Bluestem Group Inc. Announces Unaudited Consolidated First Quarter and Fiscal 2018 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 May 4, 2018 and May 5, 2017. Bluestem is a multi-brand, direct-to-consumer 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”

First Quarter Fiscal 2018 Bluestem Brands Highlights

  • The new revenue recognition accounting standard ("Topic 606") was adopted in Q1 2018, resulting in the accelerated recognition of $13.3 million of direct response advertising costs
  • Net sales for the first quarter of fiscal 2018 were $381.1 million, a 10.9% decrease compared to the first quarter of fiscal 2017
  • Adjusted net sales excluding exited businesses decreased 5.1% compared to the first quarter of fiscal 2017**
  • Gross margin increased 100 basis points to 48.7%, driven by continued progress in cost reduction and price optimization efforts
  • Adjusted EBITDA for the first quarter of fiscal 2018 was $(12.6) million compared to $5.8 million in the first quarter of fiscal 2017, a reduction of 470 bps as a percent of net sales*
  • Compliant with lender covenants throughout and as of the end of the first quarter; net liquidity was $81.4 million compared to a covenant requirement of $40.0 million and leverage ratio was 4.16x compared to a covenant requirement of 4.50x

Lisa Gavales, Interim CEO, stated, “We made further progress on our turnaround strategy during the first quarter, and are pleased with the continued stabilization we have achieved in certain areas of the business. For the quarter and excluding the impact of the accounting change, we delivered strong gross margin and net contribution margin improvements. In addition, we continued to reduce the cost of doing business and drove improved results in our Northstar portfolio, including better performance in the credit portfolio. More specifically, we saw an inflection point with a 60 basis point decline in the portfolio delinquency rate which bodes well for a reduced merchant fee for the remainder of fiscal 2018. Furthermore, we have identified and began taking action on several initiatives that we believe will accelerate our turnaround effort of Orchard portfolio. As we look ahead, we will work to build on the progress we have made thus far in the business, as we remain focused on further improving our credit portfolio, driving additional cost reductions across the business, and developing a platform for our Orchard portfolio that we believe will drive sustainable long-term sales and profitability. Overall, we believe that we are on the right track to achieve long-term profitability for the Company.”

First Quarter Fiscal 2018 Bluestem Group Consolidated Statistics

unaudited in millions (except loss per share)   Q1 2018   Q1 2017
Bluestem Group net loss* $ (40.1 ) $ (43.0 )
Bluestem Group basic and diluted loss per share* $ (0.30 ) $ (0.33 )
Bluestem Group Adjusted EBITDA* $ (14.2 ) $ 6.3
Bluestem Group cash and cash equivalents $ 126.3 $ 115.8
 

First Quarter Fiscal 2018 Bluestem Brands Stand-Alone Statistics

unaudited in millions   Q1 2018   Q1 2017
Bluestem Brands net sales $ 381.1 $ 427.6
Bluestem Brands adjusted net sales** $ 381.1 $ 401.4
Bluestem Brands net loss* $ (30.7 ) $ (30.5 )
Bluestem Brands Adjusted EBITDA* $ (12.6 ) $ 5.8
 
Northstar Portfolio net sales $ 183.0 $ 187.0
Orchard Portfolio net sales $ 208.1 $ 245.8
Northstar portfolio active accounts 1.5 1.6
Orchard Portfolio gross active customers 7.4 7.8
Northstar Portfolio revolving credit portfolio:
30+ day delinquency rate 16.3 % 16.9 %
Net principal charge-off rate 20.5 % 19.6 %
 

*Includes a $13.3 million impact from the acceleration of certain advertising costs as a result of the adoption of Topic 606 in Q1 2018.

**Excludes net sales for exited businesses (PayCheck Direct, Draper's & Damon's retail stores and LinenSource). Year-over-year changes are estimated using net sales for the 13 weeks ended May 4, 2018 and May 5, 2017, respectively.

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 10:00 AM ET on Wednesday, June 20, 2018. The conference call can be accessed at (800) 347-6311 or (323) 794-2094 (International), conference ID # 6005636 and broadcast simultaneously at http://www.bluestem.com/investor-relations. Following completion of the call, a recorded replay of the webcast will be available on Bluestem’s website. To listen to the telephone replay, call toll-free (844) 512-2921 or (412) 317-6671 (International), replay pin # 6005636. The telephone replay will be available at 1:00 PM ET June 20, 2018. Additional investor information can be accessed at http://www.bluestem.com/investor-relations

About Bluestem Group

Bluestem Group Inc., a holding company headquartered in Eden Prairie, MN, operates multiple direct to consumer retail brands through its subsidiary Bluestem Brands. The Northstar Portfolio includes Fingerhut and Gettington, both of which are national multi-channel retail brands offering a broad selection of name brand and private label merchandise serving low- to middle-income consumers by offering multiple payment plans through revolving credit lines or installment loans offered by WebBank. The Orchard Portfolio consists of multi-channel brands including Appleseed’s, Bedford Fair, Blair, Draper’s & Damon’s, Gold Violin, Haband, Norm Thompson, Old Pueblo Traders, Sahalie, Tog Shop and WinterSilks. These brands offer apparel, accessories, and home products for the boomer and senior demographic, generally considered age 50 and over and provide customers with the ability to obtain credit through a third-party private label credit card. 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.
BLUESTEM BRANDS, INC.
FINANCIAL INFORMATION
13-weeks ended May 4, 2018 and May 5, 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)
  • "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, Tog Shop, and WinterSilks retail brands

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 business results for Q1 2018 reflect the adoption of the new revenue recognition accounting standard (Topic 606). The primary impact of the adoption of Topic 606 was to accelerate the timing of recognizing direct mail catalog advertising costs, which were capitalized and amortized over their expected period of future benefit prior to adoption and are now recognized on the estimated date of first delivery to recipients.

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.

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 Ended May 4, 2018

   

BLUESTEM GROUP INC.

Condensed Consolidated Statements of Comprehensive Loss

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

 
13-Weeks Ended
May 4, 2018   May 5, 2017
Net sales and revenue
Net sales $ 381,060 $ 427,622
Commercial real estate revenue, net 395   1,704  
Total net sales and revenue 381,455   429,326  
Costs and expenses
Cost of goods sold 195,167 223,819
Sales and marketing expenses 127,019 123,045
Net credit expense 25,148 29,936
General and administrative expenses 49,016 66,334
Amortization and depreciation not included in cost of goods sold 12,304 15,413
Loss on impairment   230  
Total costs and expenses 408,654 458,777
 
Operating loss (27,199 )

 

(29,451 )
 
Interest expense, net 12,602   12,865  
Loss before income taxes (39,801 )

 

(42,316 )
Income tax expense 311  

 

707  
Net loss $ (40,112 )

 

$ (43,023 )
 
Other Comprehensive loss
Unrealized gain (loss) on interest rate swap, net of tax 402  

 

(235 )
Comprehensive loss $ (39,710 )

 

$ (43,258 )
 
Basic and diluted loss per share - common stockholders
Basic and diluted loss per share $ (0.30 )

 

$ (0.33 )
Basic and diluted weighted average shares outstanding 132,326,876 132,036,278
 
       

BLUESTEM GROUP INC.

Condensed Consolidated Balance Sheets

(unaudited - in thousands)

 
May 4, 2018 February 2, 2018 May 5, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 126,269 $ 123,398 $ 115,774
Restricted cash 15,328 15,759 16,037
Customer accounts receivable, net of allowance of $7,415, $8,233 and $18,440 5,792 9,008 40,101
Merchandise inventories 197,914 194,693 217,964
Promotional material inventories 17,723 34,660 60,966
Other current assets 35,576   28,399   29,511  
Total current assets 398,602 405,917 480,353
Property and equipment, net 101,080 106,246 121,133
Intangibles, net 159,733 163,377 204,278
Goodwill 36,717 36,717 202,556
Other assets 9,851   11,222   15,339  
Total Assets $ 705,983   $ 723,479   $ 1,023,659  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 155,519 $ 160,300 $ 177,169
Accrued costs and other liabilities 89,669 67,754 95,581
Short-term debt 54,060   26,434   63,342  
Total current liabilities 299,248 254,488 336,092
Long-term debt 413,986 420,297 439,526
Deferred income taxes 4,360 4,245 37,635
Other long-term liabilities 36,151   39,349   38,696  
Total liabilities 753,745   718,379   851,949  
 
Stockholders' Equity:
Series A participating convertible preferred stock 5,000 5,000 5,000
Common stock 1,332 1,332 1,323
Treasury stock (131 ) (131 ) (131 )
Additional paid-in capital 294,581 293,892 291,169
Accumulated deficit (351,277 ) (297,324 ) (126,037 )
Accumulated other comprehensive income, net of tax 2,733   2,331   386  
Total stockholders’ equity (47,762 ) 5,100   171,710  
Total Liabilities and Stockholders' Equity $ 705,983   $ 723,479   $ 1,023,659  
 
   

BLUESTEM GROUP INC.

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
13-Weeks Ended
May 4, 2018   May 5, 2017
Operating Activities
Net loss $ (40,112 ) $ (43,023 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization and depreciation expense 13,466 16,801
Loss on impairment 230
Provision for doubtful accounts 19,953 18,152
Provision for deferred income taxes 212 161
Loss on servicing right (2,824 ) 1,250
Net gains on loans held for sale, investment securities and other 118 (1,404 )
Stock-based compensation expense 1,078 1,346
Other, net 1,043 1,310
Net change in assets and liabilities:
Customer account receivables 622 3,762
Merchandise inventories (3,221 ) 12,006
Promotional material inventories 3,096 (11,236 )
Other assets (7,555 ) 10,062
Accounts payable and other liabilities 17,116   (23,185 )
Net cash provided by (used in) operating activities 2,992 (13,768 )
 
Investing Activities
Purchases of customer accounts receivable (187,767 ) (193,394 )
Proceeds from sale of customer accounts receivable 170,408 181,432
Net purchases of property and equipment (4,958 ) (3,788 )
Distributions from equity investments 1,717 4,430
Other   (13 )
Net cash used in investing activities (20,600 ) (11,333 )
 
Financing Activities
Repayments of debt (7,200 ) (7,200 )
Borrowings on asset backed line of credit 110,602 130,999
Repayments on asset backed line of credit (83,301 ) (115,598 )
Payment of dividends   (80,023 )
Net cash provided by (used in) by financing activities 20,101 (71,822 )
 
Effect of Foreign Exchange Rates on Cash (53 ) (5 )
 
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash 2,440 (96,928 )
Cash, Cash Equivalents and Restricted Cash, Beginning of Period 139,157   228,739  
Cash, Cash Equivalents and Restricted Cash, End of Period $ 141,597   $ 131,811  
 

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, amortization and depreciation expense, loss on impairment, loss on servicing right, stock-based compensation expense, 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:

   
13-Weeks Ended
May 4, 2018   May 5, 2017
Adjusted EBITDA:
Net loss $ (40,112 ) $ (43,023 )
Income tax expense 311 707
Interest expense 12,605 12,865
Amortization and depreciation expense 13,465 16,801
Loss on impairment 230
(Gain) loss on servicing right (2,824 ) 1,250
Stock-based compensation expense 1,078 1,346
Restructuring costs 89 14,142
Other 1,195   1,977  
Adjusted EBITDA $ (14,193 ) $ 6,295  
 

BLUESTEM GROUP INC.
Non-GAAP Financial Measure
(unaudited - in thousands)

Impact of Adoption of Topic 606

The Company adopted Topic 606 which pertains to revenue recognition, on February 3, 2018.

The adoption of Topic 606 had a material impact on the timing of advertising expense recognition related to direct response advertising. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. In addition, the estimated realizable value of future product returns was reclassified from current liabilities to current assets.

The following tables present the impact the adoption of Topic 606 had on the Company's condensed consolidated statement of operations and condensed consolidated balance sheet:

   
13-Weeks Ended May 4, 2018
As reported  

% of net

sales

 

Topic 606

Adjustments

 

Balances

without

Adoption of

Topic 606

 

% of net

sales

Total net sales and revenue $ 381,455 100.0 % $ $ 381,455 100.0 %
Costs and expenses
Cost of goods sold 195,167 51.2 % 195,167 51.2 %
Sales and marketing expenses 127,019 33.3 % (13,262 ) 113,757 29.8 %
Net credit expense 25,148 6.6 % 25,148 6.6 %
General and administrative expenses 49,016 12.8 % 49,016 12.8 %

Amortization and depreciation not
included in cost of goods sold

12,304   3.2 %   12,304   3.2 %
Total costs and expenses 408,654   107.1 % (13,262 ) 395,392   103.7 %
Operating loss (27,199 ) (7.1 )% 13,262 (13,937 ) (3.7 )%
Interest expense, net 12,602   3.3 %   12,602   3.3 %
Loss before income taxes (39,801 ) (10.4 )% 13,262 (26,539 ) (7.0 )%
Income tax expense 311   0.1 %   311   0.1 %
Net loss $ (40,112 ) (10.5 )% $ 13,262   $ (26,850 ) (7.0 )%
 
           
As of May 4, 2018
As Reported   Topic 606 Adjustment  

Balances Without

Adoption of Topic 606

Promotional material inventories $ 17,723 $ 27,104 $ 44,827
Other current assets 35,576 (7,519 ) 28,057
Accrued costs and other liabilities 89,690 (7,519 ) 82,171
Accumulated deficit (351,277 ) 27,104 (324,173 )
 

Bluestem Brands, Inc.
Results for the 13-Weeks Ended May 4, 2018

 

BLUESTEM BRANDS, INC.

Condensed Consolidated Statements of Loss and Selected Operating Data

(unaudited - in thousands)

 
13-Weeks Ended  
May 4, 2018   May 5, 2017 Change(a)  
Net sales $ 381,060 $ 427,622 (10.9 )%
Cost of goods sold 195,644   223,819   (12.6 )%
Gross profit 185,416 203,803 (9.0 )%
Sales and marketing expenses(b) 127,019 123,045 3.2 %
Net credit expense 24,660 33,702 (26.8 )%
General and administrative expenses 46,430 65,035 (28.6 )%
Amortization and depreciation not included in cost of goods sold (c) 12,304 15,413 (20.2 )%
Loss on impairment 230 (100.0 )%
Interest expense, net (d) 12,602   12,865   (2.0 )%
Loss before income taxes(b) (37,599 ) (46,487 ) (19.1 )%
Income tax benefit (6,855 ) (16,034 ) (57.2 )%
Net loss(b) $ (30,744 ) $ (30,453 ) 1.0 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 48.7 % 47.7 % 100 bps
Sales and marketing expenses(b) 33.3 % 28.8 % 450 bps
Net credit expense 6.5 % 7.9 % (140 ) bps
Contribution margin (b,e) $ 33,737 $ 47,056 (28.3 )%
As a percentage of net sales(b) 8.9 % 11.0 % (210 ) bps
Adjusted general and administrative expenses (e) $ 44,457 $ 49,664 (10.5 )%
As a percentage of net sales 11.7 % 11.6 % 10 bps
Adjusted EBITDA (b,e) $ (12,608 ) $ 5,779 (318.2 )%
As a percentage of net sales(b) (3.3 )% 1.4 % (470 ) bps
 
Selected Financial Data:
Lender net liquidity (e) $ 81,369 $ 86,247 (5.7 )%
Availability on inventory line of credit $ 76,530 $ 81,605 (6.2 )%
Adjusted free cash flow (e) $ (14,396 ) $ 1,007 (1,529.6 )%
Lender leverage ratio (e) 4.16 3.54
Lender leverage ratio requirement < 4.50 < 4.50
Program agreement leverage ratio (e) 4.24 3.89
Program agreement leverage ratio requirement < 5.00 < 5.00
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (f) 111 90 23.3 %
Fingerhut FreshStart new customer credit accounts (f) 43 54 (20.4 )%
Orchard Portfolio new gross customers (g) 563 652 (13.7 )%
Northstar Portfolio active accounts (h) 1,464 1,577 (7.2 )%
Orchard Portfolio gross active customers (i) 7,435 7,813 (4.8 )%
 
(a)   Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.
(b) Fiscal 2018 amounts and percentages include the impact of the adoption of Topic 606, which pertains to revenue recognition. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. The impact of adopting Topic 606 was an increase in sales and marketing expense of $13.3 million for the 13 weeks ended May 4, 2018.
(c) 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.
(d) Interest expense is net of interest income.
(e) 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.
(f) Customers that have made their initial order on account during the fiscal period presented. Revolving new customer credit accounts excludes FreshStart graduates initially included in FreshStart new customer credit accounts when their initial order was made.
(g) 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 4, 2018 and 13-weeks ended May 5, 2017, were 198 and 219, respectively.
(h) Revolving credit customers that have made at least one purchase on account within the previous twelve fiscal months and at least one payment on account since origination.
(i) 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 May 4, 2018 and May 5, 2017, were 4.4 million and 4.7 million, respectively.
     

BLUESTEM BRANDS, INC.

Condensed Consolidated Balance Sheets

(unaudited - in thousands)

 
May 4, 2018 February 2, 2018 May 5, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 12,299 $ 9,173 $ 14,173
Restricted cash 15,328 15,759 15,953
Customer accounts receivable, net of allowance of $6,976, $7,082 and $8,887 5,708 7,275 7,699
Merchandise inventories 197,914 194,693 217,964
Promotional material inventories 17,723 34,660 60,966
Prepaid expenses and other assets 32,450   25,346   24,545  
Total current assets 281,422 286,906 341,300
Property and equipment, net 83,785 89,385 121,133
Intangible assets, net 159,733 163,377 204,278
Goodwill 36,717 36,717 202,556
Other assets 4,282   4,040   3,075  
Total Assets $ 565,939   $ 580,425   $ 872,342  
 
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 155,519 $ 160,300 $ 177,169
Current income taxes payable 36,697 36,370 26,818
Accrued costs and other liabilities 104,098 81,098 109,711
Short-term debt 54,060   26,434   63,342  
Total current liabilities 350,374 304,202 377,040
Long-term debt 413,769 420,080 439,309
Deferred income taxes 5,889 16,325 48,356
Other long-term liabilities 36,170   39,145   31,013  
Total liabilities 806,202 779,752 895,718
 
Stockholder's equity:
Common stock
Additional paid-in capital 369,602 369,602 369,602
Accumulated deficit (611,938 ) (570,697 ) (393,364 )
Accumulated other comprehensive income, net of tax 2,073   1,768   386  
Total stockholder's equity (240,263 ) (199,327 ) (23,376 )
Total Liabilities and Stockholder's Equity $ 565,939   $ 580,425   $ 872,342  
 
   

BLUESTEM BRANDS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
13-Weeks Ended
May 4, 2018   May 5, 2017
Operating Activities
Net loss $ (30,744 ) $ (30,453 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization and depreciation expense 13,238 16,801
Loss on impairment 230
Provision for doubtful accounts 19,937 21,919
Provision for deferred income taxes (10,436 ) (8,402 )
(Gain) loss on servicing right (2,824 ) 1,250
Stock-based compensation expense 689 1,234
Other, net 1,257 1,175
Net change in assets and liabilities:
Customer accounts receivable (1,011 ) 2,905
Merchandise inventories (3,221 ) 12,006
Promotional material inventories 6,440 (11,236 )
Prepaid expenses and other assets (7,482 ) 3,654
Current income taxes payable 327 (7,241 )
Accounts payable and other liabilities 18,079   (19,288 )
Net cash provided by (used in) operating activities 4,249 (15,446 )
 
Investing Activities
Purchase of customer accounts receivable (187,767 ) (193,394 )
Proceeds from sale of customer accounts receivable 170,408 210,924
Net purchase of property and equipment (4,296 ) (3,788 )
Net cash (used in) provided by investing activities (21,655 ) 13,742
 
Financing Activities
Repayments of debt (7,200 ) (7,200 )
Borrowings on asset backed line of credit 110,602 130,999
Repayments on asset backed line of credit (83,301 ) (115,598 )
Net cash provided by financing activities 20,101   8,201  
 
Net Increase in Cash, Cash Equivalents and Restricted Cash 2,695 6,497
Cash, Cash Equivalents and Restricted Cash, Beginning of Period 24,932   23,629  
Cash, Cash Equivalents and Restricted Cash, End of Period $ 27,627   $ 30,126  
 
     

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Segment Net Sales

(unaudited - in thousands, except average order size)

 
13-Weeks Ended
May 4, 2018   May 5, 2017 Change
$   % of Sales $   % of Sales %
Total sales by merchandise category:
Home $ 94,932 22.6 % $ 106,529 23.1 % (10.9 )%
Entertainment 67,864 16.2 % 73,110 15.8 % (7.2 )%
Fashion 256,600   61.2 % 281,897   61.1 % (9.0 )%
Total merchandise sales(a) 419,396 100.0 % 461,536 100.0 % (9.1 )%
Corporate and other(b) (10,012 ) (5,226 )
Returns and allowances (44,073 ) (47,689 ) (7.6 )%
Commissions and other revenues 15,749   19,001   (17.1 )%
Net sales $ 381,060   $ 427,622   (10.9 )%
Gross profit rate 48.7 % 47.7 % 100 bps
Sales and marketing expense rate(c) 33.3 % 28.8 % 450 bps
Contribution margin rate(c, d) 8.9 % 11.0 % (210 ) bps
Average order size(e) $ 100 $ 106
 
Northstar Portfolio sales by merchandise category:
Home $ 85,203 45.0 % $ 88,983 45.9 % (4.2 )%
Entertainment 67,864 35.9 % 73,110 37.7 % (7.2 )%
Fashion 36,147   19.1 % 31,833   16.4 % 13.6 %
Total merchandise sales(a) 189,214 100.0 % 193,926 100.0 % (2.4 )%
Returns and allowances (10,209 ) (11,166 ) (8.6 )%
Commissions and other revenues 4,001   4,286   (6.6 )%
Net sales $ 183,006   $ 187,046   (2.2 )%
 
Gross profit rate 43.9 % 42.3 % 160 bps
Sales and marketing expense rate(c) 15.1 % 15.3 % (20 ) bps
Contribution margin rate(c, d) 15.2 % 13.1 % 210 bps
Average order size(e) $ 221 $ 224
 
Orchard Portfolio sales by merchandise category:
Home $ 9,729 4.2 % $ 17,546 6.6 % (44.6 )%
Fashion 220,453   95.8 % 250,064   93.4 % (11.8 )%
Total merchandise sales(a) 230,182 100.0 % 267,610 100.0 % (14.0 )%
Returns and allowances (33,864 ) (36,523 ) (7.3 )%
Commissions and other revenues 11,748   14,715   (20.2 )%
Net sales $ 208,066   $ 245,802   (15.4 )%
 
Gross profit rate 52.6 % 52.6 % bps
Sales and marketing expense rate(c) 47.8 % 39.4 % 840 bps
Contribution margin rate(c,d) 4.7 % 13.2 % (850 ) bps
Average order size(e) $ 69 $ 75
 
(a)   Total merchandise sales include 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) Fiscal 2018 percentages include the impact of the adoption of Topic 606, which pertains to revenue recognition. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. The impact of adopting Topic 606 was an increase in sales and marketing expense of $13.3 million for the 13 weeks ended May 4, 2018, of which $2.1 million related to Northstar Portfolio and $11.1 million related to Orchard Portfolio.
(d) 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.
(e) 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 4, 2018   May 5, 2017 Change %
Net credit expense:
Provision for doubtful accounts:
Loss on sale of customer accounts receivable $ 17,552 $ 12,212 43.7 %
Company-owned customer accounts receivable 2,385 5,940 (59.8 )%

Loss on sale of PayCheck Direct customer accounts receivable
to BGI Holding Company

  3,766   (100.0 )%
Total provision for doubtful accounts 19,937 21,918 (9.0 )%
Credit management costs 15,944 18,822 (15.3 )%
Finance charge and fee income, net (950 ) (1,180 ) (19.5 )%
Servicing fee income and portfolio profit sharing (7,447 ) (7,108 ) 4.8 %
(Gain) loss on servicing right (2,824 ) 1,250   n/m
Net credit expense $ 24,660   $ 33,702   (26.8 )%
 
13-Weeks Ended
May 4, 2018 May 5, 2017
Serviced Portfolio Selected Credit Data: Revolving(a) FreshStart(b) Revolving(a) FreshStart(b)
Balance active accounts 1,698 121 1,800 142
Average balance outstanding $ 805 $ 102 $ 776 $ 104
Customer accounts receivable $ 1,367,340 $ 12,346 $ 1,395,741 $ 14,863
Balances 30+ days delinquent(c) $ 222,890 $ 4,580 $ 235,428 $ 6,141

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

16.3 % 37.1 % 16.9 % 41.3 %
Average customer accounts receivable $ 1,417,769 $ 12,899 $ 1,443,936 $ 15,761
Finance charge and fee income $ 94,572 $ 944 $ 94,145 $ 1,167
Finance charge and fee income rate(e) 26.7 % 10.2 % 26.1 % 11.4 %
Net principal charge-offs $ 72,778 $ 2,577 $ 70,869 $ 2,751
Net principal charge-off rate(f) 20.5 % 27.8 % 19.6 % 26.7 %
 
(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 May 4, 2018 and May 5, 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 May 4, 2018 and May 5, 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 May 4, 2018 and May 5, 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 May 4, 2018 and May 5, 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-weeks ended May 4, 2018 and 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, 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, gain or loss on servicing right, stock-based compensation expense, 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, accelerated advertising costs associated with the adoption of Topic 606 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.

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

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

   
13-Weeks Ended
May 4, 2018   May 5, 2017
Contribution margin:
Net loss $ (30,744 ) $ (30,453 )
Income tax benefit (6,855 ) (16,034 )
Interest expense, net 12,602 12,865
Loss on impairment 230
Amortization and depreciation not included in cost of sales 12,304 15,413
General and administrative expenses 46,430   65,035  
Contribution margin $ 33,737   $ 47,056  
 
Contribution margin % of net sales 8.9 % 11.0 %
 

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 4, 2018   May 5, 2017
Adjusted general and administrative expenses:
General and administrative expenses $ 46,430 $ 65,035
Less:
Stock-based compensation expense (689 ) (1,234 )
Restructuring costs (89 ) (12,160 )
Orchard Portfolio segmentation and positioning research
Other (1,195 ) (1,977 )
Adjusted general and administrative expenses $ 44,457   $ 49,664  
 
Adjusted general and administrative expenses % of net sales 11.7 % 11.6 %
 

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

                                       
13-Weeks Ended
May 4, 2018   May 5, 2017
Adjusted EBITDA:
Net loss $ (30,744 ) $ (30,453 )
Income tax benefit (6,855 ) (16,034 )
Interest expense 12,605 12,865
Amortization and depreciation expense 13,237 16,801
Loss on impairment 230
(Gain) loss on servicing right (2,824 ) 1,250
Stock-based compensation expense 689 1,234
Restructuring costs 89 17,909
Other 1,195   1,977  
Adjusted EBITDA $ (12,608 ) $ 5,779  
 
Adjusted EBITDA % of net sales (3.3 )% 1.4 %
 

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

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

                         
Fiscal Quarters Ended
May 4, 2018   May 5, 2017
Adjusted free cash flow:
Net cash provided by (used in) operating activities $ 4,249 $ (15,446 )
Plus: Proceeds from sale of customer accounts receivable 170,408 210,924
Less: Purchase of customer accounts receivable (187,767 ) (193,394 )
Less: Maintenance capital expenditures (1,286 ) (1,077 )
Adjusted free cash flow $ (14,396 ) $ 1,007  
 
Adjusted free cash flow % of net sales (3.8 )% 0.2 %
 

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

    Trailing Twelve Fiscal Months
May 4, 2018   May 5, 2017
Adjusted EBITDA $ 73,903 $ 92,977
Expected cost savings (a) 15,984 19,070
Non-cash charges (103 ) 629
One-time charges 858
Acceleration of advertising expense due to adoption of Topic 606 (b) 13,262
Other (c) 7,463   16,895  
Program agreement adjusted EBITDA 110,509   130,429  
Unrestricted subsidiary (d) 1,857 10,604
Incremental expected cost savings (a, e) 371   2,121  
Lender adjusted EBITDA $ 112,737   $ 143,154  
 
Leverage ratio net debt:
Short-term debt
Current portion of term loan, net of discount $ 24,434 $ 23,943
Asset backed line of credit 28,248 37,244
Capital lease obligation and other 1,379   2,155  
Total short-term debt 54,061 63,342
Term loan, net of discount 413,559 437,502
Capital lease obligation 210   1,807  
Total long-term debt 413,769   439,309  
Total debt 467,830 502,651
Plus: Deferred charges 6,272 8,759
Less: Cash and cash equivalents (f) (5,043 ) (4,672 )
Leverage ratio net debt $ 469,059   $ 506,738  
 
Program agreement leverage ratio 4.24 3.89
Program agreement leverage ratio requirement < 5.00 < 5.00
 
Lender leverage ratio 4.16 3.54
Lender leverage ratio requirement < 4.50 < 4.50
(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) The Company adopted Topic 606, which pertains to revenue recognition, on February 3, 2018. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients.
(c) Other includes charges such as, but not limited to or necessarily inclusive of, strategic investment charges, system implementation charges and executive recruiting.
(d) 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.
(e) Due to the unrestricted subsidiary designation, incremental expected cost savings above program agreement threshold limitations are able to be included in lender adjusted EBITDA.
(f) Excludes third party credit card receivables.
 

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

The following table presents adjusted working capital and net liquidity:

    May 4, 2018   May 5, 2017
Adjusted working capital:
Total current assets $ 281,422 $ 341,300
Total current liabilities 350,374   377,040  
Working capital $ (68,952 ) $ (35,740 )
Plus: Inter-company portion of current income taxes payable 30,583 30,255
Plus: Inter-company payable due to stock compensation 14,739   14,240  
Adjusted working capital $ (23,630 ) $ 8,755  
 
Program agreement and lender net liquidity:
Cash and cash equivalents $ 12,299 $ 14,173
Less: Third party credit card receivables (7,256 ) (9,501 )
Lender cash and cash equivalents 5,043 4,672
Plus: Asset backed line availability 76,530   81,605  
Program agreement net liquidity $ 81,573   $ 86,277  
Less: Unrestricted subsidiary cash (204 ) (30 )
Lender net liquidity $ 81,369   $ 86,247  
 
Program agreement and lender net liquidity requirement > $40,000 > $40,000

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

Impact of Adoption of Topic 606

The Company adopted Topic 606 which pertains to revenue recognition, on February 3, 2018.

The adoption of Topic 606 had a material impact on the timing of advertising expense recognition related to direct response advertising. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. In addition, the estimated realizable value of future product returns was reclassified from current liabilities to current assets.

The following tables present the impact the adoption of Topic 606 had on the Company's condensed consolidated statement of operations and condensed consolidated balance sheet:

   
13-Weeks Ended May 4, 2018

 As reported 

 

 % of net 

 sales 

 

  Topic 606  

  Adjustments  

 

 Balances 

 without 

 Adoption of

 Topic 606 

 

 % of net 

 sales 

Total net sales and revenue $ 381,060 100.0 % $ $ 381,060 100.0 %
Costs and expenses
Cost of goods sold 195,644 51.3 % 195,644 51.3 %
Sales and marketing expenses 127,019 33.3 % (13,262 ) 113,757 29.9 %
Net credit expense 24,660 6.5 % 24,660 6.5 %
General and administrative expenses 46,430 12.2 % 46,430 12.2 %

Amortization and depreciation not
included in cost of goods sold

12,304   3.2 %   12,304   3.2 %
Total costs and expenses 406,057   106.6 % (13,262 ) 392,795   103.1 %
Operating loss (24,997 ) (6.6 )% 13,262 (11,735 ) (3.1 )%
Interest expense, net 12,602   3.3 %   12,602   3.3 %
Loss before income taxes (37,599 ) (9.9 )% 13,262 (24,337 ) (6.4 )%
Income tax benefit (6,855 ) (1.8 )% 2,416   (4,439 ) (1.2 )%
Net loss $ (30,744 ) (8.1 )% $ 10,846   $ (19,898 ) (5.2 )%
 
                As of May 4, 2018
As Reported   Topic 606 Adjustment  

Balances Without

Adoption of Topic 606

Promotional material inventories $ 17,723 $ 27,104 $ 44,827
Other current assets 32,450 (7,519 ) 24,931
Current income taxes payable 36,697 1,100 37,797
Accrued costs and other liabilities 104,098 (7,519 ) 96,579
Deferred income taxes 5,889 4,660 10,549
Accumulated deficit (611,938 ) 21,344 (590,594 )

Contacts

Investor Relations:
ICR
Jean Fontana
IR@bluestembrands.com

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