Bluestem Group Inc. Announces Unaudited Consolidated Third Quarter Earnings Results and Updated Fiscal 2016 Guidance

EDEN PRAIRIE, Minn.--()--Bluestem Group Inc. ("Bluestem Group" or the "Company")(OTCMKTS: BGRP) today reported unaudited consolidated financial results that include its wholly-owned subsidiary, Bluestem Brands, Inc. and its subsidiaries (“Bluestem”), for the 13- and 39-weeks ended October 28, 2016 and October 30, 2015. We refer to the 13-week periods in this release as the “third quarter.” Bluestem is a multi-brand, online retailer of a broad selection of name-brand and private label general merchandise serving the boomer and senior demographic, generally considered age 50 and over, and low- to middle-income consumers across all age demographics.

We are obviously disappointed by our results in the third quarter. The softness in our topline, combined with continued stress in our revolving credit portfolio, has lowered our full year financial performance expectations. While we are relentlessly focused on improving our profitability and financial position, we’ve placed our updated full year sales outlook to the lower end of our previous range and reset our Adjusted EBITDA outlook for the year to a range of $85 million to $95 million,” said Steve Nave, Bluestem Group’s Chief Executive Officer.

Third Quarter 2016 Bluestem Group Consolidated Highlights

  • Net loss for the third quarter of fiscal 2016 was $32.4 million compared to net income of $9.7 million for the third quarter of fiscal 2015. Diluted loss per share was $0.25 for the third quarter of fiscal 2016 compared to diluted loss per share of $0.03 for the third quarter of fiscal 2015.
  • Adjusted EBITDA for the third quarter of fiscal 2016 was a loss of $(2.2) million compared to adjusted EBITDA of $30.9 million for the third quarter of fiscal 2015.
  • Capmark Portfolio asset proceeds for the third quarter of fiscal 2016 were $2.2 million. At the end of the third quarter of fiscal 2016, the Company had $53.7 million in net Capmark Portfolio assets remaining versus $55.3 million at the end of the second quarter of fiscal 2016.
  • Cash and cash equivalents were $162.3 million as of October 28, 2016.

Third Quarter 2016 Bluestem Brands Stand-Alone Highlights

  • Net sales for the third quarter of fiscal 2016 were $445.1 million, a 6.3% decrease over net sales of $475.0 million for the third quarter of fiscal 2015.
  • Net loss for the third quarter of fiscal 2016 was $20.9 million compared to net income of $4.9 million for the third quarter of fiscal 2015.
  • Bluestem’s adjusted EBITDA for the third quarter of fiscal 2016 was a loss of $(0.9) million compared to adjusted EBITDA of $27.0 million for the third quarter of fiscal 2015.
  • Northstar Portfolio net sales for the third quarter of fiscal 2016 were $218.3 million, a decrease of 6.7% compared to $234.0 million for the third quarter of fiscal 2015.
  • Orchard Portfolio’s net sales for the third quarter of fiscal 2016 were $218.7 million, a decrease of 11.0% compared to $245.6 million for the third quarter of fiscal 2015.
  • PayCheck Direct’s net sales for the third quarter of fiscal 2016 were $15.0 million, an increase of 36.5% compared to $11.0 million for the third quarter of fiscal 2015.
  • Northstar Portfolio active accounts were 1.6 million as of the end of the third quarter of fiscal 2016, a decrease of 5.5% compared to 1.7 million as of the end of the third quarter of fiscal 2015.
  • Orchard Portfolio’s active customers were 7.6 million as of the end of the third quarter of fiscal 2016, a decrease of 4.7% compared to 8.0 million as of the end of the third quarter of fiscal 2015.
  • 30+ day delinquent balances on the Northstar Portfolio revolving portfolio were 19.1% at the end of the third quarter of fiscal 2016 compared to 17.6% for the third quarter of fiscal 2015.
  • Net principal charge-off rate on the revolving portfolio was 20.2% for the third quarter of fiscal 2016 compared to 18.8% for the third quarter of fiscal 2015.

Bluestem Updated Fiscal Year 2016 Guidance

Bluestem Group Inc. is revising its limited forward-looking information for Bluestem for the 53-week period ending February 3, 2017, referred to in this release as the Company’s “fiscal” year 2016, as follows:

      Fiscal Year 2016
Bluestem Brands, Inc.     Previous     Revised
Net sales     $2,050MM to $2,150MM     $2,060MM to $2,085MM
% Net sales growth*     -6% to -2%     -6% to -4%
Northstar Portfolio     -9% to -6%     -7% to -5%
Orchard Portfolio*     -3% to -1%     -7% to -5%
Adjusted EBITDA     $130MM to $140MM     $85MM to $95MM
Lender Adjusted EBITDA     $140MM to $150MM     $110MM to $120MM
Maintenance capital expenditures     $19MM to $23MM     $19MM to $23MM
Full year discount on receivables sold to SCUSA     Below 3.75%     Below 4.10%

*Based on pro forma results as if Bluestem owned the Orchard Portfolio at the beginning of fiscal year 2015

      Fourth Quarter Fiscal 2016
Bluestem Brands, Inc.     Previous     Revised
Leverage ratio     Below 3.75X     Below 4.50X
Covenant     <=4.5X
Liquidity     In excess of $100MM     In excess of $100MM
Covenant     >= $40MM

Adjusted EBITDA, as forecasted for fiscal 2016, represents net income (loss) before interest expense, income tax expense/benefit, depreciation and amortization expense, stock-based compensation expense, integration costs and asset impairment charges.

Lender Adjusted EBITDA, as forecasted for fiscal 2016, represents Adjusted EBITDA plus adjustments allowed for under Bluestem’s term debt agreement including, but not limited to, one-time charges, expected cost savings, non-cash charges and other miscellaneous incurred costs as defined under the term debt agreement.

Leverage ratio and liquidity, as forecasted for fiscal 2016, are calculated in accordance with Bluestem’s term debt agreement.

BGRP Nominating Committee and Director Search

Bluestem Group Inc. today announced that its Board of Directors has formed an independent Nominating and Corporate Governance Committee to assist the Board in identifying and selecting individuals to be considered as candidates for election to the Board and that the Committee is conducting a search for qualified candidates to potentially join the Board. The search is focused on candidates with ecommerce, marketing and retail merchandising experience and who have the necessary time to devote to serving on the Company’s Board. The Board’s search will proceed with a sense of urgency while taking the time necessary to identify candidates situated to provide value to the Board, management, the Company and its stockholders.

BGRP Intent to Issue Special Dividend

Bluestem Group Inc. today also announced that its Board of Directors has made a determination to amend its current “no dividend policy” and that it intends to pursue the issuance of a special cash dividend, before the end of the Company’s fiscal year, conditional on a number of factors including (i) the passing of an ordinary resolution by the Board of Directors declaring and approving the payment of the special cash dividend, and (ii) the Directors being satisfied that all legal requirements necessary for the payment of a special cash dividend have been met. Any special cash dividend, if, as and when declared, would be funded by cash on hand.

All financial information included in this release is unaudited. Information for Bluestem Group is presented on a consolidated basis, including Orchard Brands Corporation beginning July 10, 2015. Consolidated information for Bluestem Group’s wholly-owned subsidiary, Bluestem Brands, Inc., is also presented on a stand-alone basis.

Adjusted EBITDA is defined in the accompanying financial information of Bluestem Group and Bluestem Brands. Please see “Bluestem Group Inc. and Bluestem Brands, Inc. Financial Information-Overview and Basis of Presentation” below and accompanying disclosures for a more detailed explanation of the foregoing matters, reconciliations to results reported under GAAP and other important information for investors to consider.

Earnings Teleconference Information

Steve Nave, CEO, and Mark Wagener, CFO, will host a conference call at 8:30 AM ET on Tuesday, December 13, 2016 to discuss these results. The meeting will also be accessible via conference call at (888) 430-8691 or (719) 325-2402 (International), conference ID # 1628860 and broadcast simultaneously at http://www.bluestem.com/investor-relations. Following completion of the call, a recorded replay of the webcast will be available on Bluestem’s website. To listen to the telephone replay, call toll-free (877) 870-5176 or (858) 384-5517 (International), replay pin # 1628860. The telephone replay will be available at 11:30 AM ET December 13, 2016. Additional investor information can be accessed at http://www.bluestem.com/investor-relations.

About Bluestem Group

Bluestem Group Inc. is a holding company whose businesses include Bluestem Brands, a national, multi-brand, online retailer of a broad selection of name-brand and private label general merchandise serving the boomer and senior demographic, generally considered age 50 and over, and low- to middle-income consumers over all age demographics through 16 retail brands that include: Appleseed’s, Bedford Fair, Blair, Draper’s & Damon’s, Fingerhut, Gettington, Gold Violin, Haband, LinenSource, Norm Thompson, Old Pueblo Traders, PayCheck Direct, Sahalie, Solutions, Tog Shop and Wintersilks. Complementing each brand is a large selection of merchandise with payment options that provide customers with the flexibility of paying over time. Bluestem Group is headquartered in Eden Prairie, MN. For additional information visit the Bluestem Group website at www.bluestem.com.

Forward Looking Statements

This release contains statements that are “forward-looking statements”. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. All statements contained herein that are not clearly historical in nature are forward-looking. In some cases, you can identify these statements by use of forward-looking words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project,” “intend,” “could” or similar expressions. In particular, statements regarding Bluestem Group’s plans, strategies, prospects and expectations regarding its business are forward-looking statements. You should be aware that these statements and any other forward-looking statements in this document only reflect Bluestem Group’s beliefs, assumptions and expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Many of these risks, uncertainties and assumptions are beyond Bluestem Group’s control and may cause actual results and performance to differ materially from Bluestem Group’s expectations. Forward-looking statements are based on Bluestem Group’s beliefs, assumptions and expectations of its future performance and actions, taking into account all information currently available to Bluestem Group. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to Bluestem Group or are within its control. If a change occurs, Bluestem Group’s plans, business, financial condition, and liquidity may vary materially from those expressed in its forward-looking statements. Important factors that could cause the actual results to be materially different from Bluestem Group’s expectations include the risks and uncertainties set forth in “Risk Factors” in Bluestem Group’s Report as of and for the fiscal years ended January 29, 2016 and January 30, 2015.

Accordingly, you should not place undue reliance on the forward-looking statements contained in this release. These forward-looking statements are made only as of the date of this release. Bluestem Group undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview and Basis of Presentation

As used in this release:

  • “Bluestem Group,” “we,” “us,” “our,” or “the Company” refers to Bluestem Group Inc. with its consolidated subsidiaries
  • “Bluestem” refers to Bluestem Brands, Inc., an indirect subsidiary of Bluestem Group Inc., which consists of the Northstar Portfolio of retail brands, PayCheck Direct and the Orchard Portfolio of retail brands
  • "Northstar Portfolio” refers to the consolidated Fingerhut and Gettington retail brands
  • “Orchard Portfolio” refers to the consolidated Appleseed’s, Bedford Fair, Blair, Draper’s & Damon’s, Gold Violin, Haband, LinenSource, Norm Thompson, Old Pueblo Traders, Sahalie, Solutions, Tog Shop, and WinterSilks retail brands
  • “Capmark Portfolio” refers to the commercial real estate finance operations of Bluestem Group Inc.

The accompanying financial information for Bluestem Group Inc. is presented on a consolidated basis, including Bluestem Brands, Inc. and its consolidated subsidiaries, which includes Orchard Brands Corporation and its consolidated subsidiaries beginning July 10, 2015. The accompanying financial information for Bluestem Group’s wholly-owned subsidiary, Bluestem, is also presented on a stand-alone basis. All financial information included in this release is unaudited.

The Company reviews and presents the consolidated business results based on the organizational structure management uses to evaluate performance and make decisions on allocating resources and assessing performance. The consolidated business results are presented in five categories: Northstar Portfolio, Orchard Portfolio, PayCheck Direct, Capmark Portfolio and we assign certain revenues and costs to "Corporate".

Bluestem Group Consolidated Financial Information

To supplement the historical financial data derived from Bluestem Group’s and Bluestem’s consolidated financial statements, which are prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), this release uses adjusted EBITDA as a non-GAAP performance measure. In addition, Bluestem’s stand-alone consolidated financial statements includes contribution margin, adjusted general and administrative expenses, free cash flow, lender adjusted EBITDA, lender leverage ratio debt, lender leverage ratio, working capital, adjusted working capital and net liquidity as non-GAAP performance measures. These measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP. Please see the accompanying report on Bluestem Group’s and Bluestem’s results for further important information concerning these measures.

Bluestem Group Inc.

Results for the 13- and 39-weeks ended October 28, 2016 and October 30, 2015

 

BLUESTEM GROUP INC.
Condensed Consolidated Statements of Comprehensive Income
(unaudited - in thousands, except shares and per share amounts)

 

       
13-Weeks Ended 39-Weeks Ended
October 28, 2016     October 30, 2015 October 28, 2016     October 30, 2015
Net sales and revenue
Net sales $ 445,085 $ 474,957 $ 1,341,703 $ 982,507
Commercial real estate revenue 163   7,046   758   16,083  
Total net sales and revenue 445,248   482,003   1,342,461   998,590  
Costs and expenses
Cost of goods sold 245,260 243,929 702,338 533,894
Sales and marketing expenses 130,095 137,783 394,302 245,578
Net credit expense 23,898 15,143 59,719 31,251
General and administrative expenses 51,910 59,327 172,755 148,320
Amortization and depreciation not included in cost of goods sold 17,347 18,067 52,268 45,220
Gain from derivatives in our own equity (14,120 ) (548 ) (6,306 )
Gain on debt extinguishment (2,509 )   (2,509 )  
Total costs and expenses 466,001 460,129 1,378,325 997,957
 
Operating (loss) income (20,753 ) 21,874 (35,864 ) 633
 
Interest expense, net 13,189   13,945   40,394   30,219  
(Loss) income before income taxes (33,942 ) 7,929 (76,258 ) (29,586 )
Income tax (benefit) expense (1,509 ) (1,752 ) 1,219   (35,550 )
Net (loss) income $ (32,433 ) $ 9,681   $ (77,477 ) $ 5,964  
 
Other comprehensive (loss) income
Unrealized gain (loss) on interest rate swap, net of tax 246 (510 )
Net change in unrealized gains/losses on investments securities, net of tax 4   (142 ) (227 ) 5  
Comprehensive (loss) income $ (32,183 ) $ 9,539   $ (78,214 ) $ 5,969  
 
Basic and diluted (loss) income per share - common stockholders
Basic (loss) income per share $ (0.25 ) $ 0.07 $ (0.58 ) $ 0.04
Diluted (loss) income per share $ (0.25 ) $ (0.03 ) $ (0.58 ) $
Basic weighted average shares outstanding 132,036,278 136,160,378 133,176,853 136,142,101
Diluted weighted average shares outstanding 132,036,278 139,119,658 133,176,853 139,865,505
 

BLUESTEM GROUP INC.
Condensed Consolidated Balance Sheets
(unaudited - in thousands)

 

       
October 28, 2016 January 29, 2016
ASSETS
Current assets:

 

Cash and cash equivalents

 

$ 162,293 $ 185,944
Restricted cash

 

17,936 22,569
Customer accounts receivable, net of allowance of $10,566 and $14,434 34,792 44,446
Merchandise inventories

 

294,111 263,579
Promotional material inventories 83,432 53,253
Other current assets

 

56,076   49,233  
Total current assets

 

648,640 619,024
Loans held-for-sale

 

21,975 23,146
Equity investments

 

37,789 47,748
Property and equipment, net

 

134,762 125,001
Intangibles, net

 

432,679 460,551
Goodwill

 

367,481 367,481
Other assets

 

4,976   14,891  
Total Assets

 

$ 1,648,302   $ 1,657,842  

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

Accounts payable

 

$ 266,835 $ 180,601
Accrued costs and other liabilities

 

107,115 129,361
Short-term debt

 

82,660   47,981  
Total current liabilities

 

456,610 357,943
Long-term debt

 

476,019 513,847
Deferred income taxes

 

98,692 98,275
Other long-term liabilities

 

15,256   14,531  
Total liabilities

 

1,046,577   984,596  

 

Stockholders' Equity:

 

Series A participating convertible preferred stock

 

5,000 4,970
Common stock

 

1,323 1,366
Treasury stock (131 ) (131 )
Additional paid-in capital

 

368,671 361,935
Retained earnings

 

227,368 304,875
Accumulated other comprehensive (loss) income, net of tax

 

(506 ) 231  
Total stockholders’ equity

 

601,725   673,246  
Total Liabilities and Stockholders' Equity

 

$ 1,648,302   $ 1,657,842  
   

BLUESTEM GROUP INC.
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)

 

 
39-Weeks Ended
October 28, 2016     October 30, 2015
Operating Activities
Net (loss) income $ (77,477 ) $ 5,964
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Amortization and depreciation expense 55,571 47,061
Provision for doubtful accounts 24,792 10,795
Provision for deferred income taxes 418 (34,390 )
Net gains on loans held for sale, investment securities and other (122 ) (11,098 )
Gain on debt extinguishment (2,509 )
Gain from derivatives in our own equity (548 ) (6,306 )
Stock-based compensation expense 4,178 4,042
Other, net 3,994 520
Net change in assets and liabilities:
Customer account receivables (14,966 ) 14,387
Merchandise inventories (30,532 ) (98,460 )
Promotional material inventories (30,179 ) (42,254 )
Other assets 2,313 (103 )
Accounts payable and other liabilities 82,485 73,063
Payments from loans held for sale 1,289   60,898  
Net cash provided by operating activities 18,707 24,119
 
Investing Activities
Purchases of customer accounts receivable (666,034 ) (717,299 )
Proceeds from sale of customer accounts receivable 666,116 717,650
Acquisitions, net of cash on hand (381,574 )
Net purchases of property and equipment (36,456 ) (24,578 )
Distributions from equity investments 9,613 60,875
Net decrease (increase) in restricted cash 4,633 (4,623 )
Other (565 ) 674  
Net cash used in investing activities (22,693 ) (348,875 )
 
Financing Activities
Borrowings of debt 269,246
Repayments of debt (22,353 ) (93,092 )
Extinguishment of debt (18,150 )
Borrowings on asset backed line of credit 730,413 370,045
Repayments on asset backed line of credit (697,049 ) (297,320 )
Payments for the repurchase of common stock (12,554 )
Treasury shares repurchased   (131 )
Net cash (used in) provided by financing activities (19,693 ) 248,748
 
Effect of Foreign Exchange Rates on Cash 28   (114 )
 
Net Decrease in Cash and Cash Equivalents (23,651 ) (76,122 )
Cash and Cash Equivalents, Beginning of Period 185,944   254,208  
Cash and Cash Equivalents, End of Period $ 162,293   $ 178,086  
 

BLUESTEM GROUP INC.

Non-GAAP Financial Measure

(unaudited - in thousands)

To supplement the consolidated financial statements of Bluestem Group Inc. and its subsidiaries which are presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") we use the following measure that is not in accordance with, or an alternative to, measures prepared in accordance with GAAP ("non-GAAP measure"):

Adjusted EBITDA, as presented, represents net (loss) income attributable to Bluestem Group Inc. before interest expense, income tax (benefit) expense, amortization and depreciation expense, stock-based compensation expense, gain from derivatives in our own equity, gain on debt extinguishment, acquisition transaction costs, integration costs and other costs.

We provide this measure because we believe it is useful to investors in evaluating our operating performance compared to other companies in our industry. As a non-GAAP measure, it has limitations in that it does not reflect all of the amounts associated with Bluestem Group Inc.'s results of operations as determined in accordance with GAAP and is not based on any comprehensive set of accounting rules or principles. This non-GAAP measure should be considered along with the GAAP financial presentation and should not be considered in isolation or as a substitute for results reported in accordance with GAAP. In addition, our calculation of Adjusted EBITDA may not be comparable to the calculation of such measure by other companies.

The following table reconciles Adjusted EBITDA from the nearest GAAP performance measure, which is net (loss) income:

       
13-Weeks Ended     39-Weeks Ended
October 28, 2016     October 30, 2015 October 28, 2016     October 30, 2015
Adjusted EBITDA:
Net (loss) income $ (32,433 ) $ 9,681 $ (77,477 ) $ 5,964
Interest expense 13,189 13,946 40,395 30,223
Income tax (benefit) expense (1,509 ) (1,752 ) 1,219 (35,550 )
Amortization and depreciation expense 18,444 19,107 55,571 47,061
Stock-based compensation expense 1,377 1,095 3,980 4,042
Gain from derivatives in our own equity (14,120 ) (548 ) (6,306 )
Gain on debt extinguishment (2,509 ) (2,509 )
Acquisition transaction costs 8,422
Integration costs 655 2,972 3,921 2,972
Other 588     588    
Adjusted EBITDA $ (2,198 ) $ 30,929   $ 25,140   $ 56,828  
 

Bluestem Brands, Inc.
Results for the 13- and 39-weeks ended October 28, 2016 and October 30, 2015

 

BLUESTEM BRANDS, INC.
Condensed Consolidated Statements of Comprehensive Income and Selected Operating Data
(unaudited - in thousands)

 

       
13-Weeks Ended
October 28, 2016     October 30, 2015 Change (a)
Net sales $ 445,085 $ 474,957 (6.3 )%
Cost of goods sold 245,260   243,929   0.5 %
Gross profit 199,825 231,028 (13.5 )%
Sales and marketing expenses 130,095 137,783 (5.6 )%
Net credit expense 23,898 15,143 57.8 %
General and administrative expenses 50,539 56,826 (11.1 )%
Amortization and depreciation not included in cost of goods sold (b) 17,347 18,067 (4.0 )%
Interest expense, net (c) 13,432   13,945   (3.7 )%
Loss before income taxes (35,486 ) (10,736 ) 230.5 %
Income tax benefit (14,595 ) (15,604 ) (6.5 )%
Net (loss) income $ (20,891 ) $ 4,868   n/m
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 44.9 % 48.6 % (370 ) bps
Sales and marketing expenses 29.2 % 29.0 % 20 bps
Net credit expense 5.4 % 3.2 % 220 bps
Contribution margin (d) $ 45,832 $ 78,102 (41.3 )%
As a percentage of net sales 10.3 % 16.4 % (610 ) bps
Adjusted general and administrative expenses (d) $ 47,976 $ 52,249 (8.2 )%
As a percentage of net sales 10.8 % 11.0 % (20 ) bps
Adjusted EBITDA (d) $ (920 ) $ 27,022 n/m
As a percentage of net sales (0.2 )% 5.7 % (590 ) bps
 
Selected Financial Data:
Liquidity (e) $ 109,591 $ 97,371 12.5 %
Availability on inventory line of credit $ 106,195 $ 94,704 12.1 %
Free Cash Flow (d) $ (5,912 ) $ 22,274 n/m
Lender Leverage Ratio (d) 4.18 3.80 10.0 %
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (f) 144 169 (14.8 )%
Fingerhut FreshStart new customer credit accounts (f) 51 55 (7.3 )%
PayCheck Direct new customer credit accounts (f) 15 13 15.4 %
Orchard Portfolio new gross customers (g) 594 652 (8.9 )%
Northstar Portfolio active accounts (h) 1,594 1,686 (5.5 )%
Orchard Portfolio active customers (i) 7,624 7,996 (4.7 )%
PayCheck Direct eligible client employees (j) 7,597 6,216 22.2 %

(a) Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.

(b) Consists of amortization expense of customer relationship finite-lived intangible assets and depreciation expense of software. Depreciation expense related to owned fulfillment facilities and equipment in Bluestem's fulfillment facilities are included in cost of goods sold.

(c) Interest expense net of interest income.

(d) Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.

(e) Liquidity defined as unrestricted cash and cash equivalents as defined by Bluestem's term loan agreement dated November 7, 2014 plus availability under the asset backed line of credit.

(f) Customers that have made their initial order on account during the fiscal period presented. Revolving new customer credit accounts excludes FreshStart graduates initially included in FreshStart new customer credit accounts when their initial order was made.

(g) Customers who have made a first time purchase from a particular brand within the Orchard Portfolio during the period presented.

(h) Revolving credit customers that have made at least one purchase on account within the previous twelve fiscal months and at least one payment on account since origination.

(i) Customers that have made at least one purchase within the previous twelve fiscal months.

(j) PayCheck Direct clients' full-time active employees with a tenure greater than six months, are at least 18 years old, and have met certain minimum annual earnings.

 

BLUESTEM BRANDS, INC.
Condensed Consolidated Statements of Comprehensive Income and Selected Operating Data
(unaudited - in thousands)

 

       

 

39-Weeks Ended
October 28, 2016     October 30, 2015 Change (a)
Net sales $ 1,341,703 $ 982,507 36.6 %
Cost of goods sold 702,338   533,892   31.6 %
Gross profit 639,365 448,615 42.5 %
Sales and marketing expenses 394,302 245,578 60.6 %
Net credit expense 59,719 31,251 91.1 %
General and administrative expenses 167,929 137,004 22.6 %
Amortization and depreciation not included in cost of goods sold (b) 52,268 45,220 15.6 %
Interest expense, net (c) 40,637   30,219   34.5 %
Loss before income taxes (75,490 ) (40,657 ) 85.7 %
Income tax benefit (27,957 ) (21,162 ) 32.1 %
Net loss $ (47,533 ) $ (19,495 ) 143.8 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 47.7 % 45.7 % 200 bps
Sales and marketing expenses 29.4 % 25.0 % 440 bps
Net credit expense 4.5 % 3.2 % 130 bps
Contribution margin (d) $ 185,344 $ 171,786 7.9 %
As a percentage of net sales 13.8 % 17.5 % (370 ) bps
Adjusted general and administrative expenses (d) $ 158,597 $ 119,566 32.6 %
As a percentage of net sales 11.8 % 12.2 % (40 ) bps
Adjusted EBITDA (d) $ 30,432 $ 54,435 (44.1 )%
As a percentage of net sales 2.3 % 5.5 % (320 ) bps
 
Selected Financial Data:
Liquidity (e) $ 109,591 $ 97,371 12.5 %
Availability on inventory line of credit $ 106,195 $ 94,704 12.1 %
Free Cash Flow (d) $ 14,032 $ 42,859 (67.3 )%
Lender Leverage Ratio (d) 4.18 3.80 10.0 %
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (f) 396 462 (14.3 )%
Fingerhut FreshStart new customer credit accounts (f) 146 165 (11.5 )%
PayCheck Direct new customer credit accounts (f) 35 26 34.6 %
Orchard Portfolio new gross customers (g) 1,844 846 118.0 %
Northstar Portfolio active accounts (h) 1,594 1,686 (5.5 )%
Orchard Portfolio active customers (i) 7,624 7,996 (4.7 )%
PayCheck Direct eligible client employees (j) 7,597 6,216 22.2 %

(a) Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.

(b) Consists of amortization expense of customer relationship finite-lived intangible assets and depreciation expense of software. Depreciation expense related to owned fulfillment facilities and equipment in Bluestem's fulfillment facilities are included in cost of goods sold.

(c) Interest expense net of interest income.

(d) Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.

(e) Liquidity defined as unrestricted cash and cash equivalents as defined by Bluestem's term loan agreement dated November 7, 2014 plus availability under the asset backed line of credit.

(f) Customers that have made their initial order on account during the fiscal period presented. Revolving new customer credit accounts excludes FreshStart graduates initially included in FreshStart new customer credit accounts when their initial order was made.

(g) Customers who have made a first time purchase from a particular brand within the Orchard Portfolio during the period presented.

(h) Revolving credit customers that have made at least one purchase on account within the previous twelve fiscal months and at least one payment on account since origination.

(i) Customers that have made at least one purchase within the previous twelve fiscal months.

(j) PayCheck Direct clients' full-time active employees with a tenure greater than six months, are at least 18 years old, and have met certain minimum annual earnings.

 

BLUESTEM BRANDS, INC.
Condensed Consolidated Balance Sheets
(unaudited - in thousands)

 

       
October 28, 2016 January 29, 2016
ASSETS
Current assets:
Cash and cash equivalents $ 11,310 $ 11,870
Restricted cash 17,852 22,485
Customer accounts receivable, net of allowance of $10,566 and $14,434 34,792 44,446
Merchandise inventories 294,111 263,579
Promotional material inventories 83,432 53,253
Prepaid expenses and other assets 31,802   32,647  
Total current assets 473,299 428,280
Property and equipment, net 134,762 125,001
Intangible assets, net 432,679 460,551
Goodwill 367,481 367,481
Other assets 3,476   3,405  
Total Assets $ 1,411,697   $ 1,384,718  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 266,835 $ 180,601
Current income taxes payable 6,639 34,583
Accrued costs and other liabilities 109,316 111,613
Short-term debt 83,791   47,981  
Total current liabilities 466,581 374,778
Long-term debt 471,585 490,032
Deferred income taxes 153,956 154,428
Other long-term liabilities 8,308   6,171  
Total liabilities 1,100,430 1,025,409
 
Stockholders' equity:
Common stock
Additional paid-in capital 369,602 369,602
Retained earnings (57,825 ) (10,293 )
Accumulated other comprehensive loss, net of tax (510 )  
Total stockholders' equity 311,267   359,309  
Total Liabilities and Stockholders’ Equity $ 1,411,697   $ 1,384,718  
 

BLUESTEM BRANDS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)

 

   
39-Weeks Ended
October 28, 2016     October 30, 2015
Operating Activities
Net (loss) income $ (47,533 ) $ (19,495 )
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Amortization and depreciation expense 55,571 47,061
Provision for doubtful accounts 24,792 10,795
Provision for deferred income taxes (472 ) (9,655 )
Stock-based compensation expense 3,628 3,007
Other, net 4,248 3,611
Net change in assets and liabilities:
Customer accounts receivable (15,220 ) (5,551 )
Merchandise inventories (30,532 ) (98,460 )
Promotional material inventories (30,179 ) (42,254 )
Prepaid expenses and other assets 366 (207 )
Current income taxes payable (27,944 ) (13,604 )
Accounts payable and other liabilities 83,624   85,399  
Net cash provided by (used in) operating activities 20,349 (39,353 )
 
Investing Activities
Purchase of customer accounts receivable (666,034 ) (717,299 )
Proceeds from sale of customer accounts receivable 666,116 717,650
Acquisitions, net of cash on hand (381,574 )
Net purchase of property and equipment (36,456 ) (24,582 )
Net decrease (increase) in restricted cash 4,633   (4,539 )
Net cash used in investing activities (31,741 ) (410,344 )
 
Financing Activities
Borrowings of debt 269,246
Repayments of debt (22,532 ) (35,634 )
Borrowings on asset backed line of credit 730,413 370,045
Repayments on asset backed line of credit (697,049 ) (297,320 )
Cash equity contributions   100,000  
Net cash (used in) provided by financing activities 10,832   406,337  
 
Net Increase (Decrease) in Cash and Cash Equivalents (560 ) (43,360 )
Cash and Cash Equivalents, Beginning of Period 11,870   59,222  
Cash and Cash Equivalents, End of Period $ 11,310   $ 15,862  
 

BLUESTEM BRANDS, INC.
Supplemental Financial Information - Segment Net Sales
(unaudited - in thousands, except average order size)

 

   
13-Weeks Ended
October 28, 2016     October 30, 2015     Change
$     % of Sales $     % of Sales %
Total sales by merchandise category:
Home $ 124,884 25.8 % $ 133,540 25.3 % (6.5 )%
Entertainment 99,141 20.5 % 105,756 20.1 % (6.3 )%
Fashion 259,789   53.7 % 288,148   54.6 % (9.8 )%
Total merchandise sales (a) 483,814 100.0 % 527,444 100.0 % (8.3 )%
Corporate (6,895 ) (15,589 )
Returns and allowances (49,476 ) (55,395 ) (10.7 )%
Commissions and other revenues 17,642   18,497   (4.6 )%
Net sales $ 445,085   $ 474,957   (6.3 )%
Gross profit rate 44.9 % 48.6 % (370 ) bps
Sales and marketing expense 29.2 % 29.0 % 20 bps
Contribution margin rate (b) 10.3 % 16.4 % (610 ) bps
Average order size (c) $ 107 $ 111
 
Northstar Portfolio sales by merchandise category:
Home $ 100,028 43.7 % $ 106,382 43.0 % (6.0 )%
Entertainment 90,646 39.5 % 98,811 40.0 % (8.3 )%
Fashion 38,591   16.8 % 42,141   17.0 % (8.4 )%
Total merchandise sales (a) 229,265 100.0 % 247,334 100.0 % (7.3 )%
Returns and allowances (15,926 ) (18,085 ) (11.9 )%
Commissions and other revenues 4,994   4,706   6.1 %
Net sales $ 218,333   $ 233,955   (6.7 )%
 
Gross profit rate 38.4 % 41.5 % (310 ) bps
Sales and marketing expense 18.0 % 19.2 % (120 ) bps
Contribution margin rate (b) 10.5 % 16.7 % (620 ) bps
Average order size (c) $ 224 $ 232
 
Orchard Portfolio sales by merchandise category:
Home $ 19,743 8.3 % $ 23,787 8.8 % (17.0 )%
Fashion 219,402   91.7 % 245,059   91.2 % (10.5 )%
Total merchandise sales (a) 239,145 100.0 % 268,846 100.0 % (11.0 )%
Returns and allowances (32,773 ) (36,728 ) (10.8 )%
Commissions and other revenues 12,324   13,523   (8.9 )%
Net sales $ 218,696   $ 245,641   (11.0 )%
 
Gross profit rate 52.3 % 56.1 % (380 ) bps
Sales and marketing expense 40.0 % 38.0 % 200 bps
Contribution margin rate (b) 12.3 % 18.0 % (570 ) bps
Average order size (c) $ 70 $ 73
 
PayCheck Direct sales by merchandise category:
Home $ 5,113 33.2 % $ 3,371 29.9 % 51.7 %
Entertainment 8,495 55.1 % 6,945 61.7 % 22.3 %
Fashion 1,796   11.7 % 948   8.4 % 89.5 %
Total merchandise sales (a) 15,404 100.0 % 11,264 100.0 % 36.8 %
Returns and allowances (777 ) (582 ) 33.5 %
Commissions and other revenues 324   268   20.9 %
Net sales $ 14,951   $ 10,950   36.5 %
 
Gross profit rate 34.4 % 30.2 % 420 bps
Sales and marketing expense 32.1 % 35.5 % (340 ) bps
Contribution margin rate (b) (13.0 )% (22.5 )% 950 bps
Average order size (c) $ 540 $ 584

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.

(b) Represents contribution margin as a percentage of net sales. Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.

(c) Represents merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.

 

BLUESTEM BRANDS, INC.
Supplemental Financial Information - Segment Net Sales
(unaudited - in thousands, except average order size)

 

   
39-Weeks Ended
October 28, 2016     October 30, 2015     Change
$     % of Sales $     % of Sales %
Total sales by merchandise category:
Home $ 382,955 26.2 % $ 370,133 34.6 % 3.5 %
Entertainment 267,441 18.3 % 291,361 27.3 % (8.2 )%
Fashion 808,810   55.5 % 407,328   38.1 % 98.6 %
Total merchandise sales (a) 1,459,206 100.0 % 1,068,822 100.0 % 36.5 %
Corporate (14,134 ) (21,158 )
Returns and allowances (157,168 ) (96,258 ) 63.3 %
Commissions and other revenues 53,799   31,101   73.0 %
Net sales $ 1,341,703   $ 982,507   36.6 %
 
Gross profit rate 47.7 % 45.7 % 200 bps
Sales and marketing expense 29.4 % 25.0 % 440 bps
Contribution margin rate (b) 13.8 % 17.5 % (370 ) bps
Average order size (c) $ 107 $ 141
 
Northstar Portfolio sales by merchandise category:
Home $ 303,269 46.3 % $ 332,676 46.0 % (8.8 )%
Entertainment 247,822 37.9 % 276,692 38.2 % (10.4 )%
Fashion 103,462   15.8 % 114,016   15.8 % (9.3 )%
Total merchandise sales (a) 654,553 100.0 % 723,384 100.0 % (9.5 )%
Returns and allowances (44,722 ) (50,822 ) (12.0 )%
Commissions and other revenues 14,335   13,714   4.5 %
Net sales $ 624,166   $ 686,276   (9.1 )%
 
Gross profit rate 41.3 % 41.9 % (60 ) bps
Sales and marketing expense 19.0 % 19.1 % (10 ) bps
Contribution margin rate (b) 13.7 % 18.7 % (500 ) bps
Average order size (c) $ 230 $ 228
 
Orchard Portfolio sales by merchandise category:
Home $ 65,241 8.5 % $ 29,514 9.2 % 121.1 %
Fashion 701,270   91.5 % 291,574   90.8 % 140.5 %
Total merchandise sales (a) 766,511 100.0 % 321,088 100.0 % 138.7 %
Returns and allowances (110,729 ) (44,339 ) 149.7 %
Commissions and other revenues 38,708   16,804   130.3 %
Net sales $ 694,490   $ 293,553   136.6 %
 
Gross profit rate 54.0 % 55.7 % (170 ) bps
Sales and marketing expense 38.4 % 37.8 % 60 bps
Contribution margin rate (b) 15.7 % 17.9 % (220 ) bps
Average order size (c) $ 73 $ 74
 
PayCheck Direct sales by merchandise category:
Home $ 14,445 37.9 % $ 7,943 32.6 % 81.9 %
Entertainment 19,619 51.4 % 14,669 60.2 % 33.7 %
Fashion 4,078   10.7 % 1,738   7.2 % 134.6 %
Total merchandise sales (a) 38,142 100.0 % 24,350 100.0 % 56.6 %
Returns and allowances (1,717 ) (1,097 )
Commissions and other revenues 756   583  
Net sales $ 37,181   $ 23,836  
 
Gross profit rate 34.9 % 31.9 % 300 bps
Sales and marketing expense 29.6 % 32.7 % (310 ) bps
Contribution margin rate (b) (11.0 )% (14.3 )% 330 bps
Average order size (c) $ 524 $ 576

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.

(b) Represents contribution margin as a percentage of net sales. Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.

(c) Represents merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.

 

BLUESTEM BRANDS, INC.
Supplemental Financial Information - Credit Portfolio
(unaudited - in thousands, except average balance outstanding)

 

   
13-Weeks Ended
October 28, 2016     October 30, 2015     Change
Net credit expense:
Credit management costs $ 18,919 $ 19,267 (1.8 )%
Provision for doubtful accounts 11,535 3,637 217.2 %
Finance charge and fee income 2 (466 ) (100.4 )%
Servicing fee income and portfolio profit sharing (6,558 ) (7,295 ) (10.1 )%
Net credit expense $ 23,898   $ 15,143   57.8 %
 
Serviced Portfolio Selected Credit Data: 13-Weeks Ended
October 28, 2016
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,805 106 65
Average balance outstanding $ 726 $ 98 $ 484
Customer accounts receivable $ 1,311,610 $ 10,322 $ 31,348
Balances 30+ days delinquent (d) $ 251,046 $ 3,318 $ 2,841
Balances 30+ days delinquent as a percentage of total customer accounts receivable (e) 19.1 % 32.1 % 9.1 %
Average customer accounts receivable $ 1,342,888 $ 11,034 $ 31,413
Finance charge and fee income $ 84,957 $ (73 ) n/a
Finance charge and fee income rate (f) 25.3 % (0.9 )% n/a
Net principal charge-offs $ 67,964 $ 2,872 $ 2,150
Net principal charge-off rate (g) 20.2 % 33.9 % 27.4 %
 
13-Weeks Ended
October 30, 2015
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,812 120 38
Average balance outstanding $ 677 $ 103 $ 541
Customer accounts receivable (h) $ 1,225,964 $ 12,385 $ 20,618
Balances 30+ days delinquent (d) $ 215,964 $ 4,333 $ 1,058
Balances 30+ days delinquent as a percentage of total customer accounts receivable (e) 17.6 % 35.0 % 5.1 %
Average customer accounts receivable $ 1,249,882 $ 13,202 $ 19,101
Finance charge and fee income $ 85,093 $ 67 n/a
Finance charge and fee income rate (f) 27.2 % 0.7 % n/a
Net principal charge-offs $ 58,835 $ 3,693 $ 812
Net principal charge-off rate (g) 18.8 % 38.4 % 17.0 %

(a) Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.

(b) FreshStart serviced portfolio is Fingerhut's installment accounts.

(c) PayCheck Direct ("PCD") installment serviced portfolio is installment receivables issued to consumers who are members and employees of participating organizations and employers in the PCD program.

(d) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.

(e) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end as a percentage of total customer accounts receivable as of the customers' statement cycle dates prior to or on fiscal period end.

(f) Revolving finance charge and fee income rate represents finance charge and fee income as a percentage of average customer accounts receivable for the 13-weeks ended October 28, 2016 and October 30, 2015 annualized to 52-week periods for comparability. FreshStart finance charge and fee income rate represents finance charge and fee income as a percentage of the 13 weeks of FreshStart related sales five months prior to the 13-weeks ended October 28, 2016 and October 30, 2015.

(g) Revolving and PCD Installment net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13-weeks ended October 28, 2016 and October 30, 2015 annualized to 52-week periods for comparability. FreshStart net principal charge-off rate represents net principal charge-offs as a percentage of the 13 weeks of FreshStart related sales five months prior to the 13-weeks ended October 28, 2016 and October 30, 2015.

(h) Customer account receivable excludes impact from purchase accounting fair value adjustment.

 

BLUESTEM BRANDS, INC.
Supplemental Financial Information - Credit Portfolio
(unaudited - in thousands, except average balance outstanding)

 

   
39-Weeks Ended
October 28, 2016     October 30, 2015     Change
Net credit expense:
Credit management costs $ 56,520 $ 56,469 0.1 %
Provision for doubtful accounts 24,792 10,795 129.7 %
Finance charge and fee income (1,425 ) (4,648 ) (69.3 )%
Servicing fee income and portfolio profit sharing (20,168 ) (31,365 ) (35.7 )%
Net credit expense $ 59,719   $ 31,251   91.1 %
 
Serviced Portfolio Selected Credit Data: 39-Weeks Ended
October 28, 2016
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,805 106 65
Average balance outstanding $ 726 $ 98 $ 484
Customer accounts receivable $ 1,311,610 $ 10,322 $ 31,348
Balances 30+ days delinquent (d) $ 251,046 $ 3,318 $ 2,841
Balances 30+ days delinquent as a percentage of total customer accounts receivable (e) 19.1 % 32.1 % 9.1 %
Average customer accounts receivable $ 1,376,102 $ 13,967 $ 32,180
Finance charge and fee income $ 275,773 $ 1,182 n/a
Finance charge and fee income rate (f) 26.7 % 3.5 % n/a
Net principal charge-offs $ 198,168 $ 10,823 $ 4,364
Net principal charge-off rate (g) 19.2 % 31.7 % 18.1 %
 
39-Weeks Ended
October 30, 2015
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,812 120 38
Average balance outstanding $ 677 $ 103 $ 541
Customer accounts receivable (h) $ 1,225,964 $ 12,385 $ 20,618
Balances 30+ days delinquent (d) $ 215,964 $ 4,333 $ 1,058
Balances 30+ days delinquent as a percentage of total customer accounts receivable (e) 17.6 % 35.0 % 5.1 %
Average customer accounts receivable $ 1,248,142 $ 17,487 $ 17,606
Finance charge and fee income $ 267,350 $ 1,749 n/a
Finance charge and fee income rate (f) 28.6 % 4.3 % n/a
Net principal charge-offs $ 172,539 $ 13,958 $ 1,877
Net principal charge-off rate (g) 18.4 % 34.0 % 14.2 %

(a) Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.

(b) FreshStart serviced portfolio is Fingerhut's installment accounts.

(c) PayCheck Direct ("PCD") installment serviced portfolio is installment receivables issued to consumers who are members and employees of participating organizations and employers in the PCD program.

(d) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.

(e) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end as a percentage of total customer accounts receivable as of the customers' statement cycle dates prior to or on fiscal period end.

(f) Revolving finance charge and fee income rate represents finance charge and fee income as a percentage of average customer accounts receivable for the 39-weeks ended October 28, 2016 and October 30, 2015 annualized to 52-week periods for comparability. FreshStart finance charge and fee income rate represents finance charge and fee income as a percentage of the 26 weeks of FreshStart related sales five months prior to the 39-weeks ended October 28, 2016 and October 30, 2015.

(g) Revolving and PCD Installment net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 39-weeks ended October 28, 2016 and October 30, 2015 annualized to 52-week periods for comparability. FreshStart net principal charge-off rate represents net principal charge-offs as a percentage of the 26 weeks of FreshStart related sales five months prior to the 39-weeks ended October 28, 2016 and October 30, 2015.

(h) Customer account receivable excludes impact from purchase accounting fair value adjustment.

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands)

To supplement the condensed consolidated financial information of Bluestem Brands, Inc. and its subsidiaries for the 13- and 39-weeks ended October 28, 2016, which are presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), Bluestem uses the following measures that are not in accordance with, or an alternative to, measures prepared in accordance with GAAP (non-GAAP measures):

Contribution margin, as presented, is defined as net sales less cost of goods sold, sales and marketing expenses and net credit expense. Contribution Margin represents the combined performance of merchandising, marketing and credit management activities.

Adjusted general and administrative expenses, as presented, is defined as general and administrative expenses adjusted for stock-based compensation expense, acquisition transaction costs, integration costs, lease termination costs and other.

Adjusted EBITDA, as presented, represents net (loss) income before income tax benefit, interest expense, amortization and depreciation expense, stock-based compensation expense, acquisition transaction costs, integration costs, lease termination costs and other.

Free cash flow, as presented, represents Adjusted EBITDA, as defined above, less maintenance capital expenditures.

Lender Adjusted EBITDA, as presented, represents Adjusted EBITDA, as defined above, plus adjustments allowed for under Bluestem's term debt agreement including certain transaction-related expected cost savings, Orchard Portfolio adjusted EBITDA prior to Bluestem’s acquisition of the Orchard Portfolio, certain non-cash charges, certain one-time charges and other. Expected cost savings reflect the projected impact of cost synergies with the implemented headcount reductions, catalog circulation reductions and anticipated vendor savings, such as savings in print and paper, transportation, credit operations and marketing. Other includes such charges as, but not limited to or necessarily inclusive of, strategic investment charges, system implementation charges, executive recruiting and public company costs for those periods in which such charges were incurred.

Lender Leverage Ratio Debt, as presented, is defined as short-term debt plus long-term debt less deferred charges and cash and cash equivalents.

Lender Leverage Ratio, as presented, represents Lender Adjusted EBITDA, as defined above, divided by Lender Leverage Ratio Debt, as defined above.

Working capital, as presented, is defined as total current assets less total current liabilities.

Adjusted working capital, as presented, represents working capital, as defined above, plus current income taxes payable.

Net liquidity, as presented, is defined as cash and cash equivalents less credit card receivables ("Lender cash and cash equivalents") as defined by the lender plus availability under the asset backed line of credit.

We provide these measures because we believe they are useful to investors in evaluating our operating performance and financial condition compared to other companies in our industry and financial condition and operating performance compared to term loan financial covenants. As non-GAAP measures, they have limitations in that they do not reflect all of the amounts associated with Bluestem's results of operations as determined in accordance with GAAP and are not based on any comprehensive set of accounting rules or principles. Non-GAAP measures should be considered along with the GAAP financial presentation and should not be considered in isolation or as a substitute for results reported in accordance with GAAP. In addition, our calculations of contribution margin, adjusted general and administrative expense, adjusted EBITDA, free cash flow, lender adjusted EBITDA, lender leverage ratio debt, lender leverage ratio, working capital, adjusted working capital and net liquidity may not be comparable to the calculations of such measures by other companies. The results of Orchard Brands Corporation and its subsidiaries are included in the results from the acquisition date of July 10, 2015.

The following table reconciles Contribution Margin from the nearest GAAP performance measure, which is net (loss) income:

       
13-Weeks Ended 39-Weeks Ended
October 28, 2016     October 30, 2015 October 28, 2016     October 30, 2015
Contribution Margin:
Net (loss) income $ (20,891 ) $ 4,868 $ (47,533 ) $ (19,495 )
Income tax benefit (14,595 ) (15,604 ) (27,957 ) (21,162 )
Interest expense, net 13,432 13,945 40,637 30,219
Amortization and depreciation not included in cost of sales 17,347 18,067 52,268 45,220
General and administrative expenses 50,539   56,826   167,929   137,004  
Contribution Margin $ 45,832   $ 78,102   $ 185,344   $ 171,786  
 
Contribution margin % of net sales 10.3 % 16.4 % 13.8 % 17.5 %

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands)

The following table reconciles Adjusted General and Administrative expenses from the nearest GAAP performance measure, which is general and administrative expenses:

 

       
13-Weeks Ended 39-Weeks Ended
October 28, 2016     October 30, 2015 October 28, 2016     October 30, 2015
Adjusted General and Administrative Expenses:
General and administrative expenses $ 50,539 $ 56,826 $ 167,929 $ 137,004
Less:
Stock-based compensation expense 1,101 1,059 3,628 3,007
Acquisition transaction costs 8,342
Integration costs 655 2,972 3,921 2,972
Lease termination costs 1,122
Other 807   546   1,783   1,995  
Adjusted General and Administrative Expenses $ 47,976   $ 52,249   $ 158,597   $ 119,566  
 
Adjusted general and administrative expenses % of net sales 10.8 % 11.0 % 11.8 % 12.2 %

The following table reconciles Adjusted EBITDA from the nearest GAAP performance measure, which is net (loss) income:

       
13-Weeks Ended 39-Weeks Ended
October 28, 2016     October 30, 2015 October 28, 2016     October 30, 2015
Adjusted EBITDA:
Net (loss) income $ (20,891 ) $ 4,868 $ (47,533 ) $ (19,495 )
Income tax benefit (14,595 ) (15,604 ) (27,957 ) (21,162 )
Interest expense 13,432 13,946 40,638 30,223
Amortization and depreciation expense 18,444   19,107   55,571   47,061  
EBITDA (3,610 ) 22,317 20,719 36,627
Stock-based compensation expense 1,101 1,059 3,628 3,007
Acquisition transaction costs 8,342
Integration costs 655 2,972 3,921 2,972
Lease termination costs 1,122
Other 934   674   2,164   2,365  
Adjusted EBITDA $ (920 ) $ 27,022   $ 30,432   $ 54,435  
 
Adjusted EBITDA % of net sales (0.2 )% 5.7 % 2.3 % 5.5 %

The following table reconciles Free Cash Flow from Adjusted EBITDA:

       
13-Weeks Ended 39-Weeks Ended
October 28, 2016     October 30, 2015 October 28, 2016     October 30, 2015
Free Cash Flow:
Adjusted EBITDA $ (920 ) $ 27,022 $ 30,432 $ 54,435
Less:
Maintenance capital expenditures 4,992   4,748   16,400   11,576  
Free Cash Flow $ (5,912 ) $ 22,274   $ 14,032   $ 42,859  
 
Free Cash Flow % of net sales (1.3 )% 4.7 % 1.0 % 4.4 %

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands)

The following table presents Trailing Twelve Months Lender Adjusted EBITDA and Lender Leverage Ratio:

   
Trailing Twelve Fiscal Months
October 28, 2016     October 30, 2015
Adjusted EBITDA $ 106,827 $ 111,071
Expected cost savings (a) 18,971
Orchard pre-acquisition adjusted EBITDA 45,019
Non-cash charges 961
One-time charges

2,000

Other (b)

5,869

  6,016  
Lender Adjusted EBITDA $ 134,628   $ 162,106  
Lender Leverage Ratio Debt:
Short-term debt
Current portion of term loan, net of discount $ 24,877 $ 25,013
Asset backed line of credit 56,286 80,619
Capital lease obligation 2,629   2,358  
Total short-term debt 83,792 107,990
Term Loan, net of discount 468,829 493,729
Capital lease obligation 2,755   3,004  
Total long-term debt 471,584   496,733  
Total Debt 555,376 604,723
Plus: Deferred charges 10,483 13,048
Less: Cash and cash equivalents (3,397 ) (2,172 )
Lender Leverage Ratio Debt $ 562,462   $ 615,599  
 
Lender Leverage Ratio 4.18 3.80

The following table presents adjusted working capital and net liquidity:

       
October 28, 2016 October 30, 2015
Total current assets $ 473,299 $ 505,969
Total current liabilities 466,581   468,534  
Working capital $ 6,718 $ 37,435
Plus: Current income taxes payable(c) 6,639   3,928  
Adjusted working capital $ 13,357   $ 41,363  
 
Cash & cash equivalents $ 11,310 $ 15,862
Less: Third party credit card receivables (7,914 ) (13,195 )
Lender cash & cash equivalents 3,396 2,667
Plus: Inventory line availability 106,195   94,704  
Net Liquidity $ 109,591   $ 97,371  
 

(a) Expected cost savings reflects the projected impact of cost synergies with the implemented headcount reductions and anticipated vendor savings.

(b) Other includes charges such as, but not limited to or necessarily inclusive of, strategic investment charges, system implementation charges, executive recruiting and public company costs.

(c) Current income taxes payable are substantially all inter-company liabilities among entities consolidated within Bluestem Group Inc.

Contacts

Investor Relations:
ICR
Denise Garcia
IR@bluestembrands.com

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