The ODP Corporation (ODP) Q2 2021 Earnings Call Transcript

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The ODP Corporation (ODP 4.85%)
Q2 2021 Earnings Call
Aug 4, 2021, 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 2021 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 of Investor Relations

Good morning, and thank you for joining us for The ODP Corporation's Second Quarter 2021 Earnings Conference Call. This is Tim Perrott, and I'm here with Gerry Smith, our CEO; and Anthony Scaglione, our Executive Vice President and CFO. Also joining us today is David Bleisch, our Executive Vice President and Chief Legal and Administrative Officer. During today's call, Gerry will provide an update on the business, focusing much of his commentary on our accomplishments in the second quarter, including our improved operational performance, and the progress we are making on all of our initiatives to drive shareholder value. David Bleisch will then provide commentary regarding the previously disclosed proposal made by USR, an entity controlled by Sycamore Partners, the owner of Staples, to acquire the consumer business of The ODP Corporation.

After David's commentary, Anthony will then review the company's financial results, including highlights of our divisional performance. 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 Chief Executive Officer, Gerry Smith. Gerry?

Gerry P. Smith -- Chief Executive Officer and Director

Thank you, Tim, and good morning to everyone joining our call today. We appreciate you joining us this morning and hope all of our listeners and their families continue to remain safe and healthy. I'm happy to be here with you today to discuss our results and accomplishments for the second quarter. Our success this quarter reflects the strong commitment from our entire team in delivering improved results while remaining true to the core tenants that drive our business. During the quarter, we drove strong overall performance and made significant progress on all of our key strategic initiatives. As I have mentioned on our previous calls, our strong performance and strategic actions are supported by the key tenets of our business as outlined on slide four in our presentation. These tenets form our foundation as we address market dynamics, pursue growth and position our business to unlock value for shareholders in the future.

This foundation is centered on driving a low-cost model, expanding our value proposition to our customers and moving into higher-value businesses through the addition of new growth engines. As reflected in our results, we've been executing along these priorities, improving the flexibility of our business model and structure and using our unique ecosystem to meet the growing needs of our customers. At the center of our approach is our winning five c culture. One of the key components of our culture is commitment. Our entire team is committed to driving value for our stakeholders and not only doing things right, but also doing the right things for our business, shareholders, employees and for the communities where we serve. I'm very proud of the culture we have created at ODP and the foundation it provides as we support our community, attract new talent and continue to execute on strategic priorities.

I think a true testament to our five c culture is the strong team we have built over the past several years. We have attracted some of the best and brightest talent across a broad range of industries, including technology, business commerce, supply chain and finance. In the quarter, we delivered improved operating results, advanced our digital platform business and made progress on all of our initiatives to unlock future shareholder value. The highlights of these accomplishments for the quarter are shown on slide five. First, as I've stated on previous calls, maintaining a safe environment continues to be a top priority. We're continuing to monitor state and national health guidelines, and we are continuing to implement safety measures as necessary to help protect our associates and customers.

Turning to the highlights. We delivered improved overall performance as the broader economy begin to recover from the pandemic and the flexibility of our ecosystem allowed us to continue serving customers in all environments. Demand grew as more businesses and schools begin to return to work and to in-class learning, driving strong results in our retail division and improving performance in our Business Solutions Division, or BSD. Coupled with our low-cost model approach, we delivered strong adjusted operating results and begin preparing for the upcoming back-to-school season. Next, supporting our key tenet of building new growth engines in higher-value markets, we continue to advance our digital platform business adding key talent to our team and continue to make progress on building out the capabilities of our new platform.

We remain in an excellent position to drive value in the large and growing business commerce market in the future. Also, as we announced last quarter, we are executing upon our plans to separate ODP into two independent publicly traded companies. We are making meaningful progress in all separation activities, including on the various commercial agreements between the future companies. Additionally, as we announced in our earnings press release this morning, recognizing the flexibility afforded by the holding company reorganization we implemented last year, we modified our plan for separation. Under the modified plan, we intend to accomplish this transformation by spinning off our consumer business as opposed to our B2B business, as previously announced. With this change, the B2B businesses will continue to be owned by the ODP Corporation and anticipated timing related to separation remains the same.

We will highlight more details on this shortly. Finally, we're happy to report that we've been executing upon our share repurchase program, buying back nearly $70 million of our stock through the end of July. Now turning to more details regarding our operating results as shown on slide six. Our performance in the second quarter was highlighted by stronger revenue growth and continued solid operating results. Steady recovery of the broader economy, along with our value proposition, low-cost model and flexibility in serving customers in multiple environments contributed to this performance. As the economy has begun to recover, businesses and schools have started to return to the office and to in-class learning, driving increased demand for several product categories, including core supplies.

Continued strong support for work from anywhere customers, small businesses and education customers also helped drive growth. All these factors contributed to improved performance at our Business Solutions Division and continued impressive performance in our Retail Division resulted in a consolidated 6% increase in revenue over last year. Coupling stronger growth with our continued low-cost model approach, we more than tripled our adjusted operating income versus the prior year. The stand-out among our operational performance was once again our retail division, as shown on slide seven. Our Retail Division again drove impressive overall performance with sales on par with last year despite significantly fewer stores in service. We're continuing to fire on all cylinders, capturing the continued elevated demand driven by home office support needs and school reopenings while leveraging our new labor model to drive stronger bottom-line results.

We saw increasing demand from education customers and signs of recovery in small businesses, driving greater demand for core supplies and copy and print services. Store traffic trends for stores in service were up significantly and conversion rates improved. We also continue to see strength in our Buy On-Line Pick-up in Store, or BOPIS offering, although sales for this service option was lower versus last year's peak at the start of the pandemic. But to put into perspective, sales through BOPIS are up over 70% when compared to the same period in 2019, highlighting the importance and convenience of this service for our customers. We've also added a unique service approach that we expect will help further drive BOPIS sales. We recently implemented our 30-minute guarantee for in-store and curbside pickup.

We are one of the few companies in retail to offer such a guarantee, which has been well received by our customers. We expect this will help drive sales and higher customer satisfaction scores in the quarters to come. Putting our performance into perspective, our retail team delivered total sales in line with last year despite 169 fewer stores in service. Although we are not specifically reporting due to differences in store hours and other factors, this performance points to a significant increase in same-store sales. From an operating perspective, we drove a 2.5 times increase in our operating income, driven by the impact of our labor and store operating model, improved mix of our products and services and improved lease terms. Overall, our Retail Division remains in an excellent position to continue serving as the home office headquarters for remote and hybrid workers while continuing to be the essential school supply source for education customers, including schools, teachers and students.

In fact, we remain very excited about the upcoming back-to-school season and the new service commitments we are making to customers as well as our continued support of communities and schools as shown on slide eight. It should be no surprise that we're expecting a stronger back-to-school season than what the industry had experienced in 2020 during the height of the pandemic. Over a long absence, pent-up demand for school supplies and accessories, arts and crafts and technology creates a significant opportunity for ODP as we head into the third quarter. We have worked through many of the industry challenges regarding sourcing the supply chain and are prepared with a broad assortment of products for upcoming demand. We're encouraged by the activity we've already experiencing since quarter end, and remain well positioned as we continue to witness a strong emotional connection to the Office Depot brand among teachers and students.

We're also inspired by the feedback we're receiving from customers regarding the 30-minute service guarantee that I mentioned earlier. To date, this has been very well received by our customers. We're also proud to be giving back to our schools and communities through our Start Proud program. Our Start Proud program now in its fourth year continues to support schools and low-income communities nationwide and provide students, parents and teachers with the supplies they need to start the school year confident and prepared. Also, through our 5% Give Back to Schools program, which gives 5% back to schools on qualifying purchases, we have raised nearly $40 million in funding to support schools and communities. Additionally, our Elevate Together program launched this year is already providing strong support in our community for minority-owned businesses throughout the country.

I'm proud of all these efforts and the support they are providing for communities nationwide. Now turning to our Business Solutions division, as shown on slide nine. As we anticipated, we drove improved performance in our BSD division as the economy continued to recover and overall business activity increased. Our stronger performance was led by the education sector, mainly K-12 as well as the public sector driving demand for a wide spectrum of products, including core product categories, which will begin to enter back into the mix. In addition to core products, we continue to drive strong volume in our adjacency categories led by furniture and technology resulting in adjacency categories driving 44% of overall BSD revenues. Larger enterprises, which are only beginning to bring employees and staff back to the office have been on a slower pace of recovery.

However, we expect demand from this sector to grow throughout the balance of the year. That said, these positive trends helped drive a strong double-digit increase in revenue in our contract channel, which was partially offset by lower sales in our e-commerce channel as post-pandemic traffic trends and online traffic have begun to decline. In total, BSD delivered an impressive 12% increase in total revenue relative to last year. Combined with our low-cost model and improved product mix, we drove nearly a 2.5 times increase in operating income. On the new business front, we are winning and building share. Our pipeline of new business continues to grow, and our close rates are near historical highs. When combining this success with our mid-90% retention rate, we are driving net new customer wins and expect that we are gaining share in the large enterprise marketplace.

As we head to the second half of the year, we are in an excellent position to continue to drive growth as we expect stronger traction from higher education customers and as large corporations begin their return to the office. Our value proposition remains strong. And along with our flexible supply chain, we continue to work with our partners and suppliers to address the recent industrywide constraints. One of our core differentiators is the use of our large private fleet and our network of diverse third-party logistics partners. When coupled with our global sourcing presence, these assets create a competitive advantage for ODP as we manage through and address the challenges head-on for the balance of the year. Now briefly turning to the performance in our CompuCom division, as shown on slide 10.

Our CompuCom division drove an increase in revenue driven largely by stronger product revenues and stabilizing service revenues. We believe the malware incident is largely behind the company with business operations functioning back to normal. Over the past few months, we have strengthened our systems and enhanced our security measures. Customers continue to rely on CompuCom for the services they provide and our retention rate remains strong. Our pipeline of new business is growing, and we are again focused on scaling the business. Also, our process of exploring a value-maximizing sale of our CompuCom division continues to move forward. Now turning to the progress we are making in our digital platform business, as shown on slide 11. Over the past several months, we have continued to advance our digital platform business and made progress in developing the technology driving our digital transformation.

We integrated BuyerQuest into our digital platform business and remain on track with our collaboration with Microsoft. Through this collaboration, we're bringing our capabilities, led by BuyerQuest, an industry-leading digital e-procurement technology platform to Microsoft's Dynamics 365 business central customers in the future. We're also continuing to attract industry-leading talent to our team. Most notably, we've added [Indecipherable] who has joined us to lead public sector for our digital platform business. She joins other notable hires over the past year to help drive our growth in the digital B2B platform business. We've also made progress on our brand alignment and we'll continue to generate strong interest from the supplier community as they recognize the expansive reach and capabilities of our new platform.

We believe these developments place us on the right path with the right team and the right technology platform to pursue growth in this very large and growing business commerce market. Before I turn the call over to David Bleisch for an update on the Sycamore proposal, I wanted to spend a few moments to highlight our progress on our separation initiatives as shown on slide 12. Our plans to separate ODP into two independent, publicly traded companies continue to move forward through the second quarter. We've established our internal teams and identified the resources necessary to move forward with the work required to execute upon this initiative. We're making solid progress in all areas of the separation, including operating mechanics, supply chain dynamics, IT support as well as the market-based commercial agreements between the companies.

Additionally, as we announced in our press release this morning, we modified our plan for separation. We now intend to structure the separation as a tax-free spin-off of our consumer business as opposed to the previously announced spin of our B2B businesses. Recognizing the flexibility afforded by the holding company reorganization implemented last year as well as our expected management and support structure, we believe that completing the separation through a distribution of our consumer business will be more efficient. The timing for completion by the first half of 2022 remains the same. An updated description of anticipated post-spin companies and the related assets as shown on slide 13. Through our modified approach, we will spin-off to ODP's shareholders, Office Depot, a leading provider of retail consumer and small business products and services distributed through more than 1,000 Office Depot, OfficeMax retail locations as well as through our award-winning e-commerce site, officedepot.com.

The remaining company will continue to be the existing holding company, the ODP Corporation, which will consist of our Business Solutions divisions, Contract business, our Canadian business, Grand & Toy as well as our independent regional office supply businesses. ODP will also include our newly formed BDP digital platform business, including BuyerQuest as well as our sourcing, supply chain and logistics assets. As I stated in our last call, we believe this action will enhance our strategic flexibility creating two highly focused, pure-play companies, unlocking significant opportunities by improving our ability to meet customer needs while aligning our assets and investment profiles to generate greater value for our shareholders. We remain on track with our plans and expect to provide additional details, including management leadership appointments for both post-spin companies and more detailed financial information in the third quarter.

With that, I will now turn the call over to David Bleisch, our Executive Vice President, Chief Legal and Administrative Officer, who will provide commentary on the previously disclosed proposal made by Sycamore Partners, the owner of Staples to acquire the consumer assets of The ODP Corporation.

Nelson David Bleisch -- Chief Legal and Secretary

Thank you, Gerry. As a reminder, on January 11, USR Parent, the owner of Staples, a Sycamore Partners subsidiary, which I will refer to as Sycamore, made a public offer to acquire 100% of the common stock of The ODP Corporation. In response, we publicly communicated that we were open to combining our retail and consumer-facing e-commerce operations with Staples under the right set of circumstances and on mutually acceptable terms. On June 4, 2021, Sycamore made a public proposal to acquire The ODP Corporation's consumer business, including the Office Depot and OfficeMax retail stores business; the company's direct channel business, officedepot.com, and the Office Depot and OfficeMax intellectual property, including all brand names for $1 billion. The proposal further stated that Sycamore intends to commence a tender offer for all of the outstanding common shares of the company unless negotiations for a consensual alternative transaction as proposed by Sycamore are successful.

The company's Board of Directors will continue to carefully review Sycamore's proposal with the assistance of its financial and legal advisors to determine the course of action that it believes is in the best interest of the company and its shareholders. The company remains in conversation with Sycamore as it is further evaluating the potential value and regulatory risk associated with Sycamore's current proposed transaction for the consumer business. In the meantime, the company continues to pursue the previously announced plan to separate the company into two independent publicly traded companies during the first half of 2022, which remains on schedule. With respect to CompuCom, we are still pursuing the previously disclosed sale process. We do not intend to provide any further update on this process until such time as definitive agreements are completed. Now I'll turn the call over to our CFO, Anthony Scaglione, for a review of our financial results.

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Thank you, David, and good morning, everyone. I'm happy to be here today to discuss our financial results for the second quarter of 2021. As I begin my review, I would like to take a moment to reflect on my first year at ODP and the tremendous progress we've made on the goals I laid out for the finance organization when I joined the company. These goals focused on driving our low-cost model, leveraging assets in support of our strategic initiatives, optimizing our capital structure and living the fivec culture. Over the past year, our team has risen to the challenge, supporting the business and improving the manner in which we operate. We've fortified the discipline around cost management, drove SG&A and other costs lower, continued to optimize our store footprint and leveraged our routes to markets to drive growth.

Our improving performance, especially during COVID, is a true testament to this progress. The pandemic has forced us, like many companies to think about our business differently, flexing our operations and discovering new ways to serve our customers. Our team has captured the many lessons we've learned during COVID, and I believe those lessons have made it a permanent part of our operational DNA. Also, our finance teams supported key initiatives, including the development of our digital platform business and separation efforts are helping us build a more valuable enterprise. All of these efforts are bringing to life the value drivers that I highlighted when I joined the company, which included our market reach, B2B platform and supply chain and, of course, our balance sheet.

In hindsight, perhaps one of the assets I did not fully appreciate when I joined the company was the power of our retail footprint and the affinity for the Office Depot brand. Our retail presence, brand and service capabilities have created a very strong bond with consumers, small businesses and through the pandemic, the hybrid workforce. Our team has worked to optimize our retail business, unlocking its value and positioning it as a top performer over the past year. We are also advancing our separation efforts as well as utilizing the strength of our balance sheet to invest in the business and enhance returns along the way. Underlying all of these efforts, our team is committed and living up to the five C culture that Gerry described earlier. Now turning to the highlights of our financial results, as shown on slide 17.

Consistent with previous quarters, we have provided our results on both a GAAP and adjusted basis. Our financial results for the second quarter included top line revenue growth and a significant improvement in our adjusted operating results as compared to last year. We are very encouraged with the strong progress we are making relative to where we were one year ago, at the height of the pandemic. The broader economy continues to show signs of recovery and more business and schools are beginning to return to the office and to in-class learning, leading to increased demand for a variety of our products. At the same time, our value proposition continued to resonate among hybrid workers and the small business sector is generating additional demand for home office categories.

Turning to the specifics of our quarterly results. We generated total revenue of $2.3 billion in the second quarter, a 6% increase over quarter two of last year. Stronger demand from the business and education sectors, along with continued support for hybrid and small business customers were the primary drivers of the increase in revenue. We saw significant increases in demand through our BSD contract channel and continued strong revenue performance in our retail channel. This accomplishment is even more impressive when you consider that we had 169 fewer stores in service compared to last year. We were encouraged to see that some of our core categories like paper, ink and toner and supplies, are sequentially growing and entering back into the mix, while home office categories and adjacency products remain strong.

These positive trends were partially offset by lower sales in our e-commerce channel, which were down compared to quarter two of last year at the beginning of the pandemic as well as lower sales of PPE. During the quarter, we recorded charges totaling $122 million, consisting of $115 million of noncash asset impairment charges and $7 million in net restructuring and other costs. Nearly all of the noncash impairment charges were associated with an impairment of goodwill and intangibles at CompuCom, mostly related to the continued macroeconomic effects of COVID-19 on their overall business condition. With the assistance of third-party valuation experts and factoring in the impact of COVID-19 has had on end markets, we recorded a noncash impairment of $114 million related to goodwill and other intangibles in our CompuCom business.

Our net restructuring and other costs included about $11 million associated with our separation efforts in the quarter, largely related to third-party advisory costs. As we progress on our separation activities in the coming quarters, we expect these and other costs related to our spin-off to grow commensurate with our progress. That said, we have initiatives in place to offset some of the costs as we move forward with our plans. Therefore, including the impact of these items on a GAAP basis, we reported a loss from operations of $78 million. Excluding these and other items, our adjusted operating income for the second quarter was $44 million, up significantly from the $10 million in the prior year period. Unallocated corporate expenses were $32 million, up from last year. Adjusted EBITDA was $93 million for the quarter compared to $59 million in last year's second quarter.

This includes adjusted depreciation and amortization expense of $43 million and $47 million in the second quarter of 2021 and 2020, respectively. Excluding the after-tax impact from the items mentioned earlier, adjusted net income for the second quarter was $28 million or $0.51 per diluted share compared to an adjusted net loss of $4 million or $0.07 per diluted share in the prior year period. Turning to cash flow. Seasonally, our second quarter cash flow results typically reflect increased investments in inventory as we prepare for the back-to-school season that occurs in quarter three every year. Cash used in operating activities during the second quarter was $11 million, which included $14 million of restructuring costs. This compared to cash used by operating activities of $8 million in the second quarter of the prior year.

The slight reduction in year-over-year was largely driven by higher working capital use due to increased receivables at CompuCom during the quarter as well as inventory purchases as we head into the back-to-school season. Capital expenditures in the quarter were $16 million compared to $15 million in the prior year period, reflecting continuing growth investments in our digital transformation, distribution network and e-commerce capabilities, offset by lower capex requirements in our Retail Division. We expect to increase our capital investments in the future quarters as we continue to move past COVID and continue to make progress on our B2B and digital transformation initiatives. Adjusting for cash charges of $14 million associated with the company's restructuring plans, adjusted free cash flow in the quarter was a use of $13 million.

I would now like to cover our business unit performance, starting with our Retail Division on slide 18. Our Retail Division continued to deliver very strong performance in the second quarter, playing an important role in supporting customers for a variety of essential needs from hybrid work to support for teachers and students. Reported sales in the quarter were $914 million, which was essentially flat versus last year. This result was very impressive, considering we had 169 fewer stores in service this year versus last, including 55 stores that we closed during the quarter. Strong traffic trends and increased conversion rates helped drive revenue. Same-store traffic was up 17% relative to last year and conversion rates were up in the single digits. Continued support for hybrid and remote workers as well as for teachers and students, increased demand for core product categories as well as copy and print services.

Our BOPIS offering, while down relative to last year, was up 71% since 2019, and we expect that our recently launched 30-minute guarantee will continue to boost sales through this service. Operating performance in our Retail Division, again, was terrific. We generated operating income of $44 million in the quarter, up over 140% compared to the same period last year, representing approximately a 290 basis point improvement in margin. This strong performance was driven by improvements in operating lease costs and improved product mix. Turning to slide 19. We drove improved performance in our Business Solutions Division. As a reminder, BSD consists of our contract channel, serving large, medium and small enterprises and our direct or e-commerce channel. As you heard from Gerry, businesses and schools are beginning to return to work and to in-class learning, and business activity is heating up as is demand for our core products.

Reported sales in the quarter for BSD were $1.1 billion, up 12% relative to last year's second quarter. Stronger demand from the public and education sectors drove a double-digit sales increase in our contract channel. This was partially offset by lower sales in our e-commerce channel compared to the strong demand last year at the beginning of the pandemic. Our expanded value proposition continued to resonate with customers, driving increased demand for core products as well as strong demand for our adjacency categories, which remained at 44% of total BSD revenues. Furniture and technology categories were up both sequentially and on a year-over-year basis. BSD's stronger revenue traction resulted in improved operating results in the quarter. Operating income was $31 million in the quarter, up significantly from the $13 million in the prior year period.

As a percentage of sales, this represents a 140-basis point improvement in margins. The increase in operating income was driven by stronger sales volume, higher gross margins, cost efficiencies and more efficient distribution costs. We continue to see BSD's performance improving as schools reopen and companies begin to return to the office in the second half. Looking at slide 20, we highlight the performance of the CompuCom division. Revenue in the second quarter was $222 million, up 4% over last year, driven by stronger product sales. Sales of services have stabilized. And as Gerry has mentioned, we believe the malware incident is largely behind the company with business operations functioning back to normal. CompuCom reported operating income of $3 million versus $4 million in the prior year, driven largely by lower sales of service in the quarter, partially offset by cost efficiency measures.

CompuCom's pipeline of new business remains healthy and the company is focused on driving future growth. Our external sales process is continuing to move forward with the commitment from our Board. Moving forward, the accounting treatment for CompuCom will change beginning in the third quarter as the criteria for an asset held for sale has been satisfied. We will provide additional insights into the process as they develop. Now briefly turning to our balance sheet highlights, as shown on slide 21. We ended the quarter with total liquidity of approximately $1.7 billion, consisting of $691 million in cash and cash equivalents and $997 million of availability under our asset-based lending facility. Total debt at the end of the quarter was approximately $359 million, primarily comprised of our long-term IRB bonds.

Our balance sheet remains a source of strength and provides us flexibility as we pursue growth and execute our strategy. I've already covered the cash flow items in my comments earlier. However, I would like to highlight that we have been executing upon our previously announced share repurchase plan during the quarter and subsequently in July. We repurchased about one million shares of stock for $46 million during the quarter. Subsequent to the quarter, we repurchased 490,000 additional shares for approximately $23 million. This leaves approximately $230 million left under our $300 million authorization. As a final comment before I turn it over for questions, I would like to thank again our entire organization for their strong commitment in executing upon our strategic initiatives and to emphasize that we are very enthusiastic about our future.

We're gaining traction, driving stronger operating results and remain encouraged regarding the improving business environment and significant opportunity during this year's back-to-school season. While we are experiencing better trends and believe that this will result in a stronger second half of 2021, we're continuing to keep guidance suspended at this time, largely related to the strategic initiatives as discussed, including the timing of costs related to the spin as well as continuing market uncertainty for the balance of the year. That being said, the trends and market conditions continue to improve, placing us in an exciting position as we enter the second half of 2021. We are excited about the progress we're making on all of our initiatives, including our separation efforts, and I look forward to providing more detailed information regarding the spin in quarter three.

With that, I will turn it over to your questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Chris McGinnis. Please say your company name, then proceed with your question.

Chris McGinnis -- Sidoti and Company -- Analyst

Chris McGinnis from Sidoti & Company, thanks for taking my question and nice quarter. Just on the modification around the spin, can you just clarify maybe just none of the assets change and really maybe just a technical modification.

Gerry P. Smith -- Chief Executive Officer and Director

Chris, thanks for the kind comments. I hope you're doing well. Yes, we're basically -- we're -- the spin just reversed basically. It was originally the B2B spinning out. We're just -- we're taking -- we're spinning out the B2C. We just think through a lot of work that is a more efficient structure. And the majority of the management as well as the Board will stay with The ODP Corporation.

Chris McGinnis -- Sidoti and Company -- Analyst

Okay. Great. And then just in the same line, I guess, just -- I know it's early, you gave a little bit more structure around the assets. Is there any thoughts around maybe the capital structure or any more details around maybe the structure and the profit trends or how that is going to be set up going forward?

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Great. Thanks for the question, Chris. As Gerry mentioned, we're making progress accordingly and providing updates along the way. As it relates to the capital structure, we're reviewing some of the current term loans in advance of the spin and the remaining day one capital structure really be considered as we get closer to spin as other parts of the overall strategy and cash flow profiles become defined both for the B2B and the B2C business. So that's where we are, and we'll provide updates accordingly along the way.

Chris McGinnis -- Sidoti and Company -- Analyst

Okay. And then just a question around trends. Can you just talk about how maybe they progressed in the quarter and maybe the exit rate on both BSD now?

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Yes. So we felt great trends in retail continue to see strength there. Great performance, good margins. Consumers are really resonating with the home office superstore. Our pace of business is very encouraging. We expect those trends to continue. Too early to say if it's a permanent shift, but it's very encouraging to see the performance out of retail over the last couple of quarters. From a BSD perspective, we've always said BSD is a second half story. It's really going to be predicated on the return to work and return to school. So early stage come back for BSD. We've seen some good indicators on the education sector. Our pipeline and win rate in commercial it's been the highest we've seen. Starts have been a little bit slower there. But really tied to the reopening and ensuring we continue to work with our customers in any environment, and we've seen the hybrid work environment resonating and our ability to serve those customers in any environment.

Chris McGinnis -- Sidoti and Company -- Analyst

Great, I'll back into you, thanks for taking my question.

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Thanks Chris.

Operator

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

Michael Lasser -- UBS -- Analyst

Good morning, thanks for taking my question. It's UBS. If you disaggregate the performance of the retail business between market growth versus recapturing share from the stores that you had closed that drove the 17% increase in traffic, how would you do it? We're trying to get a sense of what's sustainable moving forward and that will be a key point on determining what's sustainable?

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Yes. So that's a hard question to dissect in terms of the recapture. As Gerry mentioned, we had 169 stores lower this year than last year. So clearly, the performance is truly outstanding from a retail perspective. Some of that is recapture. As you know, as we close stores through our maximized B2B plan, there is a recapture rate associated with that. But even when you take a look at the performance of the existing stores and the ability for those stores to deliver what they delivered some of that is market growth. And while we don't disclose it, as Gerry mentioned, we feel really confident that the same-store trend performance is better than what we would have expected entering 2021 exiting 2020 with a strong momentum. So there is some level of recapture and the home office superstore is resonating.

Gerry P. Smith -- Chief Executive Officer and Director

Yes. I'll just add in that the continued hybrid model, I think, is definitely our retail business. Kevin and his team have done a great job. We've done a lot of work on our labor model, our low-cost model, our 30-minute guarantee. So we've brought more value proposition to it. I mean, the first half of our retail business has just been exceptional. And so I want to emphasize it's about the culture they've created, the meet and greet, the 30-minute guarantee, the low-cost model plus obviously, the return to school and hybrid model, all have been a factor. And clearly, yes, there's some from a store closure perspective, but I think it's much more than just a store transfer rate.

Michael Lasser -- UBS -- Analyst

Okay. My follow-up question is on the BSD segment. You're still a couple of hundred million dollars below where you were in 2019, presumably, that's in part because workers have yet to return to the office. If you were to get back to the same level of sales in 2019, how would the margin look based on all the actions that you've taken, including the cost cuts?

Gerry P. Smith -- Chief Executive Officer and Director

Yes, I'll take the first piece of the top line, and I'll let Anthony talk to margin. So what we're very pleased with is Steve and his team have done a really good job of building momentum. We're seeing a lot of improvement on K-12 as well as the public and education sector. So sequentially, we're growing. We've been growing since the pandemic. Our pipeline is at an all-time high. Our win rate is at an all-time high. Our retention rate is extremely high and solid. So a lot of momentum. I mean obviously, the hybrid model is still being adjusted and evaluated. And so I think that's the piece that we're evaluating. But I am very pleased with the first half of the sequential growth and trend of the business, especially, I'm eager with the K-12 as well as the university systems reopening. I think that's always been a big chunk of our business. And we're going to evaluate what's happening from a hybrid model perspective. And again, having the channels we have are important. And I think that Steve and the team have done a great job of executing. And we spent a lot of time focus on low-cost model across our whole business. We have adjusted our cost structure in this business, but I'll let Anthony comment more details about margin.

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

So Mike, when you think about the margin profile, clearly, there's a revenue pull-through effect that as BSD comes back to levels pre-pandemic, there should be that corresponding benefit to the bottom line as we've taken corrective actions on the overhead, corrective actions in costs. If you look at gross profit, that's mostly a function of the product mix. Currently, there were some impact of PPE categories that were heavily promoted in the channel in the quarter. So those -- I would say those are isolated. Other than that pressure, we saw a good mix shift in BSD into core supplies, which, as you know, have a higher margin profile. And as the economy reopens and we start to see the pull-through, our expectation is, of course, supplies become a bigger portion of that overall recovery, which will have a corresponding impact on the bottom line. But clearly, as we look at the balance of this year in 2022, the reopening and the timing of the reopening and the return to normalization will have a significant impact with BSD. And we expect that the margins as we look in 2019 and 2018 to get back to those margins in 2022 and beyond as the top line normalizes.

Michael Lasser -- UBS -- Analyst

Could I -- let me just clarify Gerry's comments, you're evaluating the impact of a hybrid work arrangement on the BSD business. Does that mean if we're in a situation where there's perpetually higher working from home, the BSD might have a more difficult time getting back to its pre-pandemic level?

Gerry P. Smith -- Chief Executive Officer and Director

No, I don't -- not at all. I think that the -- what we've done relative to our sales model, the momentum we have from a win rate perspective and the momentum we've had against from not only against competition, I'm very optimistic over a period of time, we're going to get back to pre-pandemic levels. Our Federation businesses are doing great. They're doing a fantastic job of growing and driving operating income as well. So -- and obviously, we're continuing to look at models of how to ensure we capture some of that spend as people are both working from home and working at the office as well.

Operator

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

Christian Carlino -- JPMorgan -- Analyst

Good morning, It's Christian Carlino on for Chris. JPMorgan. I was wondering, have you noticed any impact to the business due to the delta variant, particularly some governments have begun restrictions again. So what are you hearing from your larger contract customers around return to office?

Gerry P. Smith -- Chief Executive Officer and Director

We're still evaluating, but we haven't seen an impact really. I mean it's -- the momentum has continued from where we were early from quarter one, if you look at sequentially. Previously, we did see an impact for some of the other surges. But this one, it seems like from -- especially from a school perspective, education perspective, I mean schools are opening, flights are happening, universities going back. Now do the people have to wear mask, do they have to go up and obviously from a vaccination perspective. But we haven't seen a huge impact relative to at least now that we will continue to evaluate.

Christian Carlino -- JPMorgan -- Analyst

Got it. That's very helpful. And then the press release said that the NewCo will have around 1,100 stores once the spin is done early next year. Does that mean you're done closing retail stores? Or is that just using the current store count?

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Yes, I was just using the current store count. So we haven't updated on existing store count. So there continues to be evaluation under our maximized B2B plan. As we continue to progress through the year, we'll be providing that update, but that was just a reference to existing store count.

Christian Carlino -- JPMorgan -- Analyst

Got it. And then last one, what are some of the earlier reads you're seeing from BuyerQuest now that you've mostly integrated it into the digital platform?

Gerry P. Smith -- Chief Executive Officer and Director

We're very optimistic with what's happening. Great progress from a BuyerQuest perspective of integrating the team, a number of new customer opportunities. We've added a very highly talented additional executive hires across the business. And Ravi and team. But we're very optimistic that it was the right asset to acquire, and it's given us an ability to accelerate the platform. And so very bullish on the digital platform moving forward.

Christian Carlino -- JPMorgan -- Analyst

Thank you.

Operator

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

William Kafoure -- Elevation -- Analyst

Hi, This is Will Kafoure from Elevation. And congrats on the great quarter. My question was partially answered just now previously, but just has to do around retail margins more on the cost side. I know you mentioned a few moving pieces, leases, labor model, store closures. I know you're not giving guidance, but what inning would you say that we're in, in terms of optimizing the cost structure in retail? And then as a follow-up, has that strategy changed at all given the spin-out of retail?

Gerry P. Smith -- Chief Executive Officer and Director

I'll take the first part and Anthony jump in as well. I mean the work that Kevin and his team have done has been exceptional. I mean, I don't want to emphasize the labor model we put in place were -- is, I think, industry leading, and we talk about low-cost model here all the time. We're always looking for ways to transform and drive the business. We're also talking about delivering value. But I mean the 30-minute guarantee we have for BOPIS and curbside pickup is huge. Only two retailers across the country actually do that guarantee, and we're operating at a really, really high level of performance relative to that. So we think that's a huge value add. But our ability to go off and meet and greet. Our Net Promoter Score is up dramatically in our retail business over the last couple of years. So all assets -- that team is firing in all cylinders. They're doing not just the cost piece, but it's the customer satisfaction piece. It's the offerings we have with our merchant teams and our stores. And so I am extremely pleased with the progress. I think that continues as we go through spin. And I think that business is going to be viable and well positioned to be successful in the future. I'll let Anthony comment on the specifics on margin.

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Yes. So thanks for the question. As I mentioned in prior quarters, our maximized B2B plan, which is effectively looking at our retail footprint and optimizing that footprint continues to be in place. And that plan is intended, as we mentioned, to optimize cash flow, reduce our overall lease liability and increased flexibility from the operating model standpoint. A lot of the operating model changes that we've made are in place and continue to provide that benefit. As retail continues to perform, we'll look at the trajectory of store closures. We may alter that trajectory. But the overall framework in terms of the discipline we've instilled in looking at the four-wall EBITDA as well as the opportunities to continue to drive value through the chain, it remains intact and unchanged.

Gerry P. Smith -- Chief Executive Officer and Director

Any other questions, Will?

Operator

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

Gerry P. Smith -- Chief Executive Officer and Director

Yes. First I do want to thank again my team for an exceptionally strong quarter, and I appreciate all the work we're doing across our financial results as well as our culture as well and what we're doing from a community impact perspective as well. So thank you for your interest and support today and for everyone on the call, and we look for our next call in the future, and have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Timothy J. Perrott -- Vice President of Investor Relations

Gerry P. Smith -- Chief Executive Officer and Director

Nelson David Bleisch -- Chief Legal and Secretary

Diego Anthony Scaglione -- Executive Vice President and Chief Financial Officer

Chris McGinnis -- Sidoti and Company -- Analyst

Michael Lasser -- UBS -- Analyst

Christian Carlino -- JPMorgan -- Analyst

William Kafoure -- Elevation -- Analyst

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