The ODP Corporation

Good morning and welcome to the ODP Corporation's third quarter 2021 earnings conference call. All lines will be in a listen-only mode for today's call, after which instructions will be given in order to ask a question. At the request of the ODP Corporation, today's call is being recorded. I would like to introduce Tim Perrott, Vice President, Investor Relations. Mr. Perrott, you may begin.

Good morning, and thank you for joining us for the ODP Corporation's Third Quarter 2021 Earnings Conference Call. This is Tim Perotte, and I'm here with Jerry Smith, our CEO, and Anthony Scaglione, our Executive Vice President and CFO. Also joining us today is David Bleich, our Executive Vice President and Chief Legal and Administrative Officer. During today's call, Jerry will provide an update on the business, focusing much of his commentary on our accomplishments in the third quarter including our operational performance, as well as the progress we are making on all of our initiatives to drive shareholder value. David will then provide commentary on 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 the highlights of our divisional performance. And following Anthony's comments, we will then open up the line for your questions. Before we begin, I'd like 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. Security and Exchange Commission. Also 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 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 would now turn the call over to ODP's Chief Executive Officer, Jerry Smith. Jerry?

Thank you, Tim, and good morning to everyone joining our call today. We appreciate you joining us this morning and hope that all of our listeners and their families continue to remain safe and healthy. I'm happy to be here with you today to discuss the results and accomplishments for the third quarter. Our performance in the quarter reflects our team's continued commitment to our low-cost model approach and to the core tenets that drive our business, positioning us to deliver solid operating results while making progress on our strategic initiatives to unlock shareholder value. I'm extremely proud of our team's efforts in delivering these results against a much more demanding industry backdrop related to supply chain challenges and the resurgence of the COVID-19 Delta variant during the quarter. As I've mentioned on our previous calls, our performance and strategic actions are aligned and supported by the key tenets that form the foundation of our business as outlined on slide four in our presentation. These tenets form our foundation as we address market dynamics, pursue new avenues for growth, and continue to position our business to unlock future value for shareholders. This foundation is rooted in driving a low-cost model, expanding our value proposition, 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 utilizing the strength of our business model and the flexibility of our infrastructure to address the market demands. At the heart of our approach is our winning 5C culture. This quarter, I will highlight one of the key components of our 5Cs, and that is creativity. We have leveraged this component of our culture over many years to create a highly flexible supply chain operation backed by strong relationships and a well-developed infrastructure to allow us to navigate many of the current challenges impacting the macro supply chain and economy. This approach has helped our team deliver solid operating results while continuing to advance our digital platform business and making progress on our plans for separation. 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 for our associates and our customers continues to be priority number one. We continue to monitor state and national health guidelines, and we're maintaining safety measures as necessary to help protect our associates and customers. Now for the highlights. We delivered solid operating performance despite the industry-wide challenges related to sourcing and supply chain, as well as a slower pace of back to office due to the spread of the Delta variant. We were happy to see a more normal back to school season as a greater number of students and teachers returned to the classroom this year with core supply categories, helping to offset lower sales for products previously in strong demand during the height of the pandemic. Our continued low cost model focus and flexible supply chain operations hope to drive solid operating results against a more challenging backdrop. Next, supporting one of our key tenants of driving new avenues of growth, In higher value markets, we continue to advance our digital platform business, Verus. We continue to make great progress on building out the team and capabilities, leveraging new customers on the BuyerQuest platform, while advancing our collaboration with Microsoft. The progress we are making places us in an excellent position to drive value in the large and growing digital business commerce market in the future. Also, we're continuing to make progress on our plans to separate ODP into two independent, publicly traded companies. We announced the top leadership for both companies, and we're making meaningful progress on the various commercial agreements between the feature entities. Finally, we're happy to report that we've been executing upon our share repurchase program, buying back over $100 million of stock during the quarter and through the end of October. Now turning to more details regarding our accomplishments in the quarter, beginning on slide six. Our overall performance reflects both the positive attributes of our team's approach to operational excellence, as well as the value of other investments we made in our infrastructure as we faced a more challenging industry backdrop during the quarter. This backdrop included the spread of the Delta variant, delaying the return to office plans for many of our enterprise customers, as well as the global supply chain constraints and inflation have created the recent industry-wide sourcing and cost challenges. While our top line did see pressure from a reduction in our store footprint and lower demand for certain pandemic-related products, our team's continued focus on driving a low-cost model while leveraging the flexibility of our supply chain assets allowed us to deliver solid operating results. Supporting our performance, we drove stronger year-over-year growth in our contract channel as private enterprises slowly began to return to the office. The back-to-school season, while still not back to 2019 industry levels, saw more students and teachers returning to the classroom, contributing to our performance as well. In all, our teams disciplined and utilized their supply chain strength and continued efficiencies across their business offset many of the challenges and helped us drive $122 million in adjusted operating income in the third quarter. Now turning to our divisional performance, starting with our Business Solutions Division, or BSD, as highlighted on slide seven. Our BSD segment, consisting of both our contract and our e-commerce channels, continues to provide a strong value proposition for customers with a broad product and service assortment backed by robust sourcing and trusted supply chain operation. This segment of our business serves nearly half of the Fortune 500 companies, as well as medium and smaller enterprises, and other consumers through our digital presence. BSD's revenue performance was highlighted by the increase in sales in our contract channel, driven by stronger demand in core categories from private enterprises, more than offset by lower sales through our e-commerce channel. Overall, revenue was down about 2% year-over-year. Let me provide more details. The business environment in the quarter was stable in general. However, as I stated earlier, The pace of back-to-office for many of our customers was slower than we anticipated due to the spread of the Delta variant. Despite this challenge, we drove an increase in sales in our contract channel, led by the stronger demand from enterprise customers for our core supply products, furniture, and managed print services. While we are happy to see this progress, it is slower than we anticipated given the Delta variant effect. Much of this progress was offset by lower sales on our e-commerce channel compared to the very strong period last year as the demand for pandemic-related products, including PPE and furniture, was lower in the quarter. I would add that a more challenging sourcing environment for technology products contributed to lower sales in this category. Revenue generated from our adjacency categories, including cleaning and break room, furniture, tech, and copy and print, remained flat in total with last year as a percentage of BSD sales. As return to office begins to accelerate, we expect our core categories to overperform until the pace normalizes. From an operating perspective, we continue to maintain our focus on our low-cost model approach, flexing our assets and utilizing pricing strategies to help offset increased costs related to supply chain operations and other inflationary impacts. Our sales team is continuing to do a good job in both retention and winning new business. Our retention rate is at the highest it's ever been, and we're earning new business. Moving forward, we're also encouraged by the indication of the positive impacts to our business as customers return to the office. In general, on a per customer basis, our recent data shows that we do experience a lift in sales as more employees return to the office, and as just discussed, primarily in our core supply categories. This high correlation with return to work in the office will drive higher consumption of our breadth of products. And while the return to office has been slower to materialize than we had hoped for in the second half of this year, we are confident that we are well positioned to capture the demand as activity increases in the new year. Now, turning to our performance in our retail division, as shown on slide eight. Our retail division continues to provide strong value and support for our consumers, including education, home office, and small business customers, through a network of over 1,080 retail stores and the convenience of a buy online, pick up in store, or BOPAs offering. I'm proud of our associates for maintaining strict safety protocols and providing a positive shopping experience for our customers, leading to continued strong net promoter scores. Revenue performance in the quarter was lower versus last year, primarily due to 160 fewer stores in service. However, when adjusting for the store closure impact, we estimate revenue was down in the low single digits. some of the dynamics in the quarter include the resurgence of the back-to-school season as more students and teachers came back to the classroom. While we're happy to see the return to a more normal back-to-school season, as I mentioned earlier, the total supplies industry has not yet recovered to pre-pandemic levels in 2019. That said, the back-to-school season was positive for us as we drove solid year-over-year growth in our school supplies and related categories. In fact, for the categories which we participate, the data shows that we picked up market share in back-to-school categories versus last year. In all, we are encouraged by the improved year-over-year trend and looking forward to the industry fully recovering to pre-pandemic levels in the future. These positives helped offset some of the impacts from lower foot traffic and lower sales for product categories that were previously in very high demand during last year's third quarter. During the height of the pandemic last year, we experienced very strong demand in our cleaning and break room, home office and technology categories as customers procure PPE and set up home offices near the beginning of the pandemic. As COVID-19 cases have begun to recede, demand for these items were lower compared to the strong performance in these categories last year. Additionally, we did face challenges in the quarter related to supply chain and sourcing availability for a number of SKUs we sell. The number of out-of-stocks we had this quarter continues to run higher than pre-pandemic levels most notably for technology products and PCs, driven by the continued chip shortages, as well as overall challenges for components, including certain ink and toner. We are continuing to work with our vendors and partners to efficiently source these products and improve our inventory levels, but we expect these challenges to persist in the near term. Operationally, our team's continued focus on our low-cost model helped to offset some of these challenges, including the increase in overall supply chain costs. Through strong cost controls, the benefits of our maximized B2B plan, and the new labor model we implemented last year, our team drove an increase in offering margins versus last year. Overall, we're encouraged by our progress. Our store footprint continues to become more profitable, and our omnichannel presence continues to be a popular choice among our customers. Demand through our BOPUS offering, while slightly lower on a comparable basis relative to last year, is up about 70% versus the same period in 2019. Feeding off the success of our 30-minute guarantee, we recently launched our 20-minute guarantee for in-store and curbside pickup. We are the only company in retail that we know of to offer such a guarantee, which has been well received by our customers. Coupled with the growth of independent delivery channels, we expect this will drive sales and continue to generate good customer satisfaction scores in the quarters to come. Now, as shown on slide nine, I'd like to take a moment to discuss the impacts related to the industry-wide supply chain disruptions and how ODP is in a position of strength to navigate this challenging environment. Much of the recent well-publicized global supply chain challenges began with the onset of the pandemic. During the COVID-19 outbreak, labor resources were constrained both in manufacturing and transportation, factory hours were limited, and a demand shift from services to products added additional stress to the system. One of the obvious early casualties was the microchip shortage, causing sourcing and supply challenges in everything from vehicles to PCs. And I know how frustrating this challenge can be, as I was the former COO with global supply chain responsibilities of a major technology and PC manufacturer. These factors continue to put strain on global supply chain assets, including manufacturing, ocean carriers, port operations, long haul, last mile, and labor. Many raw materials used in everyday manufacturing have become scarce and more expensive to ship, causing suppliers to increase costs to their customers, creating an inflationary effect. Transportation costs in the spot market have skyrocketed, with ocean carrier spot rates up hundreds of percentage points over the historical rates, and labor scarcity and costs have continued to rise. All these factors have made it more challenging for all industries to source, import, distribute, and deliver goods, and do so at a reasonable cost. These factors have an impact to our operations, causing sourcing challenges for certain products and increasing costs related to supply chain product and labor. That said, because of the investments we have previously made in our supply chain infrastructure and longstanding relationships, ODP is better positioned than most companies to navigate through these challenges. Why is this so? Well, it boils down to the investments we've made in our infrastructure, including our private fleet, the flexibility of our distribution network, and the long-term relationships we've had with transportation partners and suppliers that place us in a position of strength. Starting at the source, we leverage our large global sourcing office in Asia, a unique asset that provides us with a significant presence in the region, allowing us to stay on the pulse of the manufacturing market dynamics. We have a diverse number of manufacturing partners for a private label and numerous vendor relationships that supply the products we source. We're continuing to work closely with our vendors, focus on accurate forecasts for our inventory, adjusting lead times and leveraging safety stock when needed, helping to reduce the number of out-of-stocks and delays. For the products that we source directly over the ocean and into the U.S., we have long-established contracted rates with a number of different ocean carriers that protect us from the high spot market rates that you've heard about in the media. These are longstanding relationships with contracts that are continuing to be honored. And when we do have a need, we have a backup plan comprised from relationships with non-vessel owning carriers, which also helps us protect some of the costs that we're seeing from higher spot market rates. Regarding port congestion, we utilize a flexible approach with the capability to route to other ports to help alleviate congestion challenges where it is cost-effective and available for us to do so. Additionally, we do a good job at planning well in advance to source and ship goods as necessary. Also, when we saw some pressure building earlier in the year, we put actions in place to help set inventory levels early. This helped us during this year's back-to-school season, which was a good example of how we manage sourcing challenges. Next, a key advantage for ODP is that we have invested in and built our own large private fleet helping manage some of the increases in over-the-road trucking and last-mile delivery costs. And because we deliver to retail stores, we have a strong backhaul program and can use our closed-loop transportation to bring in our goods as well as our vendors' goods. We essentially run our own Less Than Truck Load, or LTL, network, leveraging this network for backhaul and vendor consolidation, hoping to mitigate some of the industry rate increases. For last-mile delivery challenges, We leverage our private fleet and our relationships with over 25 national and regional small parcel carriers with which we have longstanding relationships. Last mile capacity has been severely constrained and capacity limits are in place. While everyone has been scrambling to establish agreements with carriers, we are already there. This helps to mitigate costs, helps to ensure reliable delivery to our customers. Lastly, labor costs continue to be pressured given the tight labor market and supply chain and retail in general. Wage inflation has become a real challenge in industry, increasing labor costs for us and others, which we expect will continue in the near term. We're remaining market competitive for labor resources by using creative approaches that are more short-term orientated, including incentive base, which offers us flexibility in the future. All these are leading to higher supply chain product costs and greater challenges in sourcing and managing inventory. While we're impacted by this environment, expect the challenges to remain for some period of time, we do have pricing flexibility that allows us to pass through some price increases to help alleviate cost pressures, and we can pull other cost levers to help manage margins. Now turning to the progress we're making in our digital platform business, as shown on slide 10. We're very excited about the progress we're making on our digital platform business, Veris, and the impressive team that we have assembled to drive future growth in this valuable market. We've fully integrated BuyerQuest, an industry-leading digital e-procurement technology platform, and are continuing to attract and integrate new customers. We're continuing to advance our collaboration with Microsoft in preparing to bring the capabilities of BuyerQuest to Microsoft's business central customers in the future. We are continuing to generate strong interest from the supplier community as they recognize the expansive reach and capabilities of our new platform. Our progress is placing us on the right path with the right team and technology platform to pursue growth in the large and growing digital business commerce market. While we are still in the early stages, we're extremely excited at the pace at which we are executing and look forward to sharing more as we position the business in 2022 and beyond. Before I turn the call over to David Bleich for a brief update on Sycamore, I wanted to spend a few moments to highlight our progress on our separation initiatives as shown on slide 11. Our plans to separate ODP into two independent, publicly traded companies continue to progress in the third quarter. We are making advancements in all areas of the separation, including organizational structure, operating and supply chain mechanics, IT support, and on the commercial agreements between the companies. As part of this progress, we announced the selection of CEOs of both companies to become effective upon completion of the spinoff as well as the company names for each of the two entities. We announced that Kevin Moffitt, who currently leads our retail business, will be appointed CEO of Office Depot upon completion of the spinoff, and I will lead the ODP Corporation, a leading supplier of B2B solutions serving small, medium, and enterprise-level companies. The timing for completion of the separation currently remains the same. As a reminder, a description of the anticipated post-spend companies and their related assets is shown on slide 12. Separating a highly integrated company like the ODP Corporation is not an easy task. However, we believe that creating two highly focused, pure-play companies enhances our strategic flexibility and unlocks opportunities to meet customer needs while aligning our assets and investment profiles to generate greater values for our shareholders. We remain on track with our plans and expect to provide additional detailed information in the coming quarter. With that, I will now turn the call over to David Bleich, our Executive Vice President and 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.

Thank you, Jerry. As a reminder, on June 4, 2021, USR Parent, the owner of Staples, a Sycamore Partners subsidiary, which I will refer to as 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 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 interests of the company and its shareholders. The company remains in conversation with Sycamore as it further evaluates the potential value and regulatory risk of Sycamore's proposed transaction. The company's previously announced plan to separate the company into two independent publicly traded companies during the first half of 2022 remains on schedule. With respect to CopyCom, the previously disclosed sale process continues to progress. We are working toward announcing the transaction before the end of the year, but there can be no assurance that we will do so. We do not intend to provide any further details on this process until it is completed. I'll now turn the call over to our Chief Financial Officer, Anthony Scaglione.

Thank you, David, and good morning, everyone. I'm happy to be here with you today to discuss our financial results for the third quarter of 2021. As I begin my review, I would like to take a moment to thank our entire team for their continued focus on delivering results against a more challenging industry backdrop while executing on our separation plans. As Jerry mentioned, separating a business as integrated as ODP takes remarkable commitment and skill, and doing so while we're managing the industry challenges is truly impressive. Before I speak to the quarter and as a follow-up to Jerry's comments, I thought I would take a few moments to discuss in more detail some of the costs and inflationary impacts we faced, primarily relating to COGS, supply chain, and labor. as well as the strategies we've been employing to address these headwinds. While these are industry-wide challenges and not unique to our business, we have been taking several actions to help mitigate some of the impact to our operations. Let me start with product inflation. The overall cost of products from our suppliers continues to be on the rise over recent quarters. Materials containing pulp, aluminum, steel, and resin as well as those products sourced overseas, were most affected. This has impacted many of our SKUs, including paper, furniture, tech, and other essential office categories. While it's still in the early stages, in total, across our entire COGS base, we have seen a low to mid-single-digit percent rise on average in overall product costs. Next, supply chain related costs, including transportation, distribution, and labor costs were also higher, creating challenges as we sourced and distributed products to our retail stores and to our end customers. Demand is up and capacity is limited, and transportation and labor costs in supply chain has risen. In total, our supply chain cost to serve was up over 100 basis points, driven from higher transportation and distribution rates, third-party logistics, and labor. breaking out labor costs, wages for logistic workers, and in general, labor costs across our retail operations, when combined, were up high single digits across the business. These costs and sourcing challenges that we faced during the quarter will likely continue into 2022. That said, we are in a strong position to mitigate many of these impacts and have been taking early actions to address. Our strategy has been rooted in a few key areas. First, from a supply and sourcing standpoint, We are leveraging our private fleet and third-party relationships to help mitigate some of the cost increases in transportation and ensure reliable services to our customers. This extends from ocean carrier contract arrangements to domestic small parcel carrier relationships as well as long haul. For product invoice increases in both our retail and BSD channels, we have been managing price actions and passing through cost increases to customers where appropriate while remaining competitive with the market. These price actions are not uncommon. And in fact, we had already anticipated some of the cost pressures and have taken early action in several SKUs. We're also working to manage through increases in labor costs. In our retail segment, our labor model and efficiencies we have gained through our store footprint have helped mitigate some of the increased costs for our operations. In our BSD and supply chain areas, We're using more short-term incentives rather than long-term wage locks, helping us address the wage inflation but dampening long-term effects. The capability to execute upon all these actions is a testament to the investments we have made over the years and a core strength in how we operate on a daily basis. However, the environment has become more challenging, and we expect that these conditions will persist into 2022. That said, we are in a good position to continue to mitigate some of these challenges and to continue to manage accordingly. Now turning to the highlights of our financial results as shown on slide 15, consistent with previous quarters, we have provided our results on both a gap and adjusted basis. Our financial results reflect many of the drivers and dynamics that Gerry identified earlier, including a more normalized back to school season, a slower pace of return to the office activities, as well as the aforementioned supply chain dynamic. As you heard, costs have risen relative to last year in the areas of materials, labor, and supply chain. Our team has remained focused on driving our low-cost model and taking aim at addressing these inflationary cost pressures. We have seen positive results from these efforts, maintaining margins in the business despite the more challenging backdrop. Also, as I mentioned last quarter, I would like to highlight that CompuCom results are being treated from an accounting perspective as an asset held for sale. Therefore, CompuCom results are not consolidated in our top line revenue or at the operating income level and is reflected on a net basis below the operating line. Our prior periods have been adjusted for this change as well. Turning to the specifics of our quarterly results, we generated total revenue of $2.2 billion in the third quarter, down 7% versus Q3 of last year. This was driven primarily by 160 fewer stores in service compared to last year, coupled with lower comparable sales for products previously in high demand during the early stages of the pandemic. We saw an increase in core supply categories, which was offset by lower demand for PPE, cleaning, and furniture categories, primarily in our retail and digital channels. Technology and ink categories were also lower in the quarter, partially driven by sourcing challenges impacting availability. Despite the slower than anticipated back-to-work trends in the quarter, we drove an increase in sales in our enterprise contract channel, and our back-to-school performance generated positive year-over-year results. GAAP operating income in the quarter was $104 million, up slightly from $102 million last year. Included in operating income was $18 million of charges, including $5 million of non-cash asset impairment charges primarily related with the right-of-use assets associated with our retail locations. The remaining $13 million in net merger, restructuring, and other costs was primarily associated with our separation efforts, largely related to third-party advisory costs. We expect these costs to continue as we continue to make progress on our separation activities. Excluding these and other items, our adjusted operating income for the third quarter was $122 million compared to $136 million last year. Unallocated corporate expenses were $26 million as we continued to develop our digital platform business. Adjusted EBITDA was $162 million for the quarter compared to $175 million in last year's third quarter. This includes adjusted depreciation and amortization expense of $36 million and $37 million in the third quarters of 2021 and 2020, respectively. Excluding the after-tax impact from the items mentioned earlier, Adjusted net income for the third quarter was $96 million or $1.76 per diluted share, compared to adjusted net income of $102 million or $1.88 per diluted share in the prior period. Turning to cash flow, we generated operating cash flow of $121 million, which included $3 million of restructuring costs. This compared to operating cash flow of $256 million last year. The reduction year over year is largely due to timing and higher working capital use in the quarter related to an increase in accounts receivable and quicker payment terms for certain items given the sourcing challenges I mentioned earlier. Additionally, we had an AMT tax refund of $44 million in last year's results that did not repeat this year. Capital expenditures in the quarter were $19 million compared to $13 million in the prior year period, reflecting targeted growth investments in our digital transformation distribution network, and e-commerce capabilities, offset by lower CapEx in our retail division. In future quarters, we expect to increase our capital investments in our digital platform as we make progress on VAERS. Adjusting for cash charges of $3 million associated with the company's restructuring plans, adjusted free cash flow in the quarter was $123 million. Now I'd like to cover our business unit performance, starting with our BSD division on slide 16. As a reminder, BSD consists of our contract channel, serving large, medium, and small enterprises, as well as our e-commerce channel, both backed by a flexible and reliable supply chain and distribution network. As you heard from Jerry, the pace of return to work did not materialize as quickly as we had hoped for the quarter due to the spread of the Delta variant. However, we did generate growth in our contract channel. This growth was offset by lower sales in e-commerce. Reported sales in the quarter for BSD were $1.2 billion, down 2% relative to last year's third quarter. On a positive note, as more businesses slowly began to return to the office, we saw an increase in demand for core supplies, driving stronger sales in our contract channel. Demand for core supply categories were up in the high single digits, highlighting the correlation between return to the office activity and core supplies growing in the mix. Also, furniture and print services showed better traction during the quarter in this channel. Overall, adjacency categories remained at 44% of total BSD sales. Offsetting this progress was lower sales in our digital channel compared to the strong demand during the height of the pandemic. Sales of PPE, technology, and furniture, all products in very strong demand at the height of the pandemic, were all lower in this channel during the quarter. That said, our e-commerce channel is a key component of our omnichannel presence, providing our customers with the convenience and ease of shopping online, and fuels our strong and growing BOPUS offerings with those sales reflected in our retail business. BSD's operating performance remained relatively steady despite the challenges related to an increase in supply chain and distribution costs. Operating income was $41 million in the quarter versus $45 million in the prior year period. This represented only a slight decrease as a percentage of sales. A mixed shift into core supplies and continued cost efficiencies helped to mitigate the increase in distribution costs. Now turning to our retail division results as shown on slide 17. Reported sales in the quarter were roughly $1 billion, down 13%, primarily driven by 160 fewer retail stores in service this year versus last year, including seven of which we closed during the quarter. When eliminating the impact of store closures, our estimate of open store comparable sales were just down a few points, continuing the strength we have seen over the last year. This is our estimate of the impact, given a variety of factors making the comparisons difficult on a standalone basis, but we are pleased with the retail store performance and their results. Same-store traffic was slightly lower year-over-year, with the increased back-to-school traffic being offset by lower in-store traffic relative to the third quarter of last year during the pandemic. Our sales conversion rates are up, balanced by lower average order volume, leading to essentially a flat sales per shopper. While the demand for back-to-school supplies still has not recovered to pre-pandemic levels, we did drive stronger growth in school supply categories contributing to our performance. Additionally, we saw strong performance in our copy and print services up about 25% compared to last year. Balancing this progress, we saw lower demand compared to the very strong performance last year for categories relating to the pandemic. These included PPE and cleaning products, furniture, and technology. I would add that out-of-stocks also added to lower sales of technology products like PCs as well as ink during the quarter. Our omnipresence continue to be recognized by the market. Bopas sales on the same store basis were essentially flat with last year, however, are up over 70% from pre-pandemic levels, showing continued strong demand for this service. And as mentioned earlier, our 20-minute guarantee we just launched is the first in a nation to offer this convenient service for our customers. All of these actions allowed us to deliver strong operating margin performance in the quarter despite the higher cost challenges. We generated operating income of $107 million in the quarter, down compared to the $119 million in the same period last year. However, as a percentage of sales, operating margins were 10.7%, a 30 basis point improvement from last year. Strong core supplies, improvements in operating and lease costs, and continued cost efficiencies drove this result. Now briefly turning to our balance sheet highlights as shown on slide 18. We ended the quarter with total liquidity of approximately $1.7 billion, consisting of $753 million in cash and cash equivalents, and $953 million in availability under our asset-based lending facility. Total debt at the end of the quarter was approximately $353 million, primarily comprised of our long-term IRB bonds. Our balance sheet continues to remain 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 October. we repurchased about 1.7 million shares of our stock for $76 million during the quarter. Subsequent to the quarter, we repurchased an additional 600,000 shares for approximately $24 million. This leaves roughly $150 million remaining under our $300 million authorization. As a final comment, I would again like to thank our entire organization for their strong commitment in executing upon our strategic initiatives and meeting the challenges of the quarter. I would emphasize that our entire team is enthusiastic about our future, excited about our path for growth, and energized to continue to create value for shareholders. We are making progress and excited about our new digital platform business, Veris. We are very encouraged by our progress to date and the team we have built. 2022 will be a critical year of development as we enhance the capabilities of this platform, add new customers, and continue to work with the supplier community. Moving forward in the coming year, we expect to continue to invest and focus even more resources targeted at capturing this large and high growth opportunity in the digital business commerce market. We look forward to sharing more details at year end as we continue to position this business. One last comment before we turn it over to your questions. Given the continued unpredictability and the pace of back to office activity, as well as the uncertainty related to the global supply chain, we are continuing to suspend guidance at this time. We do expect that the global challenges related to supply chain costs and inflation would likely intensify as we head into year-end, but expect to continue to manage with the actions I mentioned earlier. To conclude, we remain very encouraged about our future and the progress we are making across all of our strategic initiatives and are keenly focused on leveraging our strong position to navigate the global challenges and drive future growth. With that, I will turn it over to your questions. Thank you.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star, then the number one. Our first question comes from the line of Chris McGinnis. Please state your company name, then proceed with your question.

Good morning. Sedodian Company. Thanks for taking my questions and nice quarter. If we could just start off maybe around Sycamore. Can you Maybe just to explain a little bit more, are you in active conversations with Sycamore at this point? Thanks.

Hey, Chris. Good morning, Jerry. I will say that we're on ongoing conversations, as David said, and we'll continue to evaluate the value as well as the regulatory risk. I think it's really important to highlight that we're going to evaluate all options, whether it's sale, whether it's spend, what's the best option for creating shareholder value. Anthony, the board, and myself take that very seriously, that Our job is to pick the right path with the highest value for our shareholders. And again, we're on ongoing conversations with them to evaluate that.

Okay, great. And just around the supply chain, obviously a lot of talk on the call. Can you just talk about your inventories heading into Q4, how you feel about that? And I guess just on pricing, are you at price at this point or are you still a little bit behind? And I guess how does that progress as you think over Q4 and then head into 2022? Thanks.

Hey, Chris, this is Anthony. I would say on the inventory side, you know, overall, you know, we're right where we expect to be from an inventory level given the sales penetration as well as movement in some of our categories that we started the year heavy.

So if you think about some of the PPE categories, hand sanitizers, we were able to move a lot of that throughout the year from an inventory standpoint.

So as we look at our inventory levels heading into Q4 and into Q1, you know, clearly still challenged in certain areas like ink and toner

Certain technology has been a challenge. We don't see that necessarily correcting in the near term, and it'll continue to be a challenge from an inventory standpoint. But overall, we feel like we're in a good shape as we look into the balance of this year and into Q1. Still some uncertainty, and you'll probably see trends consistent to what we saw in Q3, continuing performance overall in our retail chain. Our contract business within BSD is really going to be contingent on that return to office. which we now expect to more meaningfully be part of our Q1 story versus a Q4, but hopefully trends continue to improve. Jerry? Chris, two things I'll add is I think it's real important.

I'm very proud of this team for the performance we had in this quarter with the headwinds that we experienced. I think it highlights two things. Number one is our low-cost model. We continue to be able to respond to pricing and inflationary pressures and make sure we pass that through and drive that through to the bottom line. But I really want to highlight, we spent a lot of time with the script on it, and both Anthony and I, we really have supply chain strength with Crosstar. We want to thank our supply chain, our procurement, our merchandising, as well as our global sourcing office, Sam Copeland leads in Shenzhen, as well as Hong Kong. So from an end-to-end perspective, we made a lot of investments pretty quietly over the last three or four years. But we have a private fleet. We have long-term relationships with many partners. We have ocean rates that are on a contracted basis. So we've been able to weather. We have many relationships across 3PLs as well. So I think relative to a lot of other people in a lot of other industries or even our industry, because of this focus on supply chain and the strength we have on our teams, we're able to rat quicker and bluntly work through some of the challenges that many people are facing. So we're very proud of the team and you can see from our results our ability to go off and execute to that.

I appreciate that. And then I guess just one last question around uh demand trends uh you know are they i guess specifically the bsd um are you seeing an increase in in october you know an acceleration from the demand uh you saw in q3 um and then just maybe conversations you're having with the customers on kind of timing of coming back into the office thanks yeah i think the good thing there chris is you know where we see seen companies come back more meaningfully in q3 the correlation to a pickup in our core

was pretty high, so we're seeing that positivity as companies return. But given some of the delays that we saw, you know, as the Delta variant began to spread and Q3 became Q4 and now many companies are shifting to Q1, you know, clearly we're monitoring that pace of recovery from a return to office. But we have, you know, been in active conversations with our customers. We see positivity in terms of our ability to service those customers in any environment.

But clearly, you know, the tailwind's going to occur as the normalization to return to office occurs.

Okay. And just one quick question on that hybrid model. Can you just talk about your offering there, how you're positioning it, and is it an opportunity to take share in this environment given, you know, the hybrid model? Thanks.

I think because, you know, I think a couple things. Number one, Steve and his team have done a good job of partnering closely with our large enterprise customers as they source to a hybrid approach. And so we're continuing to make investments in that area. And there's a number of different go-to-market strategies we use. And I think the fact of having the multiple channels we have to reach from a hybrid model is important for us as well. Our online business, we're going to continue to make investments in our apps we use, as well as our websites, as well as having the ability, again, the private fleet is a huge advantage for us. And so we're able to deliver to customers both remotely as well as they come back in the office.

Exactly. And just around Veris, can you just maybe, is there any data points you could provide us? I know it's very early still, but can you just talk about maybe how it's tracking versus your expectations and any more color you could provide around that opportunity?

I think it's, I mean, I'm super pleased in where it's tracking. I think Prentice has built an incredibly strong team from a talent perspective. The Microsoft relation continues to grow and develop, and we have a lot of very positive feedback. Trends on that piece, I think our platform development is going really well. I'll use an analogy for you. I was thinking about this earlier this morning. We're really building a foundation. It's almost like building a house. It takes a long time to see the progress of a house, but we're laying the pipes. We're laying all that infrastructure. We're laying that concrete foundation down. I mean, Terry Lieber is an outstanding technology leader, and him and his team are doing a great job of really building that foundation. And I think as we... further in 2022 and 2023 as people start seeing some of the results of that foundation, I think it's going to be a great value for us. I think we have an outstanding opportunity. I think we're in a space and opportunity that we think there's a wide open market for us to go off and capture.

Great. Thanks for taking my questions. I'll jump back in queue.

Thank you, Chris.

Thanks, Chris. Again, if you would like to ask a question, please press star, the number one. Your next question comes from Michael Lasser. Please state your company before asking your question.

Good morning. Thanks a lot for taking my question. I'm from UBS. Given the correlation between those areas where you have seen a back to office and your sales performance, assuming that 2022 is a more normalized back to office environment, would you expect your business solution sales to get back to where they were in 2019? Or because of hybrid and other factors, it feels going to be below where it is in 2019?

Yeah, I think, Michael, it's too early to tell.

Clearly, the cadence of the return to office, and to my earlier comments around the correlation we're seeing in the pickup in our core as people return to the office is a positive.

Offsetting that is obviously where, ultimately, corporations land in that hybrid model.

So early indications, you know, clearly we're able to serve customers in a variety of ways and we're, you know, building towards the areas that Jerry mentioned from a technology standpoint to ensure that we're capturing that spend for corporations no matter where the individual sits in the office or at home.

But it's too early to tell whether the trends back to 2019 occur in 2022 or we start to see that pace begin in 2022 and continue on in years to come. years back there.

I'll add a little color. Every CFO and every CPO in a company wants to make sure they manage their costs. In the early days of the pandemic, people just were able to expense out, but I think there'll be more and more governance in the future, which will bode well for Office Depot as well as our multiple channels of opportunity.

Thank you. My follow-up question is with supply chain costs weighing on your gross margin in the third quarter and it being down 18 basis points. Is that the number that we should think about using for the fourth quarter? And if that's the case, are there offsets within the SG&A line that could help drive overall margin expansion in the fourth quarter?

I think overall what you saw from a pressure point on supply chain, the labor increase, everything we mentioned in our prepared remarks, I think that trend will continue through Q4. Some of these costs, as we mentioned, are passed through our customers through pricing actions. Others are other initiatives from a productivity standpoint.

I think the company has exhibited that low-cost model to address where those cost pressures are and being ahead of those cost pressures as it relates to some of the pricing areas. And one thing to note that I didn't mention in the earlier question is, you know, we also took a very, you know, deliberate and strong stance as it relates to some of our discounting. So as we looked at the quarter and as we looked at inventory levels, we were not probably as heavily discounted as in years past, which obviously improved our margin profile.

And we expect, given all the challenges on supply chain, the challenges on products, that we'll continue that trend throughout this year.

Thanks a lot.

Your next question comes from the line of William Cofour. Please state your company before asking your question.

Hi. Company's Elevation. Just wondering if you could provide a little more color on the performance of higher education relative to K-12. Thanks.

We saw, I mean, from a back-to-school perspective, K-12 If you look at from a market perspective, overachieved last year, we felt from a forecast perspective, many people thought we'd get back to the industry to get back to 2019 levels. From an NPD perspective, it did not. But the good news is we did take share relative within our sector. So it's above 2020 levels, but still slightly below 2019 levels. I do think as, you know, hopefully that the pandemic continues to wane and If there's not a variant after Delta, then I think that as people get more and more of a back to normal piece, we're hoping in 2022 we'll see some of that 2019 type of level of strength. But I was pleased with the performance of our teams, especially obviously would have liked to have the 2019 levels, but I think I'm hoping 2022 we see more of that.

Great. Thanks. That's all I had.

Thanks so much. Appreciate it.

At this time, I would like to turn it back over to Gary Smith, CEO, for closing remarks.

Well, thanks, everyone, for joining our call today. I want to highlight a couple things. Obviously, we're going to continue to focus on driving our top-line business. We're going to continue to focus on our great execution across our low-cost model. We'll continue to emphasize the power of our supply chain, procurement, sourcing teams across the globe and those relationships we have. And we're going to continue to ensure that We deliver shareholder value by evaluating all different avenues for value for the corporation. Appreciate the time today, and everyone have a great day. Thank you.

Thank you. This concludes today's conference. You may now disconnect. Speakers, please hold the line.