Bluestem Group Inc. Announces Unaudited Consolidated First Quarter and Fiscal Year 2017 Earnings Results

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-weeks ended May 5, 2017 and April 29, 2016. We refer to the 13-week periods in this release as the "first 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.

Bluestem produced stable year-over-year results in the first quarter of 2017. Topline revenue was flat to last year and adjusted EBITDA improved slightly. We continue to make good progress on our turnaround plan and identified an incremental $5 million of in-year 2017 savings, bringing the total 2017 savings to $50 million. The credit portfolio remains a key focus, although we are still seeing the effects of increased sub-prime credit supply on portfolio performance and higher losses persisted in the quarter. We believe we are taking the appropriate steps to improve the portfolio performance and are beginning to see lower delinquency rates in our new vintages,” said Steve Nave, Bluestem Group’s President and Chief Executive Officer.

First Quarter Fiscal 2017 Bluestem Group Consolidated Highlights

  • Net loss for the first quarter of fiscal 2017 was $43.0 million compared to net loss of $33.8 million for the first quarter of fiscal 2016. Basic and diluted loss per share was $0.33 for the first quarter of fiscal 2017 compared to basic and diluted loss per share of $0.25 for the first quarter of fiscal 2016. Restructuring costs of $17.0 million were incurred during the first quarter of fiscal 2017.
  • Adjusted EBITDA for the first quarter of fiscal 2017 was $6.3 million compared to adjusted EBITDA of $1.6 million for the first quarter of fiscal 2016.
  • Capmark Portfolio asset proceeds for the first quarter of fiscal 2017 were $10.3 million. At the end of the first quarter of fiscal 2017, the Company had $14.0 million in net Capmark Portfolio assets remaining versus $23.0 million at the end of the fourth quarter of fiscal 2016.
  • Cash and cash equivalents were $115.8 million as of May 5, 2017. A special dividend of $80.0 million was paid during the first quarter of fiscal 2017.

First Quarter Fiscal 2017 Bluestem Brands Stand-Alone Highlights

  • Net sales for the first quarter of fiscal 2017 were $427.6 million compared to net sales of $428.5 million for the first quarter of fiscal 2016.
  • Net loss for the first quarter of fiscal 2017 was $30.5 million compared to net loss of $19.2 million for the first quarter of fiscal 2016.
  • Bluestem’s adjusted EBITDA for the first quarter of fiscal 2017 was $5.8 million compared to adjusted EBITDA of $3.7 million for the first quarter of fiscal 2016.
  • Northstar Portfolio net sales for the first quarter of fiscal 2017 were $187.0 million, an increase of 2.1% compared to $183.2 million for the first quarter of fiscal 2016.
  • Orchard Portfolio’s net sales for the first quarter of fiscal 2017 were $245.8 million, a decrease of 1.4% compared to $249.3 million for the first quarter of fiscal 2016.
  • Northstar Portfolio active accounts were 1.6 million as of the end of the first quarter of fiscal 2017, a decrease of 6.1% compared to 1.7 million as of the end of the first quarter of fiscal 2016.
  • Orchard Portfolio’s gross active customers were 7.8 million as of the end of the first quarter of fiscal 2017 and 2016.
  • 30+ day delinquent balances on the Northstar Portfolio revolving portfolio were 16.9% at the end of the first quarter of fiscal 2017 compared to 15.9% for the first quarter of fiscal 2016.
  • Net principal charge-off rate on the revolving portfolio was 19.6% for the first quarter of fiscal 2017 compared to 17.5% for the first quarter of fiscal 2016.

All financial information included in this release is unaudited. Information for Bluestem Group is presented on a consolidated basis. 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
The Company will host a conference call at 8:00 AM ET on June 21, 2017. The conference call can be accessed at (888) 516-2447 or (719) 325-2314 (International), conference ID #8256912 and will be 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 (844) 512-2921 or (412) 317-6671 (International), replay pin #8256912. The telephone replay will be available at 11:00AM ET June 21, 2017. 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 14 retail brands that include: Appleseed’s, Bedford Fair, Blair, Draper’s & Damon’s, Fingerhut, Gettington, Gold Violin, Haband, LinenSource (currently in the process of exiting), Norm Thompson, Old Pueblo Traders, Sahalie, 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 February 3, 2017 and January 29, 2016.

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.

BLUESTEM GROUP INC.
BLUESTEM BRANDS, INC.
FINANCIAL INFORMATION
13-weeks ended May 5, 2017 and April 29, 2016

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
  • “BGI Holding Company” refers to the Bluestem Group Inc. legal entity, excluding its subsidiaries
  • “Bluestem” refers to Bluestem Brands, Inc., an indirect subsidiary of Bluestem Group Inc., which consists of the Northstar Portfolio of retail brands, the Orchard Portfolio of retail brands and PayCheck Direct (which was exited in the first quarter of fiscal 2017 and currently is winding down)
  • "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 (currently in the process of exiting), Norm Thompson, Old Pueblo Traders, Sahalie, Solutions (which was exited in the fourth quarter of fiscal 2016), 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. 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. Beginning in fiscal 2017, the consolidated business results are presented in three categories: Northstar Portfolio, Orchard Portfolio, and Corporate and other.

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, program agreement adjusted EBITDA, lender adjusted EBITDA, leverage ratio debt, program agreement leverage ratio, lender leverage ratio, working capital, adjusted working capital, program agreement net liquidity and lender 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-Weeks Ended May 5, 2017

     
 

BLUESTEM GROUP INC.

Condensed Consolidated Statements of Comprehensive Income

(unaudited - in thousands, except shares and per share amounts)

 
13-Weeks Ended
May 5, 2017     April 29, 2016
Net sales and revenue
Net sales $ 427,622 $ 428,516
Commercial real estate revenue 1,704   538  
Total net sales and revenue 429,326   429,054  
Costs and expenses
Cost of goods sold 223,819 214,717
Sales and marketing expenses 123,045 132,999
Net credit expense 29,936 17,177
General and administrative expenses 66,334 66,948
Amortization and depreciation not included in cost of goods sold 15,413 16,234
Loss on impairment 230
Gain on derivatives in our own equity   (548 )
Total costs and expenses 458,777 447,527
 
Operating loss (29,451 ) (18,473 )
 
Interest expense, net 12,865   13,523  
Loss before income taxes (42,316 ) (31,996 )
Income tax expense 707   1,760  
Net loss $ (43,023 ) $ (33,756 )
 
Other comprehensive loss
Unrealized loss on interest rate swap, net of tax (235 ) (336 )
Net change in unrealized gains/losses on investments securities, net of tax   (231 )
Comprehensive loss $ (43,258 ) $ (34,323 )
 
Basic and diluted loss per share - common stockholders
Basic and diluted loss per share $ (0.33 ) $ (0.25 )
Basic and diluted weighted average shares outstanding 132,036,278 135,522,684
 
         

BLUESTEM GROUP INC.

Condensed Consolidated Balance Sheets

(unaudited - in thousands)

 
May 5, 2017 February 3, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 115,774 $ 212,942
Restricted cash 16,037 15,797
Customer accounts receivable, net of allowance of $18,440 and $17,041 40,101 50,053
Merchandise inventories 217,964 229,970
Promotional material inventories 60,966 49,730
Other current assets 29,511   39,135  
Total current assets 480,353 597,627
Property and equipment, net 121,133 130,065
Intangibles, net 204,278 208,563
Goodwill 202,556 202,556
Other assets 15,339   41,926  
Total Assets $ 1,023,659   $ 1,180,737  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 177,169 $ 221,539
Accrued costs and other liabilities 95,581 154,095
Short-term debt 63,342   47,500  
Total current liabilities 336,092 423,134
Long-term debt 439,526 468,924
Deferred income taxes 37,635 37,474
Other long-term liabilities 38,696   37,470  
Total liabilities 851,949   967,002  
 
Stockholders' Equity:
Series A participating convertible preferred stock 5,000 5,000
Common stock 1,323 1,323
Treasury stock (131 ) (131 )
Additional paid-in capital 291,169 289,789
Retained earnings (126,037 ) (82,867 )
Accumulated other comprehensive income, net of tax 386   621  
Total stockholders’ equity 171,710   213,735  
Total Liabilities and Stockholders' Equity $ 1,023,659   $ 1,180,737  
 
     

BLUESTEM GROUP INC.

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
13-Weeks Ended
May 5, 2017     April 29, 2016
Operating Activities
Net loss $ (43,023 ) $ (33,756 )
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation expense 16,801 17,427
Loss on impairment 230
Provision for doubtful accounts 18,152 6,079
Provision for deferred income taxes 161 909
Loss on servicing right 1,250
Net gains on loans held for sale, investment securities and other (1,404 ) (168 )
Stock-based compensation expense 1,346 1,200
Other, net 1,310 991
Net change in assets and liabilities:
Customer account receivables 3,762 (642 )
Merchandise inventories 12,006 (12,008 )
Promotional material inventories (11,236 ) (19,534 )
Other assets 10,062 (4,208 )
Accounts payable and other liabilities (23,185 ) (5,195 )
Payments from loans held for sale   43  
Net cash used in operating activities (13,768 ) (48,862 )
 
Investing Activities
Purchases of customer accounts receivable (193,394 ) (193,775 )
Proceeds from sale of customer accounts receivable 181,432 193,806
Net purchases of property and equipment (3,788 ) (15,287 )
Distributions from equity investments 4,430 3,815
Net decrease (increase) in restricted cash (240 ) 2,963
Other (13 )  
Net cash used in investing activities (11,573 ) (8,478 )
 
Financing Activities
Repayments of debt (7,200 ) (7,554 )
Borrowings on asset backed line of credit 130,999 278,427
Repayments on asset backed line of credit (115,598 ) (207,545 )
Payments for the repurchase of common stock (12,553 )
Payment of dividends (80,023 )  
Net cash (used in) provided by financing activities (71,822 ) 50,775
 
Effect of Foreign Exchange Rates on Cash (5 ) 53  
 
Net Increase (Decrease) in Cash and Cash Equivalents (97,168 ) (6,512 )
Cash and Cash Equivalents, Beginning of Period 212,942   185,944  
Cash and Cash Equivalents, End of Period $ 115,774   $ 179,432  
 

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 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 attributable to Bluestem Group Inc. before income tax expense, interest expense, net, amortization and depreciation expense, loss on impairment, loss on servicing right, stock-based compensation expense, gain on derivatives in our own equity, integration costs, restructuring costs and other.

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:

     
13-Weeks Ended
May 5, 2017     April 29, 2016
Adjusted EBITDA:
Net loss $ (43,023 ) $ (33,756 )
Income tax expense 707 1,760
Interest expense, net 12,865 13,523
Amortization and depreciation expense 16,801 17,318
Loss on impairment 230
Loss on servicing right 1,250
Stock-based compensation expense 1,346 1,200
Gain on derivatives in our own equity (548 )
Integration costs 2,069
Restructuring costs 14,142
Other 1,977    
Adjusted EBITDA $ 6,295   $ 1,566  
 
 

Bluestem Brands, Inc.
Results for the 13-Weeks Ended May 5, 2017

         
 

BLUESTEM BRANDS, INC.

Condensed Consolidated Statements of Comprehensive Income and Selected Operating Data

(unaudited - in thousands)

 
13-Weeks Ended
May 5, 2017     April 29, 2016 Change (a)
Net sales $ 427,622 $ 428,516 (0.2 )%
Cost of goods sold 223,819   214,717   4.2 %
Gross profit 203,803 213,799 (4.7 )%
Sales and marketing expenses 123,045 132,999 (7.5 )%
Net credit expense 33,702 17,177 96.2 %
General and administrative expenses 65,035 64,960 0.1 %
Amortization and depreciation not included in cost of goods sold (b) 15,413 16,234 (5.1 )%
Loss on impairment 230 n/m
Interest expense, net (c) 12,865   13,523   (4.9 )%
Loss before income taxes (46,487 ) (31,094 ) 49.5 %
Income tax benefit (16,034 ) (11,923 ) 34.5 %
Net loss $ (30,453 ) $ (19,171 ) 58.8 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 47.7 % 49.9 % (220 ) bps
Sales and marketing expenses 28.8 % 31.0 % (220 ) bps
Net credit expense 7.9 % 4.0 % 390 bps
Contribution margin (d) $ 47,056 $ 63,623 (26.0 )%
As a percentage of net sales 11.0 % 14.8 % (380 ) bps
Adjusted general and administrative expenses (d) $ 49,664 $ 61,168 (18.8 )%
As a percentage of net sales 11.6 % 14.3 % (270 ) bps
Adjusted EBITDA (d) $ 5,779 $ 3,666 57.6 %
As a percentage of net sales 1.4 % 0.9 % 50 bps
 
Selected Financial Data:
Lender net liquidity (d) $ 86,247 $ 66,120 30.4 %
Availability on inventory line of credit $ 81,605 $ 63,357 28.8 %
Free cash flow (d) $ 4,702 $ (1,261 ) (472.9 )%
Lender leverage ratio (d) 3.54 4.16 (14.9 )%
Lender leverage ratio requirement 4.50 4.75
Program agreement leverage ratio (d) 3.89 4.16 (6.5 )%
Program agreement leverage ratio requirement 5.00 5.00
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (e) 90 120 (25.0 )%
Fingerhut FreshStart new customer credit accounts (e) 54 51 5.9 %
Orchard Portfolio new gross customers (f) 652 701 (7.0 )%
Northstar Portfolio active accounts (g) 1,577 1,680 (6.1 )%
Orchard Portfolio gross active customers (h) 7,807 7,799 0.1 %
 

(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. Depreciation expense related to software, owned fulfillment facilities and equipment in Bluestem's fulfillment facilities are included in cost of goods sold.
(c) Interest expense is 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) 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.
(f) Individual customers who have made a first time purchase from a particular brand within the Orchard Portfolio during the period presented. Unique new customers, representing unique individuals who have made a first time purchase from the Orchard Portfolio during the 13-weeks ended May 5, 2017 and April 29, 2016, were 219 thousand and 234 thousand, respectively.
(g) 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.
(h) Individual customers that have made at least one purchase from a particular brand within the previous twelve fiscal months. Unique active customers, representing unique individuals who have made at least one purchase from the Orchard Portfolio during the twelve fiscal months ended May 5, 2017 and April 29, 2016, were 4.7 million and 5.0 million, respectively.

         

BLUESTEM BRANDS, INC.

Condensed Consolidated Balance Sheets

(unaudited - in thousands)

 
May 5, 2017 February 3, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 14,173 $ 7,916
Restricted cash 15,953 15,713
Customer accounts receivable, net of allowance of $8,887 and $17,041 7,699 50,053
Merchandise inventories 217,964 229,970
Promotional material inventories 60,966 49,730
Prepaid expenses and other assets 24,545   27,896  
Total current assets 341,300 381,278
Property and equipment, net 121,133 130,065
Intangible assets, net 204,278 208,563
Goodwill 202,556 202,556
Other assets 3,075   3,514  
Total Assets $ 872,342   $ 925,976  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 177,169 $ 221,539
Current income taxes payable 26,818 34,059
Accrued costs and other liabilities 109,711 83,055
Short-term debt 63,342   47,500  
Total current liabilities 377,040 386,153
Long-term debt 439,309 445,736
Deferred income taxes 48,356 56,758
Other long-term liabilities 31,013   29,870  
Total liabilities 895,718 918,517
 
Stockholders' equity:
Common stock
Additional paid-in capital 369,602 369,602
Retained earnings (393,364 ) (362,764 )
Accumulated other comprehensive loss, net of tax 386   621  
Total stockholders' equity (23,376 ) 7,459  
Total Liabilities and Stockholders’ Equity $ 872,342   $ 925,976  
 
     

BLUESTEM BRANDS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
13-Weeks Ended
May 5, 2017     April 29, 2016
Operating Activities
Net loss $ (30,453 ) $ (19,171 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization and depreciation expense 16,801 17,427
Loss on impairment 230
Provision for doubtful accounts 21,919 6,079
Provision for deferred income taxes (8,402 ) (2,674 )
Loss on servicing right 1,250
Stock-based compensation expense 1,234 1,082
Other, net 1,175 1,377
Net change in assets and liabilities:
Customer accounts receivable 2,905 (642 )
Merchandise inventories 12,006 (12,008 )
Promotional material inventories (11,236 ) (19,534 )
Prepaid expenses and other assets 3,654 (2,540 )
Current income taxes payable (7,241 ) (9,586 )
Accounts payable and other liabilities (19,288 ) (8,208 )
Net cash used in operating activities (15,446 ) (48,398 )
 
Investing Activities
Purchase of customer accounts receivable (193,394 ) (193,775 )
Proceeds from sale of customer accounts receivable 210,924 193,806
Net purchase of property and equipment (3,788 ) (15,287 )
Net decrease (increase) in restricted cash (240 ) 2,963  
Net cash provided by (used in) investing activities 13,502 (12,293 )
 
Financing Activities
Repayments of debt (7,200 ) (7,511 )
Borrowings on asset backed line of credit 130,999 278,427
Repayments on asset backed line of credit (115,598 ) (207,545 )
Net cash provided by financing activities 8,201   63,371  
 
Net Decrease in Cash and Cash Equivalents 6,257 2,680
Cash and Cash Equivalents, Beginning of Period 7,916   11,870  
Cash and Cash Equivalents, End of Period $ 14,173   $ 14,550  
 
         

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Segment Net Sales

(unaudited - in thousands, except average order size)

 
13-Weeks Ended
May 5, 2017     April 29, 2016 Change
$     % of Sales $     % of Sales %
Total sales by merchandise category:
Home $ 106,529 23.1 % $ 114,278 24.4 % (6.8 )%
Entertainment 73,110 15.8 % 70,330 15.0 % 4.0 %
Fashion 281,897   61.1 % 283,611   60.6 % (0.6 )%
Total merchandise sales(a) 461,536 100.0 % 468,219 100.0 % (1.4 )%
Corporate and other(b) (5,226 ) (3,938 )
Returns and allowances (47,689 ) (53,138 ) (10.3 )%
Commissions and other revenues 19,001   17,373   9.4 %
Net sales $ 427,622   $ 428,516   (0.2 )%
Gross profit rate 47.7 % 49.9 % (220 ) bps
Sales and marketing expense 28.8 % 31.0 % (220 ) bps
Contribution margin rate(c) 11.0 % 14.8 % (380 ) bps
Average order size(d) $ 106 $ 107
 
Northstar Portfolio sales by merchandise category:
Home $ 88,983 45.9 % $ 91,137 47.6 % (2.4 )%
Entertainment 73,110 37.7 % 70,330 36.7 % 4.0 %
Fashion 31,833   16.4 % 30,143   15.7 % 5.6 %
Total merchandise sales(a) 193,926 100.0 % 191,610 100.0 % 1.2 %
Returns and allowances (11,166 ) (12,745 ) (12.4 )%
Commissions and other revenues 4,286   4,312   (0.6 )%
Net sales $ 187,046   $ 183,177   2.1 %
 
Gross profit rate 42.3 % 44.4 % (210 ) bps
Sales and marketing expense 15.3 % 20.8 % (550 ) bps
Contribution margin rate(c) 13.1 % 14.9 % (180 ) bps
Average order size(d) $ 224 $ 230
 
Orchard Portfolio sales by merchandise category:
Home $ 17,546 6.6 % $ 23,141 8.4 % (24.2 )%
Fashion 250,064   93.4 % 253,468   91.6 % (1.3 )%
Total merchandise sales(a) 267,610 100.0 % 276,609 100.0 % (3.3 )%
Returns and allowances (36,523 ) (40,393 ) (9.6 )%
Commissions and other revenues 14,715   13,061   12.7 %
Net sales $ 245,802   $ 249,277   (1.4 )%
 
Gross profit rate 52.6 % 55.1 % (250 ) bps
Sales and marketing expense 39.4 % 38.1 % 130 bps
Contribution margin rate(c) 13.2 % 17.1 % (390 ) bps
Average order size(d) $ 75 $ 76
 

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.
(b) Corporate and other consist of adjustments to Bluestem's net sales related to in-transit product sales from shipping point to estimated time of delivery to the customer, net sales of PayCheck Direct and the elimination of inter-segment activities.
(c) 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.
(d) 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
May 5, 2017     April 29, 2016     Change
Net credit expense:
Credit management costs $ 18,822 $ 19,549 (3.7 )%

Provision for doubtful accounts - company-owned customer accounts
receivable(a)

5,940 3,794 56.6 %

Provision for doubtful accounts - loss on sale of Northstar customer
accounts receivable to SCUSA

12,212 2,285 434.4 %

Provision for doubtful accounts - loss on sale of PayCheck Direct customer
accounts receivable to BGI Holding Company

3,766     100.0 %
Provision for doubtful accounts 21,918 6,079 260.6 %
Finance charge and fee income (1,180 ) (1,568 ) (24.7 )%
Servicing fee income and portfolio profit sharing (7,108 ) (6,883 ) 3.3 %
Loss on servicing right 1,250     n/m
Net credit expense $ 33,702   $ 17,177   96.2 %
 
Serviced Portfolio Selected Credit Data: 13-Weeks Ended
May 5, 2017
Revolving(b) FreshStart(c)
Balance active accounts 1,800 142
Average balance outstanding $ 776 $ 104
Customer accounts receivable $ 1,395,741 $ 14,863
Balances 30+ days delinquent(d) $ 235,428 $ 6,141

Balances 30+ days delinquent as a percentage of total customer accounts
receivable(e)

16.9 % 41.3 %
Average customer accounts receivable $ 1,443,936 $ 15,761
Finance charge and fee income $ 94,145 $ 1,167
Finance charge and fee income rate(f) 26.1 % 11.4 %
Net principal charge-offs $ 70,869 $ 2,751
Net principal charge-off rate(g) 19.6 % 26.7 %
 
13-Weeks Ended
April 29, 2016
Revolving(b) FreshStart(c)
Balance active accounts 1,867 143
Average balance outstanding $ 730 $ 114
Customer accounts receivable $ 1,363,342 $ 16,393
Balances 30+ days delinquent(d) $ 216,535 $ 7,426

Balances 30+ days delinquent as a percentage of total customer accounts
receivable(e)

15.9 % 45.3 %
Average customer accounts receivable $ 1,407,855 $ 17,381
Finance charge and fee income $ 97,541 $ 1,502
Finance charge and fee income rate(f) 27.7 % 14.3 %
Net principal charge-offs $ 61,606 $ 2,960
Net principal charge-off rate(g) 17.5 % 28.2 %
 

(a) Includes $2.0 million additional provision due to the exit of PayCheck Direct.
(b) Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(c) FreshStart serviced portfolio is Fingerhut's installment accounts.
(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-week periods ended May 5, 2017 and April 29, 2016, respectively, 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-week periods ended May 5, 2017 and April 29, 2016, respectively.
(g) Revolving net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13-week periods ended May 5, 2017 and April 29, 2016, respectively, 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-week periods ended May 5, 2017 and April 29, 2016, respectively.

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

To supplement the consolidated financial information of Bluestem Brands, Inc. and its subsidiaries for the 13-weeks ended May 5, 2017, which are presented in accordance with 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, integration costs, restructuring costs and other.

Adjusted EBITDA, as presented, represents net loss before income tax benefit, interest expense, net, amortization and depreciation expense, loss on impairment, loss on servicing right, stock-based compensation expense, integration costs, restructuring costs and other.

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

Program agreement adjusted EBITDA, as presented, represents Adjusted EBITDA, as defined above, plus adjustments allowed for under Bluestem's Program 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 expected cost savings reflecting the projected impact of cost synergies such as savings in print and paper, transportation, credit operations and marketing. Other includes charges such as, but not limited to or necessarily inclusive of, strategic investments, system implementations, executive recruiting and public company cost.

Lender adjusted EBITDA, as presented, represents Program Agreement Adjusted EBITDA, as defined above, less designated unrestricted subsidiaries, which consists of the subsidiary making sales for our PayCheck Direct business, and incremental expected cost savings as allowed for under Bluestem's lender agreements.

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

Program agreement leverage ratio, as presented, represents Leverage Ratio Debt, as defined above, divided by Program Agreement Adjusted EBITDA, as defined above.

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

Program agreement 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.

Lender net liquidity, as presented, is defined as program net liquidity, as defined above, less unrestricted subsidiary cash as defined by the lender.

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 to evaluate our financial condition and operating performance compared to term loan and program agreement 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, program agreement adjusted EBITDA, lender adjusted EBITDA, lender leverage ratio debt, program agreement leverage ratio, lender leverage ratio, working capital, adjusted working capital, and program and lender net liquidity may not be comparable to the calculations of such measures by other companies.

The following table reconciles contribution margin from the nearest GAAP performance measure, which is net loss:

 
13-Weeks Ended
May 5, 2017   April 29, 2016
Contribution margin:
Net loss $ (30,453 ) $ (19,171 )
Income tax benefit (16,034 ) (11,923 )
Interest expense, net 12,865 13,523
Loss on impairment 230
Amortization and depreciation not included in cost of sales 15,413 16,234
General and administrative expenses 65,035   64,960  
Contribution margin $ 47,056   $ 63,623  
 
Contribution margin % of net sales 11.0 % 14.8 %
 

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

 
13-Weeks Ended
May 5, 2017   April 29, 2016
Adjusted general and administrative expenses:
General and administrative expenses $ 65,035 $ 64,960
Less:
Stock-based compensation expense 1,234 1,280
Integration costs 2,069
Restructuring costs 12,160
Other 1,977   443  
Adjusted general and administrative expenses $ 49,664   $ 61,168  
 
Adjusted general and administrative expenses % of net sales 11.6 % 14.3 %
 

The following table reconciles adjusted EBITDA from the nearest GAAP performance measure, which is net loss:

 
13-Weeks Ended
May 5, 2017   April 29, 2016
Adjusted EBITDA:
Net loss $ (30,453 ) $ (19,171 )
Income tax benefit (16,034 ) (11,923 )
Interest expense, net 12,865 13,523
Amortization and depreciation expense 16,801 17,318
Loss on impairment 230    
EBITDA (16,591 ) (253 )
Loss on servicing right 1,250
Stock-based compensation expense 1,234 1,280
Integration costs 2,069
Restructuring costs 17,909
Other 1,977   570  
Adjusted EBITDA $ 5,779   $ 3,666  
 
Adjusted EBITDA % of net sales 1.4 % 0.9 %
 

The following table reconciles free cash flow from adjusted EBITDA:

 
13-Weeks Ended
May 5, 2017   April 29, 2016
Free cash flow:
Adjusted EBITDA $ 5,779 $ 3,666
Less:
Maintenance capital expenditures 1,077   4,927  
Free cash flow $ 4,702   $ (1,261 )
 
Free cash flow % of net sales 1.1 % (0.3 )%
 

The following table presents trailing twelve months lender adjusted EBITDA and leverage ratios:

     
Trailing Twelve Fiscal Months
May 5, 2017     April 29, 2016
Adjusted EBITDA $ 92,977 $ 127,593
Expected cost savings (a) 19,070
Orchard pre-acquisition adjusted EBITDA 12,134
Non-cash charges 629 282
One-time charges 858
Other (b) 16,895   6,899  
Program agreement adjusted EBITDA 130,429   146,908  
Unrestricted subsidiary (c) 10,604
Incremental expected cost savings (a,d) 2,121    
Lender adjusted EBITDA $ 143,154   $ 146,908  
 
Leverage ratio debt:
Short-term debt
Current portion of term loan, net of discount $ 23,943 $ 24,881
Asset backed line of credit 37,244 92,285
Capital lease obligation and other 2,155   2,173  
Total short-term debt 63,342 119,339
Term loan, net of discount 437,502 481,316
Capital lease obligation 1,807   1,995  
Total long-term debt 439,309   483,311  
Total debt 502,651 602,650
Plus: Deferred charges 8,759 11,780
Less: Cash and cash equivalents (4,672 ) (2,763 )
Leverage ratio debt $ 506,738   $ 611,667  
 
Program agreement leverage ratio 3.89 4.16
Program agreement leverage ratio requirement 5.00 5.00
 
Lender leverage ratio 3.54 4.16

Lender leverage ratio requirement

4.50 4.75
 

(a) Expected cost savings reflects the projected impact of cost synergies such as, but not limited to or necessarily inclusive of the implemented headcount reductions, catalog circulation 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 pubic company costs.
(c) Bluestem Enterprises, Inc. ("BEI"), a subsidiary of Bluestem, was designated as an unrestricted subsidiary under Bluestem's term loan agreement at the end of fiscal 2016, which requires BEI's results of operations to be excluded from Bluestem's consolidated adjusted EBITDA calculation per the term loan agreement.
(d) Due to the unrestricted subsidiary designation, incremental expected cost savings above Program Agreement threshold limitations are able to be included in lender adjusted EBITDA.

The following table presents adjusted working capital and net liquidities:

         
May 5, 2017 April 29, 2016
Total current assets $ 341,300 $ 456,660
Total current liabilities 377,040   427,463
Working capital $ (35,740 ) $ 29,197
Plus: Current income taxes payable (e) 26,818   24,997
Adjusted working capital $ (8,922 ) $ 54,194
 
Cash & cash equivalents $ 14,173 $ 14,550
Less: Third party credit card receivables 9,501   11,787
Lender cash & cash equivalents 4,672 2,763
Plus: Asset backed line availability 81,605   63,357
Program agreement net liquidity $ 86,277   $ 66,120
Less: Unrestricted subsidiary cash (30 )
Lender net liquidity $ 86,247   $ 66,120
 
Program agreement and lender net liquidity requirement $ 40,000 $ 40,000
 

(e) 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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