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Bluestem Group Inc. Announces Unaudited Consolidated Second Quarter Earnings Results

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EDEN PRAIRIE, Minn.--(BUSINESS WIRE)--

Bluestem Group Inc. (OTCMKTS: BGRP) today reported unaudited consolidated financial results that include its wholly-owned subsidiary, Bluestem Brands, Inc. and its subsidiaries ("Bluestem"), for the 13- and 26-weeks ended July 29, 2016 and July 31, 2015. We refer to the 13-week periods in this release as the "second quarter." Bluestem is a multi-brand, online retailer of a broad selection of name-brand and private label general merchandise serving the boomer and senior demographic, generally considered age 50 and over, and low- to middle-income consumers across all age demographics.

"Consistent with our first quarter results, Bluestem's second quarter performance reflect continued headwinds from the increasing supply of credit to our customer base, as well as the short-term negative impact of our contact stream optimization testing and Gettington brand repositioning efforts. We've also seen an increase in delinquency rates in the Northstar revolving credit portfolio, which is indicative of the stress created by the increased credit supply as well as the denominator-impact of Northstar's sales decline. These results are consistent with Limited Forward-Looking Information we published on August 16," said Steve Nave, Bluestem Group's Chief Executive Officer.

Second Quarter 2016 Bluestem Group Consolidated Highlights – Includes Orchard Brands Corporation beginning July 10, 2015

  • Net loss for the second quarter of fiscal 2016 was $11.3 million compared to net income of $19.8 million for the second quarter of fiscal 2015. Diluted loss per share was $0.09 for the second quarter of fiscal 2016, compared to diluted income per share of $0.14 for the second quarter of fiscal 2015.
  • Adjusted EBITDA for the second quarter of fiscal 2016 was $25.8 million, an increase of 45.1% over the $17.8 million in the second quarter of fiscal 2015.
  • Capmark Portfolio asset proceeds for the second quarter of fiscal 2016 were $5.7 million. At the end of the second quarter of fiscal 2016, the Company had $55.3 million in net Capmark Portfolio assets remaining versus $60.7 million at the end of the first quarter of fiscal 2016.
  • Cash and cash equivalents were $178.5 million as of July 29, 2016.

Second Quarter 2016 Bluestem Brands Stand-Alone Highlights – Includes Orchard Brands Corporation beginning July 10, 2015

  • Net sales for the second quarter of fiscal 2016 were $468.1 million, including $226.5 million of net sales from the Orchard Portfolio, a 55.3% increase over net sales of $301.4 million for the second quarter of fiscal 2015, which included $47.9 million of net sales from the Orchard Portfolio.
  • Net loss for the second quarter of fiscal 2016 was $7.5 million compared to $13.1 million for the second quarter of fiscal 2015.
  • Bluestem's adjusted EBITDA in the second quarter of fiscal 2016 was $27.7 million, an increase of 35.0% over adjusted EBITDA for the second quarter of fiscal 2015 of $20.5 million.
  • Northstar Portfolio net sales for the second quarter of fiscal 2016 were $222.7 million, a decrease of 9.6% compared to $246.4 million in the second quarter of fiscal 2015.
  • Orchard Portfolio's net sales for the second quarter of fiscal 2016 were $226.5 million, a decrease of 4.5% compared to Orchard Portfolio's net sales prepared on a 13 week Adjusted Basis for the second quarter of fiscal 2015.
  • PayCheck Direct's net sales for the second quarter of fiscal 2016 were $12.2 million, an increase of 63.8% compared to $7.4 million in the second quarter of fiscal 2015.
  • Northstar Portfolio active accounts were 1.6 million as of the end of the second quarter of fiscal 2016 and 1.7 million as of the end of the second quarter of fiscal 2015.
  • Orchard Portfolio's active customers for the second quarter of fiscal 2016 were 7.7 million, a decrease of 3.3% compared to Orchard Portfolio's active customers 8.0 million for the second quarter of fiscal 2015.
  • 30+ day delinquent balances on the revolving portfolio were 17.7% at the end of the second quarter of fiscal 2016 compared to 16.3% for the second quarter of fiscal 2015.
  • Net principal charge-off rate on the revolving portfolio was 19.9% for the second quarter of fiscal 2016 compared to 19.4% for the second quarter of fiscal 2015.

All financial information included in this release is unaudited. Information for Bluestem Group is presented on a consolidated basis, including Orchard Brands Corporation beginning July 10, 2015. Consolidated information for Bluestem Group's wholly-owned subsidiary, Bluestem Brands, Inc., is also presented on a stand-alone basis. The acquisition of Orchard was accounted for as a business combination.

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

Earnings Teleconference Information
Steve Nave, CEO, and Mark Wagener, CFO, will host an in-person meeting at the offices of Akin Gump, One Bryant Park, Bank of America Tower in New York City from 9:00-11:00 AM ET on Thursday, September 8, 2016 to discuss these results. The meeting will also be accessible via conference call at (888) 504-7960 or (719) 325-2330 (International), conference ID # 2862105 and broadcast simultaneously at http://www.bluestem.com/investor-relations. Following completion of the call, a recorded replay of the webcast will be available on Bluestem's website. To listen to the telephone replay, call toll-free (877) 870-5176 or (858) 384-5517 (International), replay pin # 2862105. The telephone replay will be available at 1:00 PM ET September 8, 2016. Additional investor information can be accessed at http://www.bluestem.com/investor-relations.

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

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

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

BLUESTEM GROUP INC.

BLUESTEM BRANDS, INC.

FINANCIAL INFORMATION

13 and 26 weeks ended July 29, 2016 and July 31, 2015

Overview and Basis of Presentation
As used in this release:

  • "Bluestem Group," "we," "us," "our," or "the Company" refers to Bluestem Group Inc. with its consolidated subsidiaries
  • "Bluestem" refers to Bluestem Brands, Inc., an indirect subsidiary of Bluestem Group Inc., which consists of the Northstar Portfolio of retail brands, PayCheck Direct and the Orchard Portfolio of retail brands
  • "Northstar Portfolio" refers to the consolidated Fingerhut and Gettington retail brands
  • "Orchard Portfolio" refers to the consolidated Appleseed's, Bedford Fair, Blair, Draper's & Damon's, Gold Violin, Haband, LinenSource, Norm Thompson, Old Pueblo Traders, Sahalie, Solutions, Tog Shop, and WinterSilks retail brands
  • "Capmark Portfolio" refers to the commercial real estate finance operations of Bluestem Group Inc.
  • "Adjusted Basis" refers to Orchard Portfolio's second quarter of fiscal 2015 adjusted to exclude the extra week ended July 3, 2015 in the second quarter of fiscal 2015 and includes the performance of the Orchard Portfolio prior to Bluestem's acquisition of Orchard Brands Corporation on July 10, 2015. The second quarter of fiscal 2015 contains 14 weeks, of which the first 10 weeks are based on Orchard Brands Corporation's calendar and remaining 4 weeks are based on Bluestem's calendar.

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

The Company reviews and presents the consolidated business results based on the organizational structure Company management uses to evaluate performance and make decisions on allocating resources and assessing performance. Beginning in fiscal 2016, the consolidated business results are presented in five categories: Northstar Portfolio, Orchard Portfolio, PayCheck Direct, Capmark Portfolio and we assign certain unallocated revenues and costs to "Corporate".

Bluestem Group Consolidated Financial Information
To supplement the historical financial data derived from Bluestem Group's consolidated financial statements, which are prepared in accordance with U.S. generally accepted accounting principles, or GAAP, this release uses adjusted EBITDA as a non-GAAP performance measure. This measure is not in accordance with, or an alternative to, measures prepared in accordance with GAAP. Please see the accompanying report on Bluestem Group's results of operations for further important information concerning this measure.

Bluestem Stand-alone Financial Information
To supplement the historical financial data derived from Bluestem's consolidated financial statements, which are prepared in accordance with GAAP, this release includes adjusted EBITDA, contribution margin, adjusted general and administrative expenses, free cash flow, lender adjusted EBITDA, lender leverage ratio debt, lender leverage ratio, working capital and net liquidity, as non-GAAP performance measures. These measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP. Please see the accompanying report on Bluestem's results of operations for further important information concerning these measures.

Orchard Brands Corporation Stand-alone Financial Information
To supplement these results this release includes certain information regarding Orchard Brands Corporation's 13 week periods ended June 27, 2015, March 28, 2015 and December 27, 2014 ( the "Historical Orchard Results"), which are presented in accordance with GAAP and based on historical Orchard Brands Corporation's basis of presentation and fiscal quarter.

To supplement the historical financial data derived from the historical results of Orchard Brands Corporation the accompanying report uses adjusted EBITDA and free cash flow measures. These measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP. The accompanying report also uses adjusted net sales, adjusted gross profit, adjusted selling and marketing expenses and adjusted general and administrative expenses. These measures are conformed to Bluestem Brands, Inc. basis of presentation for comparison purposes. Bluestem Brands, Inc.'s basis of presentation is in accordance with GAAP. The financial results of the Orchard Brands Corporation for periods succeeding the acquisition of Orchard Brands Corporation on July 10, 2015 will be presented on Bluestem Brands, Inc.'s basis of presentation. Please see the accompanying report on Orchard Brands Corporation's results of operations for the Historical Orchard Results for further important information concerning these measures.

Bluestem Group Inc.

Results for the 13- and 26-weeks ended July 29, 2016 and July 31, 2015

 
BLUESTEM GROUP INC.
Condensed Consolidated Statements of Comprehensive Income
(unaudited - in thousands, except shares and per share amounts)
 
      13-Weeks Ended       26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Net sales and revenue
Net sales $ 468,102 $ 301,375 $ 896,618 $ 507,550
Commercial real estate revenue 57   2,891   595   9,037  
Total net sales and revenue 468,159   304,266   897,213   516,587  
Costs and expenses
Cost of goods sold 242,361 169,705 457,078 289,965
Sales and marketing expenses 131,208 65,077 264,207 107,794
Net credit expense 18,644 9,809 35,821 16,108
General and administrative expenses 53,896 50,568 120,844 88,992
Amortization and depreciation not included in cost of goods sold 18,687 15,102 34,921 27,153
(Gain) loss from derivatives in our own equity   (411 ) (548 ) 7,814  
Total costs and expenses 464,796 309,850 912,323 537,826
 
Operating income (loss) 3,363 (5,584 ) (15,110 ) (21,239 )
 
Interest expense, net 13,682   8,754   27,205   16,274  
Loss before income taxes (10,319 ) (14,338 ) (42,315 ) (37,513 )
Income tax expense (benefit) 967   (34,142 ) 2,728   (33,798 )
Net (loss) income $ (11,286 ) $ 19,804   $ (45,043 ) $ (3,715 )
 
Other comprehensive (loss) income
Unrealized loss on interest rate swap, net of tax (423 ) (756 )
Net change in unrealized gains/losses on investments securities, net of tax   362   (231 ) 147  
Comprehensive (loss) income $ (11,709 ) $ 20,166   $ (46,030 ) $ (3,568 )
 
Basic and diluted (loss) income per share - common stockholders
Basic and diluted (loss) income per share $ (0.09 ) $ 0.14 $ (0.34 ) $ (0.03 )
Basic weighted average shares outstanding 131,956,673 136,140,955 133,747,141 136,132,962
Diluted weighted average shares outstanding 131,956,673 137,562,102 133,747,141 136,132,962
 
 
BLUESTEM GROUP INC.
Condensed Consolidated Balance Sheets
(unaudited - in thousands)
 
        July 29, 2016     January 29, 2016
ASSETS
Current assets:
Cash and cash equivalents $ 178,501 $ 185,944
Restricted cash 22,086 22,569
Customer accounts receivable, net of allowance of $11,673 and $14,434 33,622 44,446
Merchandise inventories 253,764 263,579
Promotional material inventories 56,492 53,253
Other current assets 48,137   49,233  
Total current assets 592,602 619,024
Loans held-for-sale 21,991 23,146
Equity investments 39,324 47,748
Property and equipment, net 134,807 125,001
Intangibles, net 441,882 460,551
Goodwill 367,481 367,481
Other assets 10,142   14,891  
Total Assets $ 1,608,229   $ 1,657,842  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 176,007 $ 180,601
Accrued costs and other liabilities 98,920 129,361
Short-term debt 82,586   47,981  
Total current liabilities 357,513 357,943
Long-term debt 501,546 513,847
Deferred income taxes 98,606 98,275
Other long-term liabilities 17,755   14,531  
Total liabilities 975,420   984,596  
 
Stockholders' Equity:
Series A participating convertible preferred stock 5,000 4,970
Common stock 1,323 1,366
Treasury stock (131 ) (131 )
Additional paid-in capital 367,571 361,935
Retained earnings 259,802 304,875
Accumulated other comprehensive (loss) income, net of tax (756 ) 231  
Total stockholders' equity 632,809   673,246  
Total Liabilities and Stockholders' Equity $ 1,608,229   $ 1,657,842  
 
 
BLUESTEM GROUP INC.
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
 
        13-Weeks Ended       26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Operating Activities
Net (loss) income $ (11,286 ) $ 19,804 $ (45,043 ) $ (3,715 )
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for deferred income taxes (577 ) (35,030 ) 332 (35,031 )
Uncertain tax positions 113 34 245 (564 )
Net gains on loans held for sale, investment securities and other 41 (1,640 ) (127 ) (6,090 )
Equity in net losses (gains) of investees and cash return on investment 27 (716 ) 97 (1,129 )
Amortization and depreciation expense 19,807 15,622 37,234 27,957
(Gain) loss from derivatives in our own equity (411 ) (548 ) 7,814
Provision for doubtful accounts 7,178 1,890 13,257 7,157
Provision for merchandise returns 31,341 7,698 61,220 13,852
Stock-based compensation expense 1,403 1,527 2,801 2,947
Inventory obsolescence and other reserves 9,571 7,574 18,660 14,875
Other, net 1,314 1,878 2,653 2,793
Net change in assets and liabilities:
Customer account receivables, net (16,622 ) (21,062 ) (33,409 ) (24,194 )
Merchandise inventories 37,422 (549 ) 38,359 1,978
Promotional material inventories 16,295 2,560 (3,239 ) (5,452 )
Other assets 6,651 5,977 5,120 4,948
Accounts payable and other liabilities (50,408 ) 22,053 (94,246 ) (576 )
Payments from loans held for sale 1,077   1,589   1,120   33,538  
Net cash provided by operating activities 53,347 28,798 4,486 41,108
 
Investing Activities
Purchases of customer accounts receivable (238,850 ) (264,384 ) (432,625 ) (475,031 )
Proceeds from sale of customer accounts receivable 238,884 264,458 432,690 475,178
Net purchases of property and equipment (12,627 ) (8,919 ) (27,914 ) (15,222 )
Distributions from equity investments 4,365 48,544 8,181 57,523
Acquisitions, net of cash on hand (381,574 ) (381,574 )
Net (increase) decrease in restricted cash (2,480 ) 4,361 483 1,981
Proceeds from sales/repayments of investment securities classified as available-for-sale   166     274  
Net cash used in investing activities (10,708 ) (337,348 ) (19,185 ) (336,871 )
 
Financing Activities
Borrowings of debt 269,453 269,453
Repayments of debt (7,583 ) (17,069 ) (15,137 ) (51,967 )
Borrowings on asset backed line of credit 193,324 105,353 471,751 192,276
Repayments on asset backed line of credit (229,297 ) (109,425 ) (436,842 ) (194,944 )
Treasury shares repurchased (131 ) (131 )
Payments for the repurchase of common stock     (12,554 )  
Net cash (used in) provided by financing activities (43,556 ) 248,181 7,218 214,687
 
Effect of Foreign Exchange Rates on Cash (15 ) (36 ) 38   (77 )
 
Net Decrease in Cash and Cash Equivalents (932 ) (60,405 ) (7,443 ) (81,153 )
Cash and Cash Equivalents, Beginning of Period 179,433   233,460   185,944   254,208  
Cash and Cash Equivalents, End of Period $ 178,501   $ 173,055   $ 178,501   $ 173,055  
 

BLUESTEM GROUP INC.

Non-GAAP Financial Measure

(unaudited - in thousands)

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

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

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

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

           
13-Weeks Ended   26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Adjusted EBITDA:
Net (loss) income $ (11,286 ) $ 19,804 $ (45,043 ) $ (3,715 )
Interest expense 13,683 8,757 27,206 16,277
Income tax expense (benefit) 967 (34,142 ) 2,728 (33,798 )
Amortization and depreciation expense 19,809 15,618 37,127 27,954
Stock-based compensation expense 1,403 1,527 2,603 2,948
(Gain) loss from derivatives in our own equity (411 ) (548 ) 7,814
Acquisition transaction costs 6,610 8,422
Integration costs 1,197     3,266    
Adjusted EBITDA $ 25,773   $ 17,763   $ 27,339   $ 25,902  
 

Bluestem Brands, Inc.

Results for the 13- and 26-weeks ended July 29, 2016 and July 31, 2015

 

BLUESTEM BRANDS, INC.

Condensed Consolidated Statements of Comprehensive Income and Selected Operating Data

(unaudited - in thousands)

 
      13-Weeks Ended      
July 29, 2016     July 31, 2015 Change (a)
Net sales $ 468,102 $ 301,375 55.3 %
Cost of goods sold 242,361   169,705   42.8 %
Gross profit 225,741 131,670 71.4 %
Sales and marketing expenses 131,208 65,077 101.6 %
Net credit expense 18,644 9,809 90.1 %
General and administrative expenses 52,430 46,425 12.9 %
Amortization and depreciation not included in cost of goods sold (b) 18,687 15,102 23.7 %
Interest expense, net (c) 13,682   8,754   56.3 %
Loss before income taxes (8,910 ) (13,497 ) (34.0 )%
Income tax benefit (1,439 ) (399 ) 260.7 %
Net loss $ (7,471 ) $ (13,098 ) (43.0 )%
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 48.2 % 43.7 % 450 bps
Sales and marketing expenses 28.0 % 21.6 % 640 bps
Net credit expense 4.0 % 3.3 % 70 bps
Contribution margin (d) $ 75,890 $ 56,784 33.6 %
As a percentage of net sales 16.2 % 18.8 % (260 ) bps
Adjusted general and administrative expenses (d) $ 49,453 $ 36,916 34.0 %
As a percentage of net sales 10.6 % 12.2 % (160 ) bps
Adjusted EBITDA (d) $ 27,686 $ 20,514 35.0 %
As a percentage of net sales 5.9 % 6.8 % (90 ) bps
 
Selected Financial Data:
Liquidity (e) $ 81,372 $ 112,002 (27.3 )%
Availability on inventory line of credit $ 77,924 $ 103,652 (24.8 )%
Free Cash Flow (d) $ 23,176 $ 16,384 41.5 %
Leverage ratio (f) 3.4 3.4
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (g) 131 150 (12.7 )%
Fingerhut FreshStart new customer credit accounts (g) 45 50 (10.0 )%
PayCheck Direct new customer credit accounts (g) 11 8 37.5 %
Orchard Portfolio new gross customers (h) 549 194 183.0 %
Northstar Portfolio active accounts (i) 1,645 1,682 (2.2 )%
Orchard Portfolio active customers (j) 7,718 7,980 (3.3 )%
PayCheck Direct eligible client employees (k) 7,562 4,316 75.2 %
 

(a) Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.
(b) Consists of amortization expense of customer relationship finite-lived intangible assets and depreciation expense of software. Depreciation expense related to owned fulfillment facilities and equipment in Bluestem's fulfillment facilities are included in cost of goods sold.
(c) Interest expense net of interest income.
(d) Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.
(e) Defined as unrestricted cash and cash equivalents plus availability on inventory line of credit.
(f) Leverage ratio as defined by Bluestem's term loan agreement dated November 7, 2014.
(g) 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.
(h) Customers who have made a first time purchase from a particular brand within the Orchard Portfolio during the period presented.
(i) 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.
(j) Customers that have made at least one purchase within the previous twelve fiscal months.
(k) PayCheck Direct clients' full-time active employees with a tenure greater than six months, are at least 18 years old, and have met certain minimum annual earnings.

BLUESTEM BRANDS, INC.

Condensed Consolidated Statements of Comprehensive Income and Selected Operating Data

(unaudited - in thousands)

 
      26-Weeks Ended    
July 29, 2016     July 31, 2015 Change (a)
Net sales $ 896,618 $ 507,550 76.7 %
Cost of goods sold 457,078   289,965   57.6 %
Gross profit 439,540 217,585 102.0 %
Sales and marketing expenses 264,207 107,794 145.1 %
Net credit expense 35,821 16,108 122.4 %
General and administrative expenses 117,390 80,178 46.4 %
Amortization and depreciation not included in cost of goods sold (b) 34,921 27,153 28.6 %
Interest expense, net (c) 27,205   16,274   67.2 %
Loss before income taxes (40,004 ) (29,922 ) 33.7 %
Income tax benefit (13,362 ) (5,558 ) 140.4 %
Net loss $ (26,642 ) $ (24,364 ) 9.3 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 49.0 % 42.9 % 610 bps
Sales and marketing expenses 29.5 % 21.2 % 830 bps
Net credit expense 4.0 % 3.2 % 80 bps
Contribution margin (d) $ 139,512 $ 93,683 48.9 %
As a percentage of net sales 15.6 % 18.5 % (290 ) bps
Adjusted general and administrative expenses (d) $ 110,621 $ 67,317 64.3 %
As a percentage of net sales 12.3 % 13.3 % (100 ) bps
Adjusted EBITDA (d) $ 31,352 $ 27,412 14.4 %
As a percentage of net sales 3.5 % 5.4 % (190 ) bps
 
Selected Financial Data:
Liquidity (e) $ 81,372 $ 112,002 (27.3 )%
Availability on inventory line of credit $ 77,924 $ 103,652 (24.8 )%
Free Cash Flow (d) $ 21,915 $ 20,584 6.5 %
Leverage ratio (f) 3.4 3.4
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (g) 251 293 (14.3 )%
Fingerhut FreshStart new customer credit accounts (g) 95 110 (13.6 )%
PayCheck Direct new customer credit accounts (g) 20 8 150.0 %
Orchard Portfolio new gross customers (h) 1,977 194 919.1 %
Northstar Portfolio active accounts (i) 1,645 1,682 (2.2 )%
Orchard Portfolio active customers (j) 7,718 7,980 (3.3 )%
PayCheck Direct eligible client employees (k) 7,562 4,316 75.2 %
 

(a) Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.
(b) Consists of amortization expense of customer relationship finite-lived intangible assets and depreciation expense of software. Depreciation expense related to owned fulfillment facilities and equipment in Bluestem's fulfillment facilities are included in cost of goods sold.
(c) Interest expense net of interest income.
(d) Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.
(e) Defined as unrestricted cash and cash equivalents plus availability on inventory line of credit.
(f) Leverage ratio as defined by Bluestem's term loan agreement dated November 7, 2014.
(g) 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.
(h) Customers who have made a first time purchase from a particular brand within the Orchard Portfolio during the period presented.
(i) 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.
(j) Customers that have made at least one purchase within the previous twelve fiscal months.
(k) PayCheck Direct clients' full-time active employees with a tenure greater than six months, are at least 18 years old, and have met certain minimum annual earnings.

BLUESTEM BRANDS, INC.

Condensed Consolidated Balance Sheets
(unaudited - in thousands)

 

         
July 29, 2016 January 29, 2016
ASSETS
Current assets:
Cash and cash equivalents $ 10,487 $ 11,870
Restricted cash 22,002 22,485
Customer accounts receivable, net of allowance for doubtful accounts of $11,673 and $14,434 33,622 44,446
Merchandise inventories 253,764 263,579
Promotional material inventories 56,492 53,253
Prepaid expenses and other assets 28,155   32,647  
Total current assets 404,522 428,280
Property and equipment, net 134,807 125,001
Intangible assets, net 441,882 460,551
Goodwill 367,481 367,481
Other assets 3,643   3,405  
Total Assets $ 1,352,335   $ 1,384,718  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 176,007 $ 180,601
Current income taxes payable 21,039 34,583
Accrued costs and other liabilities 100,374 111,613
Short-term debt 82,586   47,981  
Total current liabilities 380,006 374,778
Long-term debt 477,848 490,032
Deferred income taxes 153,370 154,428
Other long-term liabilities 9,199   6,171  
Total liabilities 1,020,423 1,025,409
 
Stockholders' equity:
Common stock
Additional paid-in capital 369,602 369,602
Retained earnings (36,934 ) (10,293 )
Accumulated other comprehensive loss, net of tax (756 )  
Total stockholders' equity 331,912   359,309  
Total Liabilities and Stockholders' Equity $ 1,352,335   $ 1,384,718  
 
 
BLUESTEM BRANDS, INC.
Condensed Consolidated Statement of Cash Flows
(unaudited - in thousands)
 

 

        13-Weeks Ended       26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Operating Activities
Net loss $ (7,471 ) $ (13,098 ) $ (26,642 ) $ (24,364 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for deferred income taxes 1,616 (3,682 ) (1,058 ) (820 )
Uncertain tax positions 40 80
Amortization and depreciation expense 19,807 15,622 37,234 27,957
Provision for doubtful accounts 7,178 1,890 13,257 7,157
Provision for merchandise returns 31,341 7,698 61,220 13,852
Stock-based compensation expense 1,247 939 2,527 1,948
Inventory obsolescence and other reserves 9,571 7,574 18,660 14,875
Other, net 1,314 1,877 2,652 2,791
Net change in assets and liabilities:
Customer accounts receivable,net (16,622 ) (21,104 ) (33,663 ) (35,233 )
Merchandise inventories 37,422 (549 ) 38,359 1,978
Promotional material inventories 16,295 2,560 (3,239 ) (5,452 )
Prepaid expenses and other assets 8,850 5,872 6,310 4,725
Current income taxes payable (3,958 ) 3,287 (13,544 ) (7,306 )
Accounts payable and other liabilities (52,137 )   20,942   (96,058 ) 5,090  
Net cash provided by operating activities 54,493 29,828 6,095 7,198
 
Investing Activities
Purchase of customer accounts receivable (238,850 ) (264,384 ) (432,625 ) (475,031 )
Proceeds from sale of customer accounts receivable 238,884 264,458 432,690 475,178
Acquisitions, net of cash on hand (381,574 ) (381,574 )
Net purchase of property and equipment (12,627 ) (8,919 ) (27,914 ) (15,222 )
Net (increase) decrease in restricted cash (2,480 )   4,460   483   2,080  
Net cash used in investing activities (15,073 ) (385,959 ) (27,366 ) (394,569 )
 
Financing Activities
Borrowings of debt 269,453 269,453
Repayments of debt (7,510 ) (17,000 ) (15,021 ) (20,750 )
Borrowings on asset backed line of credit 193,324 105,353 471,751 192,276
Repayments on asset backed line of credit (229,297 ) (109,425 ) (436,842 ) (194,944 )
Cash equity contributions     100,000     100,000  
Net cash (used in) provided by financing activities (43,483 )   348,381   19,888   346,035  
 
Net Decrease in Cash and Cash Equivalents (4,063 ) (7,750 ) (1,383 ) (41,336 )
Cash and Cash Equivalents, Beginning of Period 14,550     25,636   11,870   59,222  
Cash and Cash Equivalents, End of Period $ 10,487     $ 17,886   $ 10,487   $ 17,886  
 
       

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Segment Net Sales

(unaudited - in thousands, except average order size)

 

13-Weeks Ended
July 29, 2016     July 31, 2015     Change
$     % of Sales $     % of Sales %
Total sales by merchandise category:
Home $ 139,889 28.1 % $ 131,932 41.2 % 6.0 %
Entertainment 92,808 18.7 % 102,780 32.1 % (9.7 )%
Fashion 264,397   53.2 % 85,163   26.6 % 210.5 %
Total merchandise sales (a) 497,094 100.0 % 319,875 100.0 % 55.4 %
Corporate 6,753 (378 )
Returns and allowances (54,339 ) (26,627 ) 104.1 %
Commissions and other revenues 18,594   8,505   118.6 %
Net sales $ 468,102   $ 301,375   55.3 %
 
Gross profit rate 48.2 % 43.7 % 450 bps
Sales and marketing expense 28.0 % 21.6 % 640 bps
Contribution margin rate (b) 16.2 % 18.8 % (260 ) bps
Average order size (c) $ 117 $ 175
 
Northstar Portfolio sales by merchandise category:
Home $ 112,104 48.0 % $ 123,374 47.4 % (9.1 )%
Entertainment 86,846 37.1 % 98,523 37.9 % (11.9 )%
Fashion 34,728   14.9 % 38,192   14.7 % (9.1 )%
Total merchandise sales (a) 233,678 100.0 % 260,089 100.0 % (10.2 )%
Returns and allowances (16,050 ) (18,743 ) (14.4 )%
Commissions and other revenues 5,028   5,062   (0.7 )%
Net sales $ 222,656   $ 246,408   (9.6 )%
 
Gross profit rate 41.6 % 42.0 % (40 ) bps
Sales and marketing expense 18.5 % 18.5 % bps
Contribution margin rate (b) 15.9 % 19.8 % (390 ) bps
Average order size (c) $ 239 $ 235
 
Orchard Portfolio sales by merchandise category:
Home $ 22,356 8.9 % $ 5,727 11.0 % 290.4 %
Fashion 228,401   91.1 % 46,515   89.0 % 391.0 %
Total merchandise sales (a) 250,757 100.0 % 52,242 100.0 % 380.0 %
Returns and allowances (37,563 ) (7,611 ) 393.5 %
Commissions and other revenues 13,322   3,281   306.0 %
Net sales $ 226,516   $ 47,912   372.8 %
 
Gross profit rate 54.5 % 53.6 % 90 bps
Sales and marketing expense 37.1 % 36.4 % 70 bps
Contribution margin rate (b) 17.4 % 17.1 % 30 bps
Average order size (c) $ 77 $ 74
 
PayCheck Direct sales by merchandise category:
Home $ 5,429 42.9 % $ 2,831 37.5 % 91.8 %
Entertainment 5,962 47.1 % 4,257 56.4 % 40.0 %
Fashion 1,268   10.0 % 456   6.1 % 177.8 %
Total merchandise sales (a) 12,659 100.0 % 7,544 100.0 % 67.8 %
Returns and allowances (726 ) (273 ) 166.2 %
Commissions and other revenues 244   162   50.8 %
Net sales $ 12,177   $ 7,433   63.8 %
 
Gross profit rate 34.5 % 33.7 % 80 bps
Sales and marketing expense 24.9 % 26.6 % (170 ) bps
Contribution margin rate (b) (11.1 )% (1.1 )% (1,000 ) bps
Average order size (c) $ 516 $ 535
 

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.
(b) Represents contribution margin as a percentage of net sales. Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.
(c) Represents merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.

 

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Segment Net Sales

(unaudited - in thousands, except average order size)

     

 

26-Weeks Ended
July 29, 2016   July 31, 2015   Change
$   % of Sales $   % of Sales %
Total sales by merchandise category:
Home $ 258,071 26.5 % $ 236,593 43.7 % 9.1 %
Entertainment 168,300 17.3 % 185,605 34.3 % (9.3 )%
Fashion 549,021   56.3 % 119,180   22.0 % 360.7 %
Total merchandise sales (a) 975,392 100.0 % 541,378 100.0 % 80.2 %
Corporate (7,239 ) (5,569 )
Returns and allowances (107,692 ) (40,863 ) 163.5 %
Commissions and other revenues 36,157   12,604   186.9 %
Net sales $ 896,618   $ 507,550   76.7 %
 
Gross profit rate 49.0 % 42.9 % 610 bps
Sales and marketing expense 29.5 % 21.2 % 830 bps
Contribution margin rate (b) 15.6 % 18.5 % (290 ) bps
Average order size (c) $ 111 $ 193
 
Northstar Portfolio sales by merchandise category:
Home $ 203,241 47.8 % $ 226,294 47.5 % (10.2 )%
Entertainment 157,176 37.0 % 177,881 37.4 % (11.6 )%
Fashion 64,871   15.3 % 71,875   15.1 % (9.7 )%
Total merchandise sales (a) 425,288 100.0 % 476,050 100.0 % (10.7 )%
Returns and allowances (28,796 ) (32,737 ) (12.0 )%
Commissions and other revenues 9,341   9,008   3.7 %
Net sales $ 405,833   $ 452,321   (10.3 )%
 
Gross profit rate 42.9 % 42.1 % 80 bps
Sales and marketing expense 19.5 % 19.1 % 40 bps
Contribution margin rate (b) 15.4 % 19.7 % (430 ) bps
Average order size (c) $ 235 $ 229
 
Orchard Portfolio sales by merchandise category:
Home $ 45,498 8.6 % $ 5,727 11.0 % 694.4 %
Fashion 481,868   91.4 % 46,515   89.0 % 935.9 %
Total merchandise sales (a) 527,366 100.0 % 52,242 100.0 % 909.5 %
Returns and allowances (77,956 ) (7,611 ) 924.3 %
Commissions and other revenues 26,384   3,281   704.1 %
Net sales $ 475,794   $ 47,912   893.1 %
 
Gross profit rate 54.8 % 53.6 % 120 bps
Sales and marketing expense 37.6 % 36.4 % 120 bps
Contribution margin rate (b) 17.2 % 17.1 % 10 bps
Average order size (c) $ 76 $ 74
 
PayCheck Direct sales by merchandise category:
Home $ 9,332 41.1 % $ 4,572 34.9 % 104.1 %
Entertainment 11,124 48.9 % 7,724 59.0 % 44.0 %
Fashion 2,282   10.0 % 790   6.1 % 188.9 %
Total merchandise sales (a) 22,738 100.0 % 13,086 100.0 % 73.8 %
Returns and allowances (940 ) (515 )
Commissions and other revenues 432   315  
Net sales $ 22,230   $ 12,886  
 
Gross profit rate 35.2 % 33.2 % 200 bps
Sales and marketing expense 27.9 % 30.4 % (250 ) bps
Contribution margin rate (b) (9.6 )% (7.4 )% (220 ) bps
Average order size (c) $ 520 $ 554
 

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.
(b) Represents contribution margin as a percentage of net sales. Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.
(c) Represents merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.

     
BLUESTEM BRANDS, INC.
Supplemental Financial Information - Credit Portfolio
(unaudited - in thousands, except average balance outstanding)
 
13-Weeks Ended
July 29, 2016     July 31, 2015     Change
Net credit expense:
Credit management costs $ 18,052 $ 18,108 (0.3 )%
Provision for doubtful accounts 7,178 1,890 279.8 %
Finance charge and fee income 141 (202 ) (169.8 )%
Servicing fee income and portfolio profit sharing (6,727 ) (9,987 ) (32.6 )%
Net credit expense $ 18,644   $ 9,809   90.1 %
 
Serviced Portfolio Selected Credit Data: 13-Weeks Ended
July 29, 2016
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,820 114 63
Average balance outstanding $ 739 $ 101 $ 489
Customer accounts receivable $ 1,344,320 $ 11,615 $ 30,938
Balances 30+ days delinquent (e) $ 237,466 $ 4,571 $ 2,920
Balances 30+ days delinquent as a percentage of total customer accounts receivable (f) 17.7 % 39.4 % 9.4 %
Average customer accounts receivable $ 1,377,563 $ 13,485 $ 31,764
Finance charge and fee income $ 93,274 $ (247 ) n/a
Finance charge and fee income rate (g) 27.1 % (1.7 )% n/a
Net principal charge-offs $ 68,598 $ 4,991 $ 1,264
Net principal charge-off rate (h) 19.9 % 33.5 % 15.9 %
 
13-Weeks Ended
July 31, 2015
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,800 136 32
Average balance outstanding $ 688 $ 104 $ 545
Customer accounts receivable (d) $ 1,237,579 $ 14,094 $ 17,318
Balances 30+ days delinquent (e) $ 201,406 $ 5,804 $ 2,152
Balances 30+ days delinquent as a percentage of total customer accounts receivable (f) 16.3 % 41.2 % 8.8 %
Average customer accounts receivable $ 1,252,998 $ 16,852 $ 16,574
Finance charge and fee income $ 90,072 $ (620 ) n/a
Finance charge and fee income rate (g) 28.8 % (3.1 )% n/a
Net principal charge-offs $ 60,863 $ 7,219 $ 378
Net principal charge-off rate (h) 19.4 % 36.1 % 9.1 %
 

(a) Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's installment accounts.
(c) PayCheck Direct ("PCD") installment serviced portfolio is installment receivables issued to consumers who are members and employees of participating organizations and employers in the PCD program.
(d) Customer account receivable excludes impact from purchase accounting fair value adjustment.
(e) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.
(f) 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.
(g) 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 July 29, 2016 and July 31, 2015 annualized to 52-week periods for comparability. FreshStart finance charge and fee income rate represents finance charge and fee income as a percentage of the 13 weeks of FreshStart related sales five months prior to the 13-weeks ended July 29, 2016 and July 31, 2015.
(h) Revolving and PCD Installment net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13-weeks ended July 29, 2016 and July 31, 2015 annualized to 52-week periods for comparability. FreshStart net principal charge-off rate represents net principal charge-offs as a percentage of the 13 weeks of FreshStart related sales five months prior to the 13-weeks ended July 29, 2016 and July 31, 2015.

 

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Credit Portfolio

(unaudited - in thousands, except average balance outstanding)

     
26-Weeks Ended
July 29, 2016     July 31, 2015     Change
Net credit expense:
Credit management costs $ 37,601 $ 37,202 1.1 %
Provision for doubtful accounts 13,257 7,157 85.2 %
Finance charge and fee income (1,427 ) (4,182 ) (65.9 )%
Servicing fee income and portfolio profit sharing (13,610 ) (24,069 ) (43.5 )%
Net credit expense $ 35,821   $ 16,108   122.4 %
 
Serviced Portfolio Selected Credit Data: 26-Weeks Ended
July 29, 2016
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,820 114 63
Average balance outstanding $ 739 $ 101 $ 489
Customer accounts receivable $ 1,344,320 $ 11,615 $ 30,938
Balances 30+ days delinquent (e) $ 237,466 $ 4,571 $ 2,920
Balances 30+ days delinquent as a percentage of total customer accounts receivable (f) 17.7 % 39.4 % 9.4 %
Average customer accounts receivable $ 1,392,709 $ 15,433 $ 32,563
Finance charge and fee income $ 190,816 $ 1,255 n/a
Finance charge and fee income rate (g) 27.4 % 4.9 % n/a
Net principal charge-offs $ 130,204 $ 7,951 $ 2,214
Net principal charge-off rate (h) 18.7 % 31.0 % 13.6 %
 
26-Weeks Ended
July 31, 2015
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,800 136 32
Average balance outstanding $ 688 $ 104 $ 545
Customer accounts receivable (d) $ 1,237,579 $ 14,094 $ 17,318
Balances 30+ days delinquent (e) $ 201,406 $ 5,804 $ 1,521
Balances 30+ days delinquent as a percentage of total customer accounts receivable (f) 16.3 % 41.2 % 8.8 %
Average customer accounts receivable $ 1,247,272 $ 19,630 $ 16,858
Finance charge and fee income $ 182,257 $ 1,683 n/a
Finance charge and fee income rate (g) 29.2 % 5.3 % n/a
Net principal charge-offs $ 113,704 $ 10,265 $ 1,065
Net principal charge-off rate (h) 18.2 % 32.6 % 12.6 %

(a) Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's installment accounts.
(c) PayCheck Direct ("PCD") installment serviced portfolio is installment receivables issued to consumers who are members and employees of participating organizations and employers in the PCD program.
(d) Customer account receivable excludes impact from purchase accounting fair value adjustment.
(e) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.
(f) 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.
(g) Revolving finance charge and fee income rate represents finance charge and fee income as a percentage of average customer accounts receivable for the 26-weeks ended July 29, 2016 and July 31, 2015 annualized to 52-week periods for comparability. FreshStart finance charge and fee income rate represents finance charge and fee income as a percentage of the 26 weeks of FreshStart related sales five months prior to the 26-weeks ended July 29, 2016 and July 31, 2015.
(h) Revolving and PCD Installment net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 26-weeks ended July 29, 2016 and July 31, 2015 annualized to 52-week periods for comparability. FreshStart net principal charge-off rate represents net principal charge-offs as a percentage of the 26 weeks of FreshStart related sales five months prior to the 26-weeks ended July 29, 2016 and July 31, 2015.

BLUESTEM BRANDS, INC.

Non-GAAP Financial Measures - Contribution Margin and Adjusted General and Administrative Expenses

(unaudited - in thousands)

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

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

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

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

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

We provide these measures because we believe they are useful to investors in evaluating our operating performance compared to other companies in our industry. 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, and free cash flow may not be comparable to the calculations of such measures by other companies.

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

        13-Weeks Ended     26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Contribution Margin:
Net loss $ (7,471 ) $ (13,098 ) $ (26,642 ) $ (24,364 )
Income tax benefit (1,439 ) (399 ) (13,362 ) (5,558 )
Interest expense, net 13,682 8,754 27,205 16,274
Amortization and depreciation not included in cost of sales 18,687 15,102 34,921 27,153
General and administrative expenses 52,430   46,425   117,390   80,178  
Contribution Margin $ 75,890   $ 56,784   $ 139,512   $ 93,683  
 
Contribution margin % of net sales 16.2 % 18.8 % 15.6 % 18.5 %

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

        13-Weeks Ended     26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Adjusted General and Administrative Expenses:
General and administrative expenses $ 52,430 $ 46,425 $ 117,390 $ 80,178
Less:
Stock-based compensation expense 1,247 939 2,527 1,948
Acquisition transaction costs 6,530 8,342
Integration costs 1,197 3,266
Lease termination costs 1,122 1,122
Other 533   918   976   1,449  
Adjusted General and Administrative Expenses $ 49,453   $ 36,916   $ 110,621   $ 67,317  
 
Adjusted general and administrative expenses % of net sales 10.6 % 12.2 % 12.3 % 13.3 %

BLUESTEM BRANDS, INC.

Non-GAAP Financial Measures - Adjusted EBITDA and Free Cash Flow

(unaudited - in thousands)

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

      13-Weeks Ended     26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Adjusted EBITDA:
Net loss $ (7,471 ) $ (13,098 ) $ (26,642 ) $ (24,364 )
Income tax benefit (1,439 ) (399 ) (13,362 ) (5,558 )
Interest expense 13,683 8,757 27,206 16,277
Amortization and depreciation expense 19,809   15,618   37,127   27,954  
EBITDA 24,582 10,878 24,329 14,309
Stock-based compensation expense 1,247 939 2,527 1,948
Acquisition transaction costs 6,530 8,342
Integration costs 1,197 3,266
Lease termination costs 1,122 1,122
Other 660   1,045   1,230   1,691  
Adjusted EBITDA $ 27,686   $ 20,514   $ 31,352   $ 27,412  
 
Adjusted EBITDA % of net sales 5.9 % 6.8 % 3.5 % 5.4 %

The following table reconciles Free Cash Flow from Adjusted EBITDA:

      13-Weeks Ended     26-Weeks Ended
July 29, 2016     July 31, 2015 July 29, 2016     July 31, 2015
Free Cash Flow:
Adjusted EBITDA $ 27,686 $ 20,514 $ 31,352 $ 27,412
Less:
Maintenance capital expenditures 4,510   4,130   9,437   6,828  
Free Cash Flow $ 23,176   $ 16,384   $ 21,915   $ 20,584  
 
Free Cash Flow % of net sales 5.0 % 5.4 % 2.4 % 4.1 %

BLUESTEM BRANDS, INC.

Historical Non-GAAP and Supplemental Financial Information - Basis of Presentation

(unaudited - in thousands)

To supplement the condensed consolidated financial information of Bluestem Brands, Inc. and its subsidiaries for the 13- and 26-weeks ended July 29, 2016, which are presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we are providing historical results of the Bluestem Brands, Inc. for the 13-weeks ended April 29, 2016, January 29, 2016, October 30, 2015 and July 31, 2015. The results of Orchard Brands Corporation and its subsidiaries are included in the results from the acquisition date of July 10, 2015.

In addition, we are providing preacquisition Orchard historical balance sheet information as of May 1, 2015 and January 30, 2015 on a combined basis ("Combined"). The Combined basis includes the financial information of Bluestem Brands, Inc. and Orchard Brands Corporation for comparison purposes and does not necessarily reflect the actual results that would have occurred had the July 10, 2015 acquisition of Orchard Brands Corporation occurred on January 30, 2015, nor is it necessarily indicative of the future results of operations of the combined companies. No historical financial information for the periods preceding the acquisition included herein has been adjusted to reflect, on a pro forma basis, the possible effects the acquisitions would have had on Bluestem Brands, Inc. and Orchard Brands Corporation.

We are presenting adjusted general and administrative expenses and free cash flows, as previously defined, adjusted EBITDA calculated as previously defined plus dividend equivalent expense and loss on early extinguishment of debt, as well as the following measures:

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

Lender Leverage Ratio Debt, as presented, represents short-term debt plus long-term debt less original issuance discount and deferred charges and cash and cash equivalents.

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

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

We provide these measures because we believe it is useful to investors in evaluating operating performance and financial condition compared to term loan financial covenants. As a non-GAAP measures, these measures have limitations in that they do not reflect all of the amounts associated with Bluestem 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.

 
BLUESTEM BRANDS, INC.

Historical Non-GAAP and Supplemental Financial Information - Adjusted EBITDA and Lender Adjusted EBITDA

(unaudited - in thousands)
 
      13-Weeks Ended
July 29, 2016   April 29, 2016   January 29, 2016   October 30, 2015   July 31, 2015
Net sales $ 468,102 $ 428,516 $ 737,682 $ 474,957 $ 301,375
Cost of goods sold 242,361   214,717   403,947   243,929   169,705  
Gross profit 225,741 213,799 333,735 231,028 131,670
Sales and marketing expenses 131,208 132,999 166,657 137,783 65,077
Net credit expense 18,644 17,177 32,784 15,143 9,809
General and administrative expenses 52,430 64,960 63,272 56,826 46,425
Amortization and depreciation not included in cost of goods sold 18,687   16,234   53,163   18,067   15,102  
Operating (loss) income 4,772 (17,571 ) 17,859 3,209 (4,743 )
Interest expense, net 13,682   13,523   13,701   13,945   8,754  
(Loss) income before provision for income tax (8,910 ) (31,094 ) 4,158 (10,736 ) (13,497 )
Income tax (benefit) expense (1,439 ) (11,923 ) 10,971   (15,604 ) (399 )
Net (loss) income $ (7,471 ) $ (19,171 ) $ (6,813 ) $ 4,868   $ (13,098 )
 
Income tax (benefit) expense (1,439 ) (11,923 ) 10,971 (15,604 ) (399 )
Interest expense 13,683 13,523 13,704 13,946 8,757
Amortization and depreciation expense 19,809   17,318   54,266   19,107   15,618  
EBITDA 24,582 (253 ) 72,128 22,317 10,878
Stock-based compensation expense 1,247 1,280 1,099 1,059 939
Acquisition transaction costs 6,530
Integration costs 1,197 2,069 2,635 2,972
Lease termination costs 1,122
Other 660   570   529   674   1,045  
Adjusted EBITDA $ 27,686   $ 3,666   $ 76,391   $ 27,022   $ 20,514  
 
Adjusted EBITDA % of net sales 5.9 % 0.9 % 10.4 % 5.7 % 6.8 %
 
Adjusted EBITDA $ 27,686 $ 3,666 $ 76,391 $ 27,022 $ 20,514
 
Expected cost savings (a) 23,425
Orchard pre-acquisition adjusted EBITDA 12,134
Non-cash charges 407 282
One-time charges
Other (b) 1,100   1,360   2,026   2,624   889  
Lender Adjusted EBITDA $ 52,618   $ 5,308   $ 78,417   $ 29,646   $ 33,537  
 

(a) Expected cost savings reflects the projected impact of cost synergies with the implemented headcount reductions and anticipated vendor savings
(b) Other includes charges such as, but not limited to or necessarily inclusive of, strategic investment charges, system implementation charges, executive recruiting and pubic company costs.

 
BLUESTEM BRANDS, INC.

Historical Non-GAAP and Supplemental Financial Information - Margins and Expenses, Selected Operating Data and Northstar Portfolio Credit

(unaudited - in thousands, except average order size and average balance outstanding)
     
13-Weeks Ended
July 29, 2016   April 29, 2016   January 29, 2016   October 30, 2015   July 31, 2015
Margins and Expenses as a Percentage of Net Sales:
Gross profit rate 48.2 % 49.9 % 45.2 % 48.6 % 43.7 %
Sales and marketing expenses 28.0 % 31.0 % 22.6 % 29.0 % 21.6 %
Net credit expense 4.0 % 4.0 % 4.4 % 3.2 % 3.3 %
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (a) 131 120 266 169 150
FreshStart new customer credit accounts (a) 45 51 93 55 50
PayCheck Direct new customer credit accounts (a) 11 9 25 13 8
Orchard Portfolio new gross customers (b) 549 701 686 652 194
Northstar Portfolio active accounts (c) 1,645 1,680 1,683 1,686 1,682
Orchard Portfolio active customers (d) 7,718 7,799 7,845 7,996 8,000
Average order size (e) $ 117 $ 107 $ 141 $ 110 $ 238
PayCheck Direct eligible client employees (f) 7,562 6,302 6,323 6,216 4,316
 
Northstar Portfolio Revolving Serviced Portfolio Selected Credit Data: (g)
Balance active accounts 1,820 1,867 1,984 1,812 1,800
Average balance outstanding $ 739 $ 730 $ 742 $ 677 $ 688
Customer accounts receivable (h) $ 1,344,320 $ 1,363,342 $ 1,472,335 $ 1,225,964 $ 1,237,579
Balances 30+ days delinquent (i) $ 237,466 $ 216,535 $ 216,089 $ 215,964 $ 201,406
Balances 30+ days delinquent as a percentage of total customer accounts receivable (j) 17.7 % 15.9 % 14.7 % 17.6 % 16.3 %
Average customer accounts receivable $ 1,377,563 $ 1,407,855 $ 1,418,984 $ 1,249,882 $ 1,252,998
Annualized finance charge and fee income as a percentage of average customer accounts receivable (k) 27.1 % 27.7 % 26.4 % 27.2 % 28.8 %
Net principal charge-offs $ 68,598 $ 61,606 $ 63,196 $ 58,835 $ 60,863
Net principal charge-off rate (l) 19.9 % 17.5 % 17.8 % 18.8 % 19.4 %
 

(a) Customers that have made their initial order on account during the fiscal period presented. Northstar Portfolio revolving new customer credit accounts excludes FreshStart graduates whom were initially included in FreshStart new customer credit accounts when their initial order was made.
(b) Customers who have made a first time purchase from a particular brand within the Orchard Portfolio during the period presented.
(c) 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.
(d) Customers that have made at least one purchase within the previous twelve fiscal months.
(e) Merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.
(f) PayCheck Direct clients' full-time active employees with a tenure greater than six months, are at least 18 years old, and have met certain minimum annual earnings.
(g) Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(h) Customer accounts receivable excludes impact from purchase accounting fair value adjustment.
(i) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.
(j) 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.
(k) Finance charge and fee income rate represents finance charge and fee income as a percentage of average customer accounts receivable for the 13-weeks presented above annualized to 52-week periods for comparability.
(l) Net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13-weeks presented above annualized to 52-week periods for comparability.

 

BLUESTEM BRANDS, INC.

Historical Non-GAAP and Supplemental Financial Information - Sales by Category, Adjusted General and Administrative Expenses, and Free Cash Flow

(unaudited - in thousands)

     
13-Weeks Ended
July 29, 2016   April 29, 2016   January 29, 2016   October 30, 2015   July 31, 2015
Sales by Merchandise Category:
Home $ 139,889 $ 118,182 $ 184,219 $ 133,540 $ 131,932
Entertainment 92,808 75,492 247,255 105,756 102,780
Fashion 264,397   284,624   328,044   288,148   85,163  
Total merchandise sales (a) 497,094 478,298 759,518 527,444 319,875
Corporate(b) 6,753 (13,991 ) 22,859 (15,589 ) (378 )
Returns and allowances (54,339 ) (53,352 ) (66,213 ) (55,395 ) (26,627 )
Commissions and other revenue 18,594   17,561   21,518   18,497   8,505  
Net sales $ 468,102   $ 428,516   $ 737,682   $ 474,957   $ 301,375  
 
Adjusted General and Administrative Expenses:
General and administrative expenses 52,430 64,960 63,272 56,826 46,425
Less:
Stock-based compensation expense 1,247 1,280 1,099 1,059 939
Acquisition transaction costs 6,530
Integration costs 1,197 2,069 2,635 2,972
Lease termination costs 1,122
Other 533   443   402   546   918  
Adjusted general and administrative expenses $ 49,453   $ 61,168   $ 59,136   $ 52,249   $ 36,916  
 
Adjusted general and administrative expenses % of net sales 10.6 % 14.3 % 8.0 % 11.0 % 12.2 %
 
Free Cash Flow:
Adjusted EBITDA $ 27,686 $ 3,666 $ 76,391 $ 27,022 $ 20,514
Less:
Maintenance capital expenditures 4,510   4,927   6,681   4,748   4,130  
Free Cash Flow $ 23,176   $ (1,261 ) $ 69,710   $ 22,274   $ 16,384  
 
Free Cash Flow % of net sales 5.0 % (0.3 )% 9.4 % 4.7 % 5.4 %
 

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.
(b) Corporate consists of the elimination of inter-segment activities as well as adjustments to net sales.

 
BLUESTEM BRANDS, INC.
Historical Non-GAAP and Supplemental Financial Information - Adjusted EBITDA, Lender Adjusted EBITDA and Lender Leverage Ratio

(unaudited - in thousands)

 
      Trailing Twelve Months
July 29, 2016   April 29, 2016   January 29, 2016   October 30, 2015   July 31, 2015
 
Net loss $ (28,588 ) $ (34,214 ) $ (26,309 ) $ (28,100 ) $ (37,357 )
Income tax benefit (17,995 ) (16,955 ) (10,191 ) (24,122 ) (11,813 )
Interest expense 54,856 49,930 43,927 37,644 27,948
Amortization and depreciation expense 110,513   106,310   101,328   69,211   53,735  
EBITDA 118,786 105,071 108,755 54,633 32,513
Stock-based compensation expense 4,685 4,377 4,106 10,560 10,207
Dividend equivalent expense 19,628 22,545
Acquisition transaction costs 6,530 8,342 9,923 16,695
Integration costs 8,862 7,676 5,607 2,972
Loss on early extinguishment of debt 9,298 9,298
Lease termination costs 1,122 1,122 1,122 1,122
Other 2,434   2,817   2,893   2,935   3,187  
Adjusted EBITDA 134,767 127,593 130,825 111,071 95,567
 
Expected cost savings (a) 23,425
Orchard pre-acquisition adjusted EBITDA 12,134 26,641 45,019 64,805
Non-cash charges 689 282
Other (b) 7,110   6,899   6,515   6,016   2,831  
Lender Adjusted EBITDA $ 165,991   $ 146,908   $ 163,981   $ 162,106   $ 163,203  
 
Lender Leverage Ratio Debt:
Current portion of term loan, net of discount $ 24,877 $ 24,881 $ 24,896 $ 25,013 $ 25,040
Asset backed line of credit 55,095 92,285 20,790 80,619 4,695
Capital lease obligation 2,614   2,173   2,295   2,358   1,967  
Total short-term debt 82,586 119,339 47,981 107,990 31,702
 
Term Loan, net of discount 475,073 481,316 487,560 493,729 507,541
Capital lease obligation 2,775   1,995   2,472   3,004   2,747  
Total long-term debt 477,848   483,311   490,032   496,733   510,288  
Total Debt 560,434 602,650 538,013 604,723 541,990
Less: Original issuance discount and deferred charges 11,132 11,780 12,429 13,048 13,695
Less: Cash and cash equivalents (3,448 ) (2,763 ) (2,949 ) (2,172 ) (8,349 )
Lender Leverage Ratio Debt $ 568,118   $ 611,667   $ 547,493   $ 615,599   $ 547,336  
 
Lender Leverage Ratio (c) 3.4 4.2 3.3 3.8 3.4
 

(a) Expected cost savings reflects the projected impact of cost synergies with the implemented headcount reductions and anticipated vendor savings
(b) Other includes charges such as, but not limited to or necessarily inclusive of, strategic investment charges, system implementation charges, executive recruiting and pubic company costs.
(c) Lender Leverage Ratio equals Lender Adjusted EBITDA divided by Lender Leverage Ratio Debt.

 
BLUESTEM BRANDS, INC.
Historical Non-GAAP and Supplemental Financial Information - Working Capital and Net Liquidity
(unaudited - in thousands)
 
                Combined
July 29, 2016 April 29, 2016 January 29, 2016 October 30, 2015 July 31, 2015 May 1, 2015(a)   January 30, 2015(b)
Current assets
Cash and cash equivalents $ 10,487 $ 14,550 $ 11,870 $ 15,863 $ 17,887 $ 26,128 $ 59,590
Restricted cash 22,002 19,522 22,485 17,964 11,345 15,805 13,425
Customer accounts receivable, net 33,622 38,978 44,446 29,300 28,215 48,731 52,339
Merchandise inventories 253,764 275,587 263,579 322,147 224,465 230,198 231,312
Promotional material inventories 56,492 72,787 53,253 86,813 51,118 21,988 13,976
Prepaid expenses and other assets 28,155   35,236   32,647   33,882   29,702   77,307   67,708
Total current assets 404,522 456,660 428,280 505,969 362,732 420,157 438,350
 
Current liabilities
Accounts payable 176,007 170,725 180,601 241,939 181,101 167,792 167,617
Current income taxes payable 21,039 24,997 34,583 4,970 11,379 9,895 24,359
Accrued costs and other liabilities 100,374 112,401 111,613 113,634 93,368 96,495 113,426
Short-term portion of long-term debt 82,586   119,340   47,981   107,991   31,702   50,503   35,087
Total current liabilities 380,006 427,463 374,778 468,534 317,550 324,685 340,489
             
Working capital $ 24,516   $ 29,197   $ 53,502   $ 37,435   $ 45,182   $ 95,472   $ 97,861
 
Cash & cash equivalents $ 10,487 $ 14,550 $ 11,870 $ 15,863 $ 17,887 $ 26,128 $ 59,590

Less: Third party credit card
receivables(c)

(7,039 ) (11,787 ) (8,921 ) (13,196 ) (9,538 )
Lender cash & cash equivalents 3,448 2,763 2,949 2,667 8,349 26,128 59,590
Plus: Inventory line availability 77,924   63,357   115,392   94,704   103,652   41,882   43,122
Net Liquidity $ 81,372   $ 66,120   $ 118,341   $ 97,371   $ 112,001   $ 68,010   $ 102,712
 

(a) The historical balance sheet information of Orchard Brands Corporation used to calculate the Combined information is as of April 25, 2015.
(b) The historical balance sheet information of Orchard Brands Corporation used to calculate the Combined information is as of January 24, 2015.
(c) Under Orchard Brands Corporation accounting policy cash and cash equivalents as of April 25, 2015 and January 24, 2015 did not include third party credit card receivables. As such, no adjustment for third party credit card receivables prior to Bluestem's acquisition of Orchard Brands Corporation is necessary.

Orchard Brands Corporation

Historical Results

ORCHARD BRANDS CORPORATION

Consolidated Statement of Operations

(unaudited - in thousands)

To supplement the consolidated financial information of Bluestem Brands, Inc. and its subsidiaries, we are providing certain consolidated stand-alone historical results of Orchard Brands Corporation and its subsidiaries for the 13 weeks ended June 27, 2015. This period represents the second quarter of Orchard Brands Corporation's fiscal year 2015. This information is being presented to provide an understanding of the historic consolidated results of Orchard Brands Corporation prior to ownership by Bluestem Brands, Inc. This information does not include any adjustments or otherwise give effect to any changes to the operations of Orchard Brands Corporation or its subsidiaries that might result from Bluestem Brand's acquisition of Orchard Brands Corporation. The results for the periods presented are not included in the results of Bluestem Brands, Inc. Orchard Brand Corporation's consolidated results of operations for prior periods are not necessarily indicative of future performance.

Adjusted EBITDA, as presented, represents net income (loss) before income tax expense (benefit), interest expense, amortization and depreciation expense, stock-based compensation expense, restructuring costs, acquisition transaction costs and other. We provide this measure because we believe it is useful to investors in evaluating operating performance compared to other companies in Orchard Brand's industry. As a non-GAAP measure, adjusted EBITDA has limitations in that it does not reflect all of the amounts associated with Orchard Brands Corporation's results of operations as determined in accordance with GAAP and is 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.

       
13 Weeks Ended
June 27, 2015
 
Net sales $ 276,634
Cost of goods sold 121,704  
Gross profit 154,930
Operating expenses 137,149  
Operating income 17,781
Interest expense, net 4,171  
Income (loss) before provision for income tax 13,610
Income tax expense (benefit) 5,240  
Net income (loss) $ 8,370  
 
Income tax expense (benefit) $ 5,240
Interest expense 4,171
Amortization and depreciation expense 3,684  
EBITDA 21,465
Stock-based compensation expense 179
Restructuring costs 334
Acquisition transaction costs 229
Other (a) 33  
Adjusted EBITDA $ 22,240  
 
Adjusted EBITDA % of net sales 8.0 %
 

(a) Includes one time recruiting costs, board of directors payments, common platform conversion costs, vacant positions and other.

 
ORCHARD BRANDS CORPORATION
Supplemental Financial Information
(unaudited - in thousands, except average order size)
     
13 Weeks Ended
June 27, 2015
Sales by merchandise category:
Home $ 28,681
Fashion 280,483  
Total merchandise sales (a) 309,164
Returns and allowances (47,752 )
Commissions and other revenue 15,222  
Net sales $ 276,634  
 
Operating expenses:
Selling and marketing expenses $ 105,731
General and administrative expenses 27,734
Amortization and depreciation expenses 3,684  
Operating expenses $ 137,149  
 
Other Financial Data:
Sourcing overhead expenses (b) $ 6,445
Premium expenses (free gift) (c) 1,904
Fulfillment variable expenses (d) 7,181
Fulfillment related depreciation expense (e) 283
Other (f) 298
 
Selected Operating Data:
Active customers (g) 8,020
New gross customers (h) 716
Average order size (i) $ 81
 

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.
(b) Sourcing overhead expenses are included in cost of goods sold in the stand-alone historical results of Orchard Brands Corporation. Sourcing overhead expenses are included in general and administrative expense in the consolidated Bluestem Brands, Inc. results.
(c) Premium expenses are included in cost of goods sold in the stand-alone historical results of Orchard Brands Corporation. Premium expenses are included in selling and marketing expense in the consolidated Bluestem Brands, Inc. results.
(d) Fulfillment variable expenses are included in operating expenses of the stand-alone historical results of Orchard Brands Corporation. Fulfillment variable expenses are included in cost of goods sold of the consolidated Bluestem Brands, Inc. results.
(e) Fulfillment related depreciation expense is included in operating expenses of the stand-alone historical results of Orchard Brands Corporation. Fulfillment related depreciation expense is included in cost of goods sold of consolidated Bluestem Brands, Inc. results.
(f) Other is included in cost of goods sold of the stand-alone historical results of Orchard Brands Corporation. Other is included in Net Sales of Bluestem Brands, Inc. results.
(g) Customers that have made at least one purchase within the previous twelve fiscal months.
(h) Customers who have made a first time purchase from a particular brand within the Orchard Portfolio during the period presented.
(i) Merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.

ORCHARD BRANDS CORPORATION

Financial Measures Conformed to Bluestem Brands, Inc.'s Basis of Presentation

(unaudited - in thousands)

To supplement the consolidated stand-alone historical results of Orchard Brands Corporation and its subsidiaries which are presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), and based on historical Orchard Brands Corporation's basis of presentation, the following measures are conformed to Bluestem Brands, Inc.'s basis of presentation for comparison purposes. Bluestem Brands, Inc.'s basis of presentation is in accordance with GAAP. Periods succeeding the acquisition of Orchard Brands Corporation on July 10, 2015 will be presented on Bluestem Brands, Inc.'s basis of presentation. The period presented is based on the historical Orchard Brands Corporation fiscal second quarter ended June 27, 2015.

Adjusted net sales, as presented, is defined as net sales plus other.

Adjusted gross profit rate, as presented, is defined as adjusted net sales less cost of goods sold, sourcing overhead expenses and premium expenses plus fulfillment variable expenses, fulfillment related depreciation expense and other divided by adjusted net sales.

Adjusted selling and marketing expenses, as presented, is defined as selling and marketing expenses plus premium expenses.

Adjusted general and administrative expenses, as presented, is defined as general and administrative expenses plus sourcing overhead expenses less fulfillment variable expenses, stock-based compensation expense, restructuring costs, acquisition transaction costs and other expenses.

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

 
      13 Weeks Ended
June 27, 2015
Adjusted Net Sales:
Net sales $ 276,634
Plus: Other 298  
Adjusted Net Sales $ 276,932  
 
Adjusted Gross Profit:
Cost of goods sold $ 121,704
Plus: Fulfillment variable expenses 7,181
Fulfillment related depreciation expenses 283
Other 298
Less: Sourcing overhead expenses (6,445 )
Premium expenses (1,904 )  
Adjusted cost of goods sold 121,117  
Adjusted gross profit $ 155,815  
Adjusted gross profit rate 56.3 %
 
Adjusted Selling and Marketing Expenses:
Selling and marketing expenses $ 105,731
Plus: Premium expenses 1,904  
Adjusted selling and marketing expenses $ 107,635  
Adjusted selling and marketing expenses % of Adjusted Net Sales 38.9 %
 
Adjusted General and Administrative Expenses:
General and administrative expenses $ 27,734
Plus: Sourcing overhead expenses 6,445
Less: Fulfillment variable expenses (7,181 )
Stock-based compensation expense (179 )
Restructuring costs (334 )
Acquisition transaction costs (229 )
Other (33 )  
Adjusted general and administrative expenses $ 26,223  
Adjusted general and administrative expenses % of Adjusted Net Sales 9.5 %
 
Free Cash Flow:
Adjusted EBITDA $ 22,240
Less: Maintenance capital expenditures (1,196 )  
Free Cash Flow $ 21,044  
 

ORCHARD BRANDS CORPORATION

Condensed Consolidated Balance Sheets

(unaudited - in thousands)

We are providing certain consolidated stand-alone historical balance sheet information of Orchard Brands Corporation and its subsidiaries as of June 27, 2015, March 28, 2015 and December 27, 2014. These periods represent the first two quarters of Orchard Brands Corporation's fiscal year 2015 and fiscal year end 2014. This information is being presented to provide an understanding of the historic balance sheet of Orchard Brands Corporation prior to ownership by Bluestem Brands, Inc. This information does not include any adjustments or otherwise give effect to any changes to the operations of Orchard Brands Corporation or its subsidiaries that might result from Bluestem Brand's acquisition of Orchard Brands Corporation. The information for the periods presented are not included in the GAAP financial statements of Bluestem Brands, Inc.

 
      June 27, 2015   March 28, 2015   December 27, 2014
ASSETS
Current assets:
Cash and cash equivalents $ 533 $ 399 $ 25,610
Accounts receivable, net 15,355 15,309 9,150
Merchandise inventories 124,095 142,243 118,835
Deferred tax assets - current 5,481 5,481 5,481
Promotional materials inventories 31,293 44,959 26,656
Prepaid expenses and other assets 4,309   3,641   2,811  
Total current assets 181,066 212,032 188,543
Property and equipment, net 42,712 44,135 45,538
Intangibles, net 66,341 67,310 68,280
Goodwill 57,258 57,258 57,258
Other assets 1,925   2,091   2,216  
Total Assets $ 349,302   $ 382,826   $ 361,835  
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 76,076 $ 91,533 $ 82,953
Accrued costs 19,560 20,247 27,456
Advance payments on orders 17,369 21,527 9,257
Accrued returns reserve 6,322 5,905 7,689
Revolving credit facility 25,206
Current income taxes payable 4,919 (283 ) 6,483
Short-term debt 11,375   10,562   17,260  
Total current liabilities 135,621 174,697 151,098
Long-term debt 128,302 131,332 134,363
Deferred income taxes 19,765 19,765 19,765
Other long-term liabilities 1,722   1,735   1,124  
Total liabilities 285,410   327,529   306,350  
 
Stockholders' equity
Common stock 1 1 1
Additional paid-in capital 67,248 67,070 66,892
Accumulated other comprehensive income 330 283 285
Accumulated deficit (3,687 ) (12,057 ) (11,693 )
Total stockholders' equity 63,892   55,297   55,485  
Total Liabilities and Stockholders' Equity $ 349,302   $ 382,826   $ 361,835  

ORCHARD BRANDS CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited - in thousands)

We are providing certain consolidated stand-alone historical cash flows of Orchard Brands Corporation and its subsidiaries for the 13 weeks ended June 27, 2015 and March 28, 2015. These periods represent the first two quarters of Orchard Brands Corporation's fiscal year 2015. This information is being presented to provide an understanding of the historic consolidated cash flows of Orchard Brands Corporation prior to ownership by Bluestem Brands, Inc. This information does not include any adjustments or otherwise give effect to any changes to the operations of Orchard Brands Corporation or its subsidiaries that might result from Bluestem Brand's acquisition of Orchard Brands Corporation. The results for the periods presented are not included in the GAAP financial statements of Bluestem Brands, Inc. Orchard Brand Corporation's consolidated results for prior periods are not necessarily indicative of future performance.

 
      13-Weeks Ended
June 27, 2015   March 28, 2015
Operating Activities
Net income (loss) $ 8,370 $ (361 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization expense 3,589 3,387
Amortization of debt issuance costs and discount 324 336
Provision for doubtful accounts (14 ) (31 )
Provision for merchandise returns 29,316 18,090
Stock-based compensation expense 178 179
Inventory obsolescence and other reserves 2,491 2,064
Net change in assets and liabilities:
Customer account receivables (33 ) (6,127 )
Merchandise inventories 33,737 (11,528 )
Other assets 13,061 (19,124 )
Accounts payable and other liabilities (62,045 ) (26,345 )
Net cash provided by (used in) operating activities 28,974 (39,460 )
 
Investing Activities
Net purchases of property and equipment (1,195 ) (1,010 )
Net cash used in investing activities (1,195 ) (1,010 )
 
Financing Activities
Repayments of debt (2,439 ) (9,947 )
Borrowings on revolving credit facility 18,787 36,976
Repayments on revolving credit facility (43,993 ) (11,770 )
Net cash (used in) provided by financing activities (27,645 ) 15,259  
 
Net Increase (Decrease) in Cash and Cash Equivalents 134 (25,211 )
Cash and Cash Equivalents, Beginning of Period 399   25,610  
Cash and Cash Equivalents, End of Period $ 533   $ 399  
 

ICR
Investor Relations:
Denise Garcia
IR@bluestembrands.com

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