Bluestem Group Inc. Announces Unaudited Consolidated Fourth Quarter and Fiscal 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 Brands”), for the 13-weeks ended February 2, 2018 and the 14-weeks ended February 3, 2017 and audited consolidated financial results for the 52-weeks ended February 2, 2018 and the 53-weeks ended February 3, 2017. We refer to the 13- and 14-week periods in this release as the "fourth quarter" and the 52- and 53-week periods as the "fiscal year". 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 Brands, Inc. - Non-GAAP Financial Measures”

Fourth Quarter Fiscal 2017 Bluestem Brands Highlights

  • Net sales for the fourth quarter of fiscal 2017 were $621.3 million, a 17.2% decrease compared to the fourth quarter of fiscal 2016
  • Adjusted net sales excluding the 14th week of net sales and exited businesses, decreased 6.9% compared to the fourth quarter of fiscal 2016**
  • Gross margin increased 230 basis points to 45.3%, driven by continued progress in cost reduction and price optimization efforts
  • Adjusted EBITDA for the fourth quarter of fiscal 2017 was $54.5 million, as compared to $60.4 million in the fourth quarter of fiscal 2016, an improvement of 70 bps as a percent of net sales
  • In compliance with lender covenants throughout and as of the end of the fourth quarter; net liquidity was $97.1 million compared to a covenant requirement of $40.0 million and leverage ratio was 3.67x compared to a covenant requirement of 4.50x
  • The Company recorded a $191.9 million non-cash intangible asset and goodwill impairment charge during the fourth quarter of fiscal 2017 primarily related to the Orchard tradenames and goodwill intangible assets

Lisa Gavales, Interim CEO, stated, “Our fourth quarter results were largely in line with our expectations. We reduced our cost of doing business, completed the exit of certain non-core businesses, and continued to stabilize our credit portfolio. Our EBITDA margin improved as a result of improved net contribution margin due to a reduction in our net credit expense ratio and our pricing and cost optimization efforts. In addition, we improved the productivity of our inventory, reducing levels by over 15% as compared to last year primarily due to inventory optimization initiatives in our Orchard business. Looking ahead, we will continue to execute our strategic initiatives designed to drive improved performance across our businesses and ultimately achieve long term profitable and sustainable growth."

Fourth Quarter Fiscal 2017 Bluestem Group Consolidated Statistics

unaudited in millions (except loss per share)   Q4 2017   Q4 2016
Bluestem Group net loss $     (140.5 ) $     (310.2 )
Bluestem Group basic and diluted loss per share $ (1.06 ) $ (2.36 )
Bluestem Group Adjusted EBITDA $ 53.3 $ 66.2
Bluestem Group cash and cash equivalents* $ 123.4 $ 212.9

*Q4 2017 includes impact of $80.2 million dividend paid in Q1 2017

 

Fourth Quarter Fiscal 2017 Bluestem Brands Stand-Alone Statistics

unaudited in millions   Q4 2017   Q4 2016
Bluestem Brands net sales $     621.3 $     750.3
Bluestem Brands adjusted net sales** $ 621.3 $ 667.2
Bluestem Brands net loss $ (159.8 ) $ (304.9 )
Bluestem Brands Adjusted EBITDA $ 54.5 $ 60.4
 
Northstar Portfolio net sales $ 399.0 $ 450.0
Orchard Portfolio net sales $ 207.7 $ 250.2
Northstar portfolio active accounts 1.5 1.6
Orchard Portfolio gross active customers 7.4 7.5
 
Northstar Portfolio revolving credit portfolio:
30+ day delinquency rate 16.3 % 16.1 %
Net principal charge-off rate 20.7 % 20.2 %

**Excludes net sales for exited businesses (PayCheck Direct, Solutions, Draper's & Damon's retail stores and LinenSource) and the additional fiscal week (Q4 2016 contains 14 weeks due to an additional week in our 2016 fiscal calendar compared to Q4 2017 with 13 weeks). Year-over-year changes are estimated using net sales for the 13 weeks ended February 2, 2018 and February 3, 2017, respectively. Adjusted net sales impact of approximately 10.3% was comprised of 5.5% related to the exited businesses and 4.8% related to the additional fiscal week.

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 9:30AM ET on Thursday, April 26, 2018. The conference call can be accessed at (888) 882-4478 or (323) 701-0225 (International), conference ID # 5307379 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 # 5307379. The telephone replay will be available at 12:30PM ET April 26, 2018. 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 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 group demographics through 13 retail brands that include: Appleseed’s, Bedford Fair, Blair, Draper’s & Damon’s, Fingerhut, Gettington, Gold Violin, Haband, Norm Thompson, Old Pueblo Traders, Sahalie, Tog Shop and WinterSilks. Complementing each Northstar Portfolio brand are payment options that provide customers with the flexibility of paying over time while the Orchard Portfolio brands provide customers the ability to obtain credit through a third-party private label credit card. Bluestem Group also includes Capmark Portfolio which is focused on managing a commercial real estate-related business and existing assets, including monetizing these assets when appropriate. 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 2, 2018 and February 3, 2017.

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.

Table of Contents

 
  Page
Overview and Basis of Presentation       5    
Bluestem Group Inc. 6
Consolidated Statements of Comprehensive Loss (Unaudited) 7
Consolidated Balance Sheets (Unaudited) 8
Consolidated Statements of Cash Flows (Unaudited) 9
Non-GAAP Financial Measure 10
Bluestem Brands, Inc. 11
Consolidated Statements of Loss and Selected Operating Data (Unaudited) 12
Consolidated Balance Sheets (Unaudited) 16
Consolidated Statements of Cash Flows (Unaudited) 17
Supplemental Financial Information
Segment Net Sales 18
Credit Portfolio 20
Non-GAAP Financial Measures 22
 

BLUESTEM GROUP INC.
BLUESTEM BRANDS, INC.
FINANCIAL INFORMATION

13- and 52-weeks ended February 2, 2018 and 14- and 53-weeks ended February 3, 2017

Overview and Basis of Presentation

As used in this release:

  • “Bluestem Group,” "BGI," “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 Brands" or “Bluestem” refers to Bluestem Brands, Inc., an indirect subsidiary of Bluestem Group, which consists of Northstar Portfolio, Orchard Portfolio 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 (retail stores were exited during the first quarter of fiscal 2017), Gold Violin, Haband, LinenSource (which was exited in the second quarter of fiscal 2017), 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

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, adjusted free cash flow, program agreement adjusted EBITDA, lender adjusted EBITDA, leverage ratio net 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 and Fiscal Year Ended February 2, 2018

 

BLUESTEM GROUP INC.

Consolidated Statements of Comprehensive Loss

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

 
  Fiscal Quarters Ended   Fiscal Years Ended
February 2, 2018 February 3, 2017 February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) (52-weeks) (53-weeks)
Net sales and revenue
Net sales $ 621,341 $ 750,327 $ 1,887,655 $ 2,092,030
Commercial real estate revenue, net   1,375     7,808     3,897     8,566  
Total net sales and revenue   622,716     758,135     1,891,552     2,100,596  
Costs and expenses
Cost of goods sold 339,575 428,014 1,000,765 1,130,352
Sales and marketing expenses 127,352 148,078 470,988 542,380
Net credit expense 57,474 86,701 147,295 146,420
General and administrative expenses 52,971 53,499 221,090 226,254
Amortization and depreciation not included in cost of goods sold 15,284 45,297 58,081 97,135
Loss on impairment 191,919 354,432 192,149 354,862
Gain on derivatives in our own equity

 

 

 

(548 )
Gain on debt extinguishment    

 

          (2,509 )
Total costs and expenses 784,575 1,116,021 2,090,368 2,494,346
 
Operating loss (161,859 )

 

(357,886 ) (198,816 ) (393,750 )
 
Interest expense, net   12,291     13,611     50,692     54,005  
Loss before income taxes (174,150 )

 

(371,497 ) (249,508 ) (447,755 )
Income tax benefit   (33,684 )

 

  (61,262 )   (35,198 )   (60,043 )
Net loss $ (140,466 )

 

$ (310,235 ) $ (214,310 ) $ (387,712 )
 
Other Comprehensive loss
Unrealized gain on interest rate swap, net of tax 1,586 1 1,131 1,710 621
Net change in unrealized gains/losses on investments securities, net of tax    

 

   

 

   

 

  (231 )
Comprehensive loss $ (138,880 )

 

$ (309,104 ) $ (212,600 ) $ (387,322 )
 
Basic and diluted loss per share - common stockholders
Basic and diluted loss per share $ (1.06 )

 

$ (2.36 ) $ (1.62 ) $ (2.92 )
Basic and diluted weighted average shares outstanding 132,326,876 132,036,278 132,217,503 132,880,118
 

BLUESTEM GROUP INC.

Consolidated Balance Sheets

(unaudited - in thousands)

 
  February 2, 2018   February 3, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 123,398 $ 212,942
Restricted cash 15,759 15,797
Customer accounts receivable, net of allowance of $8,233, and $17,041 9,008 50,053
Merchandise inventories 194,693 229,970
Promotional material inventories 34,660 49,730
Other current assets 28,399   39,135  
Total current assets 405,917 597,627
Property and equipment, net 106,246 130,065
Intangibles, net 163,377 208,563
Goodwill 36,717 202,556
Other assets 11,222   41,926  
Total Assets $ 723,479   $ 1,180,737  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 160,300 $ 221,539
Accrued costs and other liabilities 67,754 154,095
Short-term debt 26,434   47,500  
Total current liabilities 254,488 423,134
Long-term debt 420,297 468,924
Deferred income taxes 4,245 37,474
Other long-term liabilities 39,349   37,470  
Total liabilities 718,379   967,002  
 
Stockholders' Equity:
Series A participating convertible preferred stock 5,000 5,000
Common stock 1,332 1,323
Treasury stock (131 ) (131 )
Additional paid-in capital 293,892 289,789
Accumulated deficit (297,324 ) (82,867 )
Accumulated other comprehensive income, net of tax 2,331   621  
Total stockholders’ equity 5,100   213,735  
Total Liabilities and Stockholders' Equity $ 723,479   $ 1,180,737  
 

BLUESTEM GROUP INC.

Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
  Fiscal Years Ended
February 2, 2018   February 3, 2017
(52-weeks) (53-weeks)
Operating Activities
Net loss $ (214,310 ) $ (387,712 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation expense 62,962 101,606
Loss on impairment 192,149 354,862
Provision for doubtful accounts 107,017 78,592
Provision for deferred income taxes (33,227 ) (60,801 )
Loss on servicing right 3,665 22,323
Net gains on loans held for sale, investment securities and other (1,834 ) (2,690 )
Gain on debt extinguishment (2,509 )
Stock-based compensation expense 4,391 5,310
Other, net 3,501 (250 )
Net change in assets and liabilities:
Customer account receivables 27,274 (29,673 )
Merchandise inventories 35,277 33,609
Promotional material inventories 15,070 3,523
Other assets 11,752 20,878
Accounts payable and other liabilities (67,896 ) 4,395
Payments from loans held for sale   3,809  
Net cash provided by operating activities 145,791 145,272
 
Investing Activities
Purchases of customer accounts receivable (1,072,357 ) (1,140,370 )
Proceeds from sale of customer accounts receivable 979,111 1,085,844
Net purchases of property and equipment (20,462 ) (43,383 )
Distributions from equity investments 9,979 36,732
Net decrease in restricted cash 38 6,772
Other (13 ) (565 )
Net cash used in investing activities (103,704 ) (54,970 )
 
Financing Activities
Repayments of debt (28,802 ) (30,048 )
Extinguishment of debt (18,150 )
Borrowings on asset backed line of credit 373,887 840,760
Repayments on asset backed line of credit (396,665 ) (843,330 )
Payments for the repurchase of common stock (12,554 )
Payment of dividends (80,201 )  
Net cash used in by financing activities (131,781 ) (63,322 )
 
Effect of Foreign Exchange Rates on Cash 150   18  
 
Net (Decrease) Increase in Cash and Cash Equivalents (89,544 ) 26,998
Cash and Cash Equivalents, Beginning of Period 212,942   185,944  
Cash and Cash Equivalents, End of Period $ 123,398   $ 212,942  
 

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 benefit, interest expense, amortization and depreciation expense, loss on impairment, loss on servicing right, stock-based compensation expense, gain on derivatives in our own equity, gain on debt extinguishment, integration costs, restructuring costs, Orchard Portfolio segmentation and positioning research 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:

  Fiscal Quarters Ended   Fiscal Years Ended
February 2, 2018   February 3, 2017 February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) (52-weeks) (53-weeks)
Adjusted EBITDA:
Net loss $ (140,466 ) $ (310,235 ) $ (214,310 ) $ (387,712 )
Income tax benefit (33,684 ) (61,262 ) (35,198 ) (60,043 )
Interest expense 12,351 13,628 50,755 54,023
Amortization and depreciation expense 16,477 46,465 62,962 101,606
Loss on impairment 191,919 354,432 192,149 354,862
Loss on servicing right 4,633 22,323 3,665 22,323
Stock-based compensation expense 1,227 1,132 4,391 5,310
Gain on derivatives in our own equity (548 )
Gain on debt extinguishment (2,509 )
Integration costs 1,669 5,590
Restructuring costs 175 15,860
Orchard Portfolio segmentation and positioning research 168 3,847
Other 548   (1,955 ) 3,751   (515 )
Adjusted EBITDA $ 53,348   $ 66,197   $ 87,872   $ 92,387  
 

Bluestem Brands, Inc.
Results for the 13-weeks and Fiscal Year Ended February 2, 2018

 

BLUESTEM BRANDS, INC.

Consolidated Statements of Loss and Selected Operating Data

(unaudited - in thousands)

 
  Fiscal Quarters Ended  
February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) Change (a)
Net sales $ 621,341 $ 750,327 (17.2 )%
Cost of goods sold 340,066   428,014   (20.5 )%
Gross profit 281,275 322,313 (12.7 )%
Sales and marketing expenses 127,352 148,078 (14.0 )%
Net credit expense 57,040 86,701 (34.2 )%
General and administrative expenses 49,836 51,930 (4.0 )%
Amortization and depreciation not included in cost of goods sold (b) 15,284 45,297 (66.3 )%
Loss on impairment 191,919 354,432 (45.9 )%
Gain on debt extinguishment (3,456 ) (100.0 )%
Interest expense, net (c) 12,291   14,141   (13.1 )%
Loss before income taxes (172,447 ) (374,810 ) (54.0 )%
Income tax benefit (12,685 ) (69,872 ) (81.8 )%
Net loss $ (159,762 ) $ (304,938 ) (47.6 )%
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 45.3 % 43.0 % 230 bps
Sales and marketing expenses 20.5 % 19.7 % 80 bps
Net credit expense 9.2 % 11.6 % (240 ) bps
Contribution margin (d) $ 96,883 $ 87,534 10.7 %
As a percentage of net sales 15.6 % 11.7 % 390 bps
Adjusted general and administrative expenses (d) $ 48,091 $ 50,738 (5.2 )%
As a percentage of net sales 7.7 % 6.8 % 90 bps
Adjusted EBITDA (d) $ 54,464 $ 60,432 (9.9 )%
As a percentage of net sales 8.8 % 8.1 % 70 bps
 
Selected Financial Data:
Lender net liquidity (d) $ 97,092 $ 104,403 (7.0 )%
Availability on inventory line of credit $ 92,407 $ 100,237 (7.8 )%
Adjusted free cash flow (d) $ 42,887 $ 58,687 (26.9 )%
Lender leverage ratio (d) 3.67 3.51
Lender leverage ratio requirement < 4.50 < 4.75
Program agreement leverage ratio (d) 3.85 4.07
Program agreement leverage ratio requirement < 5.00 < 5.00
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (e) 157 223 (29.6 )%
Fingerhut FreshStart new customer credit accounts (e) 55 103 (46.6 )%
Orchard Portfolio new gross customers (f) 489 634 (22.9 )%
Northstar Portfolio active accounts (g) 1,465 1,590 (7.9 )%
Orchard Portfolio gross active customers (h) 7,374 7,498 (1.7 )%
(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 related to software and office equipment. Owned fulfillment facilities and equipment depreciation is 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 February 2, 2018 and 14-weeks ended February 3, 2017, were 175 thousand and 225 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 Orchard Portfolio during 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 February 2, 2018 and February 3, 2017, were 4.5 million and 4.8 million, respectively.
 

BLUESTEM BRANDS, INC.

Consolidated Statements of Loss and Selected Operating Data

(unaudited - in thousands)

 
  Fiscal Years Ended  
February 2, 2018   February 3, 2017
(52-weeks) (53-weeks) Change (a)
Net sales $ 1,887,655 $ 2,092,030 (9.8 )%
Cost of goods sold 1,001,596   1,130,352   (11.4 )%
Gross profit 886,059 961,678 (7.9 )%
Sales and marketing expenses 470,988 542,380 (13.2 )%
Net credit expense 148,777 146,420 1.6 %
General and administrative expenses 213,017 219,859 (3.1 )%
Amortization and depreciation not included in cost of goods sold (b) 58,081 97,135 (40.2 )%
Loss on impairment 192,149 354,862 (45.9 )%
Gain on debt extinguishment (3,456 )
Interest expense, net (c) 50,692   54,778   (7.5 )%
Loss before income taxes (247,645 ) (450,300 ) (45.0 )%
Income tax benefit (39,859 ) (97,829 ) (59.3 )%
Net loss $ (207,786 ) $ (352,471 ) (41.0 )%
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 46.9 % 46.0 % 90 bps
Sales and marketing expenses 25.0 % 25.9 % (90 ) bps
Net credit expense 7.9 % 7.0 % 90 bps
Contribution margin (d) $ 266,294 $ 272,878 (2.4 )%
As a percentage of net sales 14.1 % 13.0 % 110 bps
Adjusted general and administrative expenses (d) $ 188,068 $ 209,335 (10.2 )%
As a percentage of net sales 10.0 % 10.0 % bps
Adjusted EBITDA (d) $ 92,294 $ 90,864 1.6 %
As a percentage of net sales 4.9 % 4.3 % 60 bps
 
Selected Financial Data:
Lender net liquidity (d) $ 97,092 $ 104,403 (7.0 )%
Availability on inventory line of credit $ 92,407 $ 100,237 (7.8 )%
Adjusted free cash flow (d) $ 40,836 $ 62,718 (34.9 )%
Lender leverage ratio (d) 3.67 3.51
Lender leverage ratio requirement < 4.50 < 4.75
Program agreement leverage ratio (d) 3.85 4.07
Program agreement leverage ratio requirement < 5.00 < 5.00
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (e) 459 618 (25.7 )%
Fingerhut FreshStart new customer credit accounts (e) 197 250 (21.2 )%
Orchard Portfolio new gross customers (f) 2,091 2,478 (15.6 )%
Northstar Portfolio active accounts (g) 1,465 1,590 (7.9 )%
Orchard Portfolio gross active customers (h) 7,374 7,498 (1.7 )%
(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 related to software and office equipment. Owned fulfillment facilities and equipment depreciation is 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 fiscal years ended February 2, 2018 and February 3, 2017, were 706 thousand and 835 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 Orchard Portfolio during 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 February 2, 2018 and February 3, 2017, were 4.5 million and 4.8 million, respectively.
 

BLUESTEM BRANDS, INC.

Consolidated Balance Sheets

(unaudited - in thousands)

 
  February 2, 2018   February 3, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 9,173 $ 7,916
Restricted cash 15,759 15,713
Customer accounts receivable, net of allowance of $7,082, and $17,041 7,275 50,053
Merchandise inventories 194,693 229,970
Promotional material inventories 34,660 49,730
Prepaid expenses and other assets 25,346   27,896  
Total current assets 286,906 381,278
Property and equipment, net 89,385 130,065
Intangible assets, net 163,377 208,563
Goodwill 36,717 202,556
Other assets 4,040   3,514  
Total Assets $ 580,425   $ 925,976  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 160,300 $ 221,539
Current income taxes payable 36,370 34,059
Accrued costs and other liabilities 81,098 83,055
Short-term debt 26,434   47,500  
Total current liabilities 304,202 386,153
Long-term debt 420,080 445,736
Deferred income taxes 16,325 56,758
Other long-term liabilities 39,145   29,870  
Total liabilities 779,752 918,517
 
Stockholders' equity:
Common stock
Additional paid-in capital 369,602 369,602
Accumulated deficit (570,697 ) (362,764 )
Accumulated other comprehensive income, net of tax 1,768   621  
Total stockholders' equity (199,327 ) 7,459  
Total Liabilities and Stockholders’ Equity $ 580,425   $ 925,976  
 

BLUESTEM BRANDS, INC.

Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
  Fiscal Years Ended
February 2, 2018   February 3, 2017
(52-weeks) (53-weeks)
Operating Activities
Net loss $ (207,786 ) $ (352,471 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation expense 62,600 101,606
Loss on impairment 192,149 354,862
Provision for doubtful accounts 110,803 78,592
Provision for deferred income taxes (38,670 ) (97,670 )
Loss on servicing right 3,665 22,323
Gain on debt extinguishment (3,456 )
Stock-based compensation expense 3,525 4,946
Other, net 3,729 5,731
Net change in assets and liabilities:
Customer accounts receivable (4,624 ) (29,673 )
Merchandise inventories 35,277 33,609
Promotional material inventories 15,070 3,523
Prepaid expenses and other assets 3,360 4,087
Current income taxes payable (185 ) (524 )
Accounts payable and other liabilities (66,902 ) 10,983  
Net cash provided by operating activities 112,011 136,468
 
Investing Activities
Purchase of customer accounts receivable (1,072,357 ) (1,140,370 )
Proceeds from sale of customer accounts receivable 1,008,956 1,085,844
Proceeds from sale of assets 24,295
Net purchase of property and equipment (20,022 ) (43,383 )
Net (increase) decrease in restricted cash (46 ) 6,772  
Net cash used in investing activities (59,174 ) (91,137 )
 
Financing Activities
Repayments of debt (28,802 ) (29,732 )
Extinguishment of debt (16,983 )
Borrowings on asset backed line of credit 373,887 840,760
Repayments on asset backed line of credit (396,665 ) (843,330 )
Net cash used in financing activities (51,580 ) (49,285 )
 
Net Increase (Decrease) in Cash and Cash Equivalents 1,257 (3,954 )
Cash and Cash Equivalents, Beginning of Period 7,916   11,870  
Cash and Cash Equivalents, End of Period $ 9,173   $ 7,916  
 

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Segment Net Sales

(unaudited - in thousands, except average order size)

 
  Fiscal Quarters Ended  
February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) Change
$   % of Sales $   % of Sales %
Total sales by merchandise category:
Home $ 139,452 22.0 % $ 175,421 23.8 % (20.5 )%
Entertainment 196,589 31.0 % 220,710 29.8 % (10.9 )%
Fashion 299,058   47.0 % 342,281   46.4 % (12.6 )%
Total merchandise sales(a) 635,099 100.0 % 738,412 100.0 % (14.0 )%
Corporate and other(b) 14,593 50,166
Returns and allowances (48,822 ) (61,491 ) (20.6 )%
Commissions and other revenues 20,471   23,240   (11.9 )%
Net sales $ 621,341   $ 750,327   (17.2 )%
Gross profit rate 45.3 % 43.0 % 230 bps
Sales and marketing expense rate 20.5 % 19.7 % 80 bps
Contribution margin rate(c) 15.6 % 11.7 % 390 bps
Average order size(d) $ 123 $ 132
 
Northstar Portfolio sales by merchandise category:
Home $ 128,346 31.0 % $ 153,946 32.9 % (16.6 )%
Entertainment 196,589 47.5 % 220,710 47.2 % (10.9 )%
Fashion 88,516   21.5 % 92,998   19.9 % (4.8 )%
Total merchandise sales(a) 413,451 100.0 % 467,654 100.0 % (11.6 )%
Returns and allowances (21,279 ) (25,523 ) (16.6 )%
Commissions and other revenues 6,837   7,875   (13.2 )%
Net sales $ 399,009   $ 450,006   (11.3 )%
 
Gross profit rate 42.9 % 39.6 % 330 bps
Sales and marketing expense rate 11.5 % 11.3 % 20 bps
Contribution margin rate(c) 17.1 % 10.3 % 680 bps
Average order size(d) $ 239 $ 233
 
Orchard Portfolio sales by merchandise category:
Home $ 11,106 5.0 % $ 21,475 7.9 % (48.3 )%
Fashion 210,542   95.0 % 249,283   92.1 % (15.5 )%
Total merchandise sales(a) 221,648 100.0 % 270,758 100.0 % (18.1 )%
Returns and allowances (27,543 ) (35,968 ) (23.4 )%
Commissions and other revenues 13,634   15,365   (11.3 )%
Net sales $ 207,739   $ 250,155   (17.0 )%
 
Gross profit rate 48.0 % 49.7 % (170 ) bps
Sales and marketing expense rate 37.2 % 36.1 % 110 bps
Contribution margin rate(c) 10.7 % 13.6 % (290 ) bps
Average order size(d) $ 65 $ 71
(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 - Segment Net Sales

(unaudited - in thousands, except average order size)

 
  Fiscal Years Ended  
February 2, 2018   February 3, 2017
(52-weeks) (53-weeks) Change
$   % of Sales $   % of Sales %
Total sales by merchandise category:
Home $ 472,989 23.8 % $ 543,931 25.2 % (13.0 )%
Entertainment 447,849 22.6 % 468,532 21.7 % (4.4 )%
Fashion 1,062,565   53.6 % 1,147,013   53.1 % (7.4 )%
Total merchandise sales(a) 1,983,403 100.0 % 2,159,476 100.0 % (8.2 )%
Corporate and other(b) 10,282 73,213
Returns and allowances (184,011 ) (216,942 ) (15.2 )%
Commissions and other revenues 77,981   76,283   2.2 %
Net sales $ 1,887,655   $ 2,092,030   (9.8 )%
 
Gross profit rate 46.9 % 46.0 % 90 bps
Sales and marketing expense rate 25.0 % 25.9 % (90 ) bps
Contribution margin rate(c) 14.1 % 13.0 % 110 bps
Average order size(d) $ 111 $ 115
 
Northstar Portfolio sales by merchandise category:
Home $ 413,177 39.2 % $ 457,215 40.7 % (9.6 )%
Entertainment 447,849 42.4 % 468,532 41.8 % (4.4 )%
Fashion 193,572   18.4 % 196,460   17.5 % (1.5 )%
Total merchandise sales(a) 1,054,598 100.0 % 1,122,207 100.0 % (6.0 )%
Returns and allowances (57,837 ) (70,245 ) (17.7 )%
Commissions and other revenues 20,465   22,210   (7.9 )%
Net sales $ 1,017,226   $ 1,074,172   (5.3 )%
 
Gross profit rate 42.8 % 40.6 % 220 bps
Sales and marketing expense rate 13.6 % 15.8 % (220 ) bps
Contribution margin rate(c) 15.2 % 12.3 % 290 bps
Average order size(d) $ 235 $ 231
 
Orchard Portfolio sales by merchandise category:
Home $ 59,812 6.4 % $ 86,716 8.4 % (31.0 )%
Fashion 868,993   93.6 % 950,553   91.6 % (8.6 )%
Total merchandise sales(a) 928,805 100.0 % 1,037,269 100.0 % (10.5 )%
Returns and allowances (126,174 ) (146,697 ) (14.0 )%
Commissions and other revenues 57,516   54,073   6.4 %
Net sales $ 860,147   $ 944,645   (8.9 )%
 
Gross profit rate 51.4 % 52.9 % (150 ) bps
Sales and marketing expense rate 38.4 % 37.8 % 60 bps
Contribution margin rate(c) 13.0 % 15.1 % (210 ) bps
Average order size(d) $ 69 $ 72
(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)

 
  Fiscal Quarters Ended  
February 2, 2018   February 3, 2017
(13-weeks) (14-weeks)

Change %

Net credit expense:
Credit management costs $ 16,038 $ 21,697 (26.1 )%
Provision for doubtful accounts - company-owned customer accounts receivable 4,414 11,585 (61.9 )%
Provision for doubtful accounts - loss on sale of Northstar customer accounts receivable to SCUSA 41,183   42,214   (2.4 )%
Provision for doubtful accounts 45,597 53,799 (15.2 )%
Finance charge and fee income, net (1,036 ) (1,249 ) (17.1 )%
Servicing fee income and portfolio profit sharing (8,192 ) (9,869 ) (17.0 )%
Loss on servicing right 4,633   22,323   (79.2 )%
Net credit expense $ 57,040   $ 86,701   (34.2 )%
 
  Fiscal Quarters Ended
February 2, 2018 February 3, 2017
(13-weeks) (14-weeks)
Serviced Portfolio Selected Credit Data: Revolving(a) FreshStart(b) Revolving(a) FreshStart(b)
Balance active accounts 1,792 128 1,928 157
Average balance outstanding $ 833 $ 110 $ 789 $ 112
Customer accounts receivable $ 1,492,172 $ 14,073 $ 1,520,520 $ 17,474
Balances 30+ days delinquent(c) $ 243,467 $ 3,318 $ 244,217 $ 3,726
Balances 30+ days delinquent as a percentage of total customer accounts receivable(d) 16.3 % 23.6 % 16.1 % 21.3 %
Average customer accounts receivable $ 1,466,095 $ 12,734 $ 1,475,963 $ 14,889
Finance charge and fee income $ 88,810 $ 1,000 $ 89,374 $ 1,230
Finance charge and fee income rate(e) 24.2 % 13.6 % 24.2 % 16.0 %
Net principal charge-offs $ 75,967 $ 2,230 $ 74,675 $ 2,406
Net principal charge-off rate(f) 20.7 % 29.2 % 20.2 % 31.2 %
(a) Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's installment accounts.
(c) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.
(d) 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.
(e) 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 February 2, 2018 and 14-weeks ended February 3, 2017, 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-weeks ended February 2, 2018 and 14-weeks ended February 3, 2017, respectively.
(f) Revolving net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13-weeks ended February 2, 2018 and 14-weeks ended February 3, 2017, 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-weeks ended February 2, 2018 and 14-weeks ended February 3, 2017, respectively.
 

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Credit Portfolio

(unaudited - in thousands, except average balance outstanding)

 
  Fiscal Years Ended  
February 2, 2018   February 3, 2017
(52-weeks) (53-weeks)

Change %

Net credit expense:
Credit management costs $ 67,759 $ 78,217 (13.4 )%
Provision for doubtful accounts - company-owned customer accounts receivable(a) 13,689 23,785 (42.4 )%
Provision for doubtful accounts - loss on sale of Northstar customer accounts receivable to SCUSA 93,328 54,807 70.3 %
Provision for doubtful accounts - loss on sale of PayCheck Direct customer accounts receivable to BGI Holding Company 3,786     100.0 %
Provision for doubtful accounts 110,803 78,592 41.0 %
Finance charge and fee income (2,799 ) (2,674 ) 4.7 %
Servicing fee income and portfolio profit sharing (30,651 ) (30,038 ) 2.0 %
Loss on servicing right 3,665   22,323   (83.6 )%
Net credit expense $ 148,777   $ 146,420   1.6 %
 
  Fiscal Years Ended
February 2, 2018 February 3, 2017
(52-weeks) (53-weeks)
Serviced Portfolio Selected Credit Data: Revolving(b) FreshStart(c) Revolving(b) FreshStart(c)
Balance active accounts 1,792 128 1,928 157
Average balance outstanding $ 833 $ 110 $ 789 $ 112
Customer accounts receivable $ 1,492,172 $ 14,073 $ 1,520,520 $ 17,474
Balances 30+ days delinquent(d) $ 243,467 $ 3,318 $ 244,217 $ 3,726
Balances 30+ days delinquent as a percentage of total customer accounts receivable(e) 16.3 % 23.6 % 16.1 % 21.3 %
Average customer accounts receivable $ 1,415,594 $ 12,756 $ 1,402,481 $ 14,210
Finance charge and fee income $ 356,407 $ 2,692 $ 365,147 $ 2,412
Finance charge and fee income rate(f) 25.2 % 6.4 % 26.0 % 5.8 %
Net principal charge-offs $ 294,554 $ 12,580 $ 272,842 $ 13,229
Net principal charge-off rate(g) 20.8 % 29.5 % 19.5 % 31.8 %
(a) Includes $2.0 million additional provision during the 13-weeks ended May 5, 2017 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 fiscal years ended February 2, 2018 and February 3, 2017 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 52 weeks of FreshStart related sales five months prior to the fiscal years ended February 2, 2018 and February 3, 2017.
(g) Revolving net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the fiscal years ended February 2, 2018 and February 3, 2017, respectively annualized to 52-week periods for comparability. FreshStart net principal charge-off rate represents net principal charge-offs as a percentage of the 52 weeks of FreshStart related sales five months prior to the fiscal years ended February 2, 2018 and February 3, 2017, respectively.
 

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands except % of net sales and ratios)

To supplement the consolidated financial information of Bluestem Brands, Inc. and its subsidiaries for the 13- and 52-weeks ended February 2, 2018, and the 14- and 53-weeks ended February 3, 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, Orchard Portfolio segmentation and positioning research and other.

Adjusted EBITDA, as presented, represents net loss before income tax benefit, interest expense, amortization and depreciation expense, loss on impairment, loss on servicing right, gain on debt extinguishment, stock-based compensation expense, integration costs, restructuring costs, Orchard Portfolio segmentation & positioning research and other.

Adjusted free cash flow, as presented, represents net cash provided by operating activities, plus proceeds from the sale of customer accounts receivable, less purchase of customer accounts receivable and 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, certain non-cash charges, certain one-time charges and expected cost savings reflecting the projected impact of cost synergies such as savings in headcount reduction, print and paper, transportation, credit operations and marketing and other. Other includes charges such as, but not limited to or necessarily inclusive of, strategic investments, system implementations and executive recruiting.

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 net 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 net debt, as defined above, divided by Program agreement adjusted EBITDA, as defined above.

Lender leverage ratio, as presented, represents Leverage ratio net 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 the inter-company portion of current income taxes payable and inter-company payable due to stock compensation.

Program agreement net liquidity, as presented, is defined as cash and cash equivalents less third party 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 agreement 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, adjusted free cash flow, program agreement adjusted EBITDA, lender adjusted EBITDA, leverage ratio net debt, program agreement leverage ratio, lender leverage ratio, working capital, adjusted working capital, and program agreement 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:

  Fiscal Quarters Ended   Fiscal Years Ended
February 2, 2018   February 3, 2017 February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) (52-weeks) (53-weeks)
Contribution margin:
Net loss $ (159,762 ) $ (304,938 ) $ (207,786 ) $ (352,471 )
Income tax benefit (12,685 ) (69,872 ) (39,859 ) (97,829 )
Interest expense, net 12,291 14,141 50,692 54,778
Gain on debt extinguishment (3,456 ) (3,456 )
Loss on impairment 191,919 354,432 192,149 354,862
Amortization and depreciation not included in cost of sales 15,284 45,297 58,081 97,135
General and administrative expenses 49,836   51,930   213,017   219,859  
Contribution margin $ 96,883   $ 87,534   $ 266,294   $ 272,878  
 
Contribution margin % of net sales 15.6 % 11.7 % 14.1 % 13.0 %
 

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

  Fiscal Quarters Ended   Fiscal Years Ended
February 2, 2018   February 3, 2017 February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) (52-weeks) (53-weeks)
Adjusted general and administrative expenses:
General and administrative expenses $ 49,836 $ 51,930 $ 213,017 $ 219,859
Less:
Stock-based compensation expense 854 1,318 3,525 4,946
Integration costs 1,669 5,590
Restructuring costs 175 13,826
Orchard Portfolio segmentation and positioning research 168 3,847
Other 548   (1,795 ) 3,751   (12 )
Adjusted general and administrative expenses $ 48,091   $ 50,738   $ 188,068   $ 209,335  
 
Adjusted general and administrative expenses % of net sales 7.7 % 6.8 % 10.0 % 10.0 %
 

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

  Fiscal Quarters Ended   Fiscal Years Ended
February 2, 2018   February 3, 2017 February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) (52-weeks) (53-weeks)
Adjusted EBITDA:
Net loss $ (159,762 ) $ (304,938 ) $ (207,786 ) $ (352,471 )
Income tax benefit (12,685 ) (69,872 ) (39,859 ) (97,829 )
Interest expense 12,351 14,159 50,755 54,797
Amortization and depreciation expense 16,263 46,465 62,600 101,606
Loss on impairment 191,919 354,432 192,149 354,862
Loss on servicing right 4,633 22,323 3,665 22,323
Gain on debt extinguishment (3,456 ) (3,456 )
Stock-based compensation expense 854 1,318 3,525 4,946
Integration costs 1,669 5,590
Restructuring costs 175 19,647
Orchard Portfolio segmentation and positioning research 168 3,847
Other 548   (1,668 ) 3,751   496  
Adjusted EBITDA $ 54,464   $ 60,432   $ 92,294   $ 90,864  
 
Adjusted EBITDA % of net sales 8.8 % 8.1 % 4.9 % 4.3 %
 

The following table reconciles adjusted free cash flow from net cash provided by operating activities:

  Fiscal Quarters Ended   Fiscal Years Ended
February 2, 2018   February 3, 2017 February 2, 2018   February 3, 2017
(13-weeks) (14-weeks) (52-weeks) (53-weeks)
Adjusted free cash flow:
Net cash provided by operating activities $ 86,949 $ 116,119 $ 112,011 $ 136,468
Plus: Proceeds from sale of customer accounts receivable 378,285 419,728 1,008,956 1,085,844
Less: Purchase of customer accounts receivable (420,031 ) (474,336 ) (1,072,357 ) (1,140,370 )
Less: Maintenance capital expenditures (2,316 ) (2,824 ) (7,774 ) (19,224 )
Adjusted free cash flow $ 42,887   $ 58,687   $ 40,836   $ 62,718  
 
Adjusted free cash flow % of net sales 6.9 % 7.8 % 2.2 % 3.0 %
 

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

  Trailing Twelve Fiscal Months
February 2, 2018   February 3, 2017
(52-weeks) (53-weeks)
Adjusted EBITDA $ 92,293 $ 90,864

Expected cost savings (a)

17,038 18,002
Non-cash charges (103 ) 936
One-time charges 858

Other (b)

7,465   11,714  
Program agreement adjusted EBITDA 116,693   122,374  

Unrestricted subsidiary (c)

4,602 16,452

Incremental expected cost savings (a,d)

920   3,023  
Lender adjusted EBITDA $ 122,215   $ 141,849  
 
Leverage ratio net debt:
Short-term debt
Current portion of term loan, net of discount $ 24,921 $ 23,943
Asset backed line of credit 21,154
Capital lease obligation and other 1,513   2,403  
Total short-term debt 26,434 47,500
Term loan, net of discount 419,545 443,488
Capital lease obligation 535   2,248  
Total long-term debt 420,080   445,736  
Total debt 446,514 493,236
Plus: Deferred charges 6,894 9,381
Less: Cash and cash equivalents (e) (4,713 ) (4,220 )
Leverage ratio net debt $ 448,695   $ 498,397  
 
Program agreement leverage ratio 3.85 4.07
Program agreement leverage ratio requirement < 5.00 < 5.00
 
Lender leverage ratio 3.67 3.51

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 and executive recruiting.
(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.
(e) Excludes third party credit card receivables.
 

The following table presents adjusted working capital and net liquidity:

  February 2, 2018   February 3, 2017
Adjusted working capital:
Total current assets $ 286,906 $ 381,278
Total current liabilities 304,202   386,153  
Working capital $ (17,296 ) $ (4,875 )
Plus: Inter-company portion of current income taxes payable 30,255 27,690
Plus: Inter-company payable due to stock compensation 14,240   10,407  
Adjusted working capital $ 27,199   $ 33,222  
 
Cash and cash equivalents $ 9,173 $ 7,916
Less: Third party credit card receivables (4,460 ) (3,696 )
Lender cash and cash equivalents 4,713 4,220
Plus: Asset backed line availability 92,407   100,237  
Program agreement net liquidity $ 97,120   $ 104,457  
Less: Unrestricted subsidiary cash (28 ) (54 )
Lender net liquidity $ 97,092   $ 104,403  
 
Program agreement and lender net liquidity requirement > $40,000 > $40,000

Contacts

Investor Relations:
ICR
Jean Fontana
IR@bluestembrands.com

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