days, that's pretty impressive. And I'm -- I think we can do that in other categories and we'll continue to look at. What else do kids need from a learn-from-home or an education perspective, what do remote workers need, all of us are in that environment now. So I think, we're all learning that, hey, what do I need to be successful in this environment so we'll continue to be that platform out there. But again, it's always about getting the right cost structure in place and making sure we deliver the right essential products and services for people.

D. Anthony Scaglione -- Executive Vice President, Chief Financial Officer

And Chris, this is Anthony. Just to add some color on the cost side. Clearly, as Gerry mentioned, we saw some shift cost mix on the BSD, which has a higher relative cost to serve, that was offset on our retail side. So on a consolidated basis, we were able to offset some of the costs that we saw as the shift and mix occurred and more of the channel was to the retail side or to the stay-at-home side. But depending on the overall reopenings and our commercial and education clients, they're going to look to us for different products and services. And I think you saw how agile the company was in the quarter in terms of servicing those clients throughout that channel.

Christopher McGinnis -- Sidoti & Company -- Analyst

Great. Thanks for that and again congrats on the PPE, it does look pretty successful so far. Good luck in Q3 and thank you for taking my question.

Gerry P. Smith -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Chris Horvers. Please state your company name then proceed with your question.

Christopher Horvers -- J.P. Morgan & Co. -- Analyst

Thanks. Good morning, guys. So I want to follow up on that a little bit. Just maybe what are you seeing so far in back-to-school? I mean, you cover wide geographies and do you see any indication that maybe they're just buying early, are you able to look at that in terms of areas where the students are going back-to-school where -- or versus the work-from-home, sorry, learn-from-home environment will stay in place?

And then, just more broadly as you think about back-to-school, how are you trying to position to it? Obviously, technology and desks and so forth seem to remain strong at this point. But at the same time, technology is not the brightest margin category. So how are you broadly trying to position yourselves from an assortment perspective and a promotion perspective around that technology category?

Gerry P. Smith -- Chief Executive Officer

Well, the back-to-school, obviously, a lot of uncertainty there and it's going to be dynamic across the country I think in terms of when school reopens and when they do reopen, what does the model looks like? whether it's going to be a hybrid model or school from -- from home model. So we're monitoring that. We're obviously keeping a pace on the reopenings across the country.

On your question regarding the product mix. If you think about the way we've approached it this year and really, commend the merchandising groups because our stocking strategy on a year-over-year basis was really to leverage more of a replacement -- replenishment model versus storage model. So we were able to reduce our overall inventory in the category. It's really going be dependent on where we see the products and suites of services across the platform to drive the value that ultimately, our education clients are going to need for their students if they're going to be at home or a hybrid.

So we think there's an opportunity for both channels to actually pull through. Dependent on the pace of the reopenings, those channels may have a different mix but ultimately there is great opportunity for us to service not only the traditional back-to-school but also the school-from-home environment.

Christopher Horvers -- J.P. Morgan & Co. -- Analyst

And then, I guess on the SG&A side, very strong expense control despite the COVID top line headwinds, $406 million in SG&A. Can you maybe -- trying to get at what the baseline SG&A run rate is going forward? You have the BAT program and cost efficiency has always been a focus but then there is the variable cost component. So as you think about that $406 million, is there any way to give us a sense of like, what was a significant belt-tightening that you might have to get back next year, any thoughts on sort of the variable cost component of SG&A dollars versus sales growth?

Gerry P. Smith -- Chief Executive Officer

Yeah. I'll talk to that at a high level. We'll obviously let Tim get to you with offline with some of the more specifics. But obviously with BAT as well as our Maximize project that we announced. I mean, the entire focus is we -- as I always say is that you need a low cost model to win in this space. And I think we've demonstrated that very, very successfully over the last couple of years.

We've substantially improved our cost management. Obviously, we focus a lot on cash generation as well. But we're going to continue to look at ways to manage the business on a -- from a, I'll say, fixed cost basis to a variable cost basis in the future. And so, we're always -- Maximize is -- one of the primary goals of Maximize is to drive from a fixed cost model to a low-cost -- to a variable cost model that allows us that flexibility, although this is never repeated the COVID experience but we believe this has demonstrated the ability for us to pivot and successfully manage cash and cost in a very, very difficult environment.

So we've built a DNA here in our culture about driving cost and being efficient and are very pleased with the progress we made across not just -- our finance teams have done a tremendous job but all our organization has done a tremendous job of driving to efficiencies and productivity and even this acceleration of work-from-home is, we found all kinds of opportunity of efficiencies and productivity that by being in a work environment, you did realize things we didn't need anymore.

And so, we're going to continue to drive that in the future as we do come back into a work environment in the future. But a huge focus on low cost model and we'll continue to drive that in the future. Anthony anything to add?

D. Anthony Scaglione -- Executive Vice President, Chief Financial Officer

No, I think that my short time here just the agility of the team to respond to the top line pressures that we saw taking out costs. And I think the way to look at it is we will invest in areas that are going to produce the growth. We're not going to add G&A for the sake of adding G&A. So as the business modulates and areas for us to improve the top line recapture, those are the areas that we'll look at reinvesting. But overall, we're going to keep our SG&A, continue to be focused on where the business is heading and really keep that low-cost business model front and center.

Christopher Horvers -- J.P. Morgan & Co. -- Analyst

I guess, I had just one quick follow-up to that. Is there any sort of like just specific items you could point out like, while incentive comp was down $30 million or G&A was down actually like, anything that is not variable and is really just something you're going to have to lap as you look forward?

Gerry P. Smith -- Chief Executive Officer

We -- as we went through our cost structure, we actually look at a multiple work streams across every cost element of the business. As a work stream owner as well as benchmarks in place. So we had a very comprehensive cost model. And so, really proud of the work that our team has done. So every element of cost is looked at, benchmarked and driven.

Christopher Horvers -- J.P. Morgan & Co. -- Analyst

Got it. Best of luck.

Gerry P. Smith -- Chief Executive Officer

Thank you.

Operator

Your next question will come from the line of Michael Lasser. Please state your company name then proceed with your question.

Michael Lasser -- UBS -- Analyst

Good morning, it's UBS. I think the markets heavily focused on trying to understand what a realistic run rate for the top line of the business is. So, with that being said, you didn't reference the improvement throughout the quarter and into July. Can you give us what the run rate growth or decline for the business is in July so far?

Gerry P. Smith -- Chief Executive Officer

Well, let me maybe put it into the context of the second half. So obviously Q2 as the prepared remarks referenced, we saw improvement along the quarter. When the pandemic hit, I think everyone was flat-footed and panic. That obviously created a lot of disruption in a lot of our channels but we were able to pivot in categories as well as execution across both the services and product side and we saw improvement.

I think as we look into the second half and given the unknown and one of the reasons why we continue to withdraw guidance, we're seeing improvement. So we're not going to see the same level of degradation at the top line that we saw in Q2 continuing but there is going to be continued headwinds. If I would benchmark it based on what we've seen, it's probably low single-digits versus double-digits that we saw in some of the services that we provide and products that we -- so we see improvements continuing but the headwind continues to exist for the second half.

Michael Lasser -- UBS -- Analyst

So it's going from down 24% to down low-single digits?

Gerry P. Smith -- Chief Executive Officer

Yeah. For the second half it should be low-to-mid single-digits on an annual basis.

Michael Lasser -- UBS -- Analyst

Okay. And with the restructuring program, how many retail stores do you expect to close?

Gerry P. Smith -- Chief Executive Officer

The pace of the restructuring and referring to Maximize,it's really going be dependent on a lot of factors. It's going to be defined in our negotiations with our lease holders, making sure that we have the right view. So it's really going to be looking at the profitability and the cash flow generation by store and ensuring that we have the right line of sight and it really is going to be dependent on how effective our renegotiations were and makes it makes sense to renegotiate those leases and the terms of those leases will drive how fast we close the stores.

Michael Lasser -- UBS -- Analyst

Okay, thank you very much and good luck.

Gerry P. Smith -- Chief Executive Officer

Thank you.

D. Anthony Scaglione -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

Our next question will come from the line of William Kafoure. Please state your company name then proceed with your question.

William Kafoure -- Elevation -- Analyst

Hi, good morning. Company name is Elevation. I just wanted to say congratulations on the progress that's been made in terms of the corporate actions around the B2B transformation. I guess my question is, I know we're only a couple of quarters into this new operating environment and you're managing the cost structure dynamically very well but just kind of curious given the shift in category and channels, do you have any early learnings around what the long-term margin profile in BSD might be once we kind of reach a steady state top line in that business as a comparison historical margins? Thank you.

Gerry P. Smith -- Chief Executive Officer

Yeah. Well, thanks for the question. I think we probably need some more road underneath this from a trend perspective. We're watching it carefully. I think as we go through this the second half of the year and get a better line of sight, I think we'll be more comfortable in 2021 sort of knowing that margin profile. Obviously, there are some categories that are lower than some of our core suppliers, but there are categories we're looking at adding that are also pretty margin accretive as well.

And so -- but again just at a high level, we're always -- we're trying to always get to a cost structure that is variable base. So depending on the composition of products we can shift up and down relative to whatever our customers' need and have that capability, which is why, I keep saying a platform is important because we can offer more than just our current offerings, we want to continue to bring more and more adjacencies on this to -- and your cost of distribution that we deliver in five different things, five different categories versus one category, you're going to get scaling in that business as well.

William Kafoure -- Elevation -- Analyst

Great, thank you.

Operator

That concludes the Q&A session for today. I will now turn the call back over to Office Depot's CEO, Gerry Smith for any closing remarks.

Gerry P. Smith -- Chief Executive Officer

I just want to thank everyone for joining the call today and I just wish everyone stays safe in this difficult environment and we look forward to our conversation when we close Q3. Have a great morning and again, thank you for joining the call.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Timothy J. Perrott -- Vice President, Investor Relations

Gerry P. Smith -- Chief Executive Officer

D. Anthony Scaglione -- Executive Vice President, Chief Financial Officer

Christopher McGinnis -- Sidoti & Company -- Analyst

Christopher Horvers -- J.P. Morgan & Co. -- Analyst

Michael Lasser -- UBS -- Analyst

William Kafoure -- Elevation -- Analyst

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