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Bluestem Group Inc. Announces Unaudited Consolidated Fourth Quarter and Fiscal Year 2016 Earnings Results

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Bluestem Group Inc. ("Bluestem Group" or the "Company") (OTCMKTS: BGRP)
today reported unaudited consolidated financial results that include its
wholly-owned subsidiary, Bluestem Brands, Inc. and its subsidiaries
("Bluestem"), for the 14-weeks ended February 3, 2017 and the 13-weeks
ended January 29, 2016 and audited consolidated financial results for
the 53-weeks ended February 3, 2017 and the 52-weeks ended January 29,
2016. We refer to the 14- and 13-week periods in this release as the
"fourth quarter" and the 53- and 52-week periods as the "fiscal" year.
Bluestem is a multi-brand, online retailer of a broad selection of
name-brand and private label general merchandise serving the boomer and
senior demographic, generally considered age 50 and over, and low- to
middle-income consumers across all age demographics.

"Our fourth quarter results reflect continued performance issues in our
Northstar credit portfolio and soft retail demand in our Orchard
Portfolio. In response to these headwinds, we've executed, and continue
to execute, several actions focused on maintaining covenant compliance
and establishing a foundation for future growth. I look forward to
sharing more details about our turnaround plan when we host our fourth
quarter earnings call tomorrow," said Steve Nave, Bluestem Group's
President and Chief Executive Officer.

Fourth Quarter Fiscal 2016 Bluestem Group Consolidated Highlights

  • Net loss for the fourth quarter of fiscal 2016 was $310.2 million
    compared to net income of $8.2 million for the fourth quarter of
    fiscal 2015. Basic and diluted loss per share was $2.36 for the fourth
    quarter of fiscal 2016 compared to diluted income per share of $0.06
    for the fourth quarter of fiscal 2015.
  • The Company recorded a $354.4 million non-cash intangible asset and
    goodwill impairment charge during the fourth quarter primarily related
    to the Fingerhut tradename, customer relationship and goodwill
    intangible assets as a result of an increased supply of subprime
    credit to our customer base, which has negatively impacted net sales,
    customer retention, new customer acquisition and lower credit
    portfolio performance.
  • Adjusted EBITDA for the fourth quarter of fiscal 2016 was $66.2
    million compared to adjusted EBITDA of $80.6 million for the fourth
    quarter of fiscal 2015.
  • Capmark Portfolio asset proceeds for the fourth quarter of fiscal 2016
    were $38.7 million. At the end of the fourth quarter of fiscal 2016,
    the Company had $23.0 million in net Capmark Portfolio assets
    remaining versus $53.7 million at the end of the third quarter of
    fiscal 2016.
  • Cash and cash equivalents were $212.9 million as of February 3, 2017.
    Subsequent to fiscal 2016, the special dividend of $80.2 million was
    paid.

Fourth Quarter Fiscal 2016 Bluestem Brands Stand-Alone Highlights

  • Net sales for the fourth quarter of fiscal 2016 were $750.3 million, a
    1.7% increase compared to net sales of $737.7 million for the fourth
    quarter of fiscal 2015.
  • Net loss for the fourth quarter of fiscal 2016 was $304.9 million
    compared to net loss of $6.8 million for the fourth quarter of fiscal
    2015. The increased net loss primarily resulted from non-cash
    impairment charges to the Fingerhut tradename, customer relationship
    and goodwill intangible assets.
  • Bluestem's adjusted EBITDA for the fourth quarter of fiscal 2016 was
    $60.4 million compared to adjusted EBITDA of $76.4 million for the
    fourth quarter of fiscal 2015.
  • Northstar Portfolio net sales for the fourth quarter of fiscal 2016
    were $450.0 million, a decrease of 0.5% compared to $452.2 million for
    the fourth quarter of fiscal 2015.
  • Orchard Portfolio's net sales for the fourth quarter of fiscal 2016
    were $250.2 million, an increase of 4.5% compared to $239.5 million
    for the fourth quarter of fiscal 2015.
  • Northstar Portfolio active accounts were 1.6 million as of the end of
    the fourth quarter of fiscal 2016, a decrease of 5.5% compared to 1.7
    million as of the end of the fourth quarter of fiscal 2015.
  • Orchard Portfolio's active customers were 7.5 million as of the end of
    the fourth quarter of fiscal 2016, a decrease of 4.4% compared to 7.8
    million as of the end of the fourth quarter of fiscal 2015.
  • 30+ day delinquent balances on the Northstar Portfolio revolving
    portfolio were 16.1% at the end of the fourth quarter of fiscal 2016
    compared to 14.7% for the fourth quarter of fiscal 2015.
  • Net principal charge-off rate on the revolving portfolio was 20.2% for
    the fourth quarter of fiscal 2016 compared to 17.8% for the fourth
    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.

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 In-person Meeting and Teleconference Information
The
Company will host an in-person meeting at the offices of Akin Gump
Strauss Hauer & Feld LLP, One Bryant Park, Bank of America Tower in New
York City at 9:00 AM ET on April 27, 2017. The meeting can also be
accessed via conference call at (888) 230-5549 or (913) 312-0683
(International), conference ID #9702451 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 #9702451. The telephone replay will be available at 12:00PM ET April
27, 2017. Additional investor information can be accessed at http://www.bluestem.com/investor-relations.

About Bluestem Group
Bluestem Group Inc. is a holding
company whose businesses include Bluestem Brands, a national,
multi-brand, online retailer of a broad selection of name-brand and
private label general merchandise serving the boomer and senior
demographic, generally considered age 50 and over, and low- to
middle-income consumers over all age demographics through 15 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, Tog Shop and
Wintersilks. Complementing each brand is a large selection of
merchandise with payment options that provide customers with the
flexibility of paying over time. Bluestem Group is headquartered in Eden
Prairie, MN. For additional information visit the Bluestem Group website
at www.bluestem.com.

Forward Looking Statements
This release contains statements
that are "forward-looking statements". Forward-looking statements relate
to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning matters
that are not historical facts. All statements contained herein that are
not clearly historical in nature are forward-looking. In some cases, you
can identify these statements by use of forward-looking words such as
"may," "will," "should," "anticipate," "estimate," "expect," "plan,"
"believe," "predict," "potential," "project," "intend," "could" or
similar expressions. In particular, statements regarding Bluestem
Group's plans, strategies, prospects and expectations regarding its
business are forward-looking statements. You should be aware that these
statements and any other forward-looking statements in this document
only reflect Bluestem Group's beliefs, assumptions and expectations and
are not guarantees of performance. These statements involve risks,
uncertainties and assumptions. Many of these risks, uncertainties and
assumptions are beyond Bluestem Group's control and may cause actual
results and performance to differ materially from Bluestem Group's
expectations. Forward-looking statements are based on Bluestem Group's
beliefs, assumptions and expectations of its future performance and
actions, taking into account all information currently available to
Bluestem Group. These beliefs, assumptions and expectations can change
as a result of many possible events or factors, not all of which are
known to Bluestem Group or are within its control. If a change occurs,
Bluestem Group's plans, business, financial condition, and liquidity may
vary materially from those expressed in its forward-looking statements.
Important factors that could cause the actual results to be materially
different from Bluestem Group's expectations include the risks and
uncertainties set forth in "Risk Factors" in Bluestem Group's Report as
of and for the fiscal years ended February 3, 2017 and January 29, 2016.

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

BLUESTEM GROUP INC.
BLUESTEM BRANDS, INC.
FINANCIAL
INFORMATION

14- and 53-weeks ended February 3, 2017 and 13-
and 52-weeks ended January 29, 2016

Overview and Basis of Presentation
As used in this release:

  • "Bluestem Group," "we," "us," "our," or "the Company" refers to
    Bluestem Group Inc. with its consolidated subsidiaries
  • "Bluestem" refers to Bluestem Brands, Inc., an indirect subsidiary of
    Bluestem Group Inc., which consists of the Northstar Portfolio of
    retail brands, the Orchard Portfolio of retail brands and PayCheck
    Direct
  • "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 (which was
    discontinued in the fourth quarter of fiscal 2016), Tog Shop, and
    WinterSilks retail brands
  • "Capmark Portfolio" refers to the commercial real estate finance
    operations of Bluestem Group Inc.

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

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

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

Program Agreement
Bluestem is a party
to an agreement with WebBank and Santander Consumer USA Inc. ("SCUSA")
("Program Agreement") which includes a series of transactions related to
revolving Northstar Portfolio customer accounts receivables. The Company
markets revolving credit accounts and installment credit accounts to
qualifying customers. WebBank extends credit directly to Northstar
Portfolio customers. The credit accounts may only be used to purchase
goods and services from Northstar Portfolio, and certain third parties
that market their goods and services to Northstar Portfolio customers.
The Company is obligated to purchase and assume ownership of the
receivables after a contractual holding period by WebBank. The purchase
price of the receivables from WebBank is at par value, and the Company
pays applicable fees along with applicable customer finance charges
earned by WebBank during the contractual hold period. SCUSA is obligated
to reimburse Bluestem for origination and other product fees.

Bluestem Group Inc.
Results for the 14- and 53-weeks
ended February 3, 2017

             

BLUESTEM GROUP INC.

Consolidated Statements of Comprehensive Income

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

 
Fiscal Quarters Ended Fiscal Years Ended
February 3, 2017       January 29, 2016 February 3, 2017       January 29, 2016
(14-weeks) (13-weeks) (53-weeks) (52-weeks)
Net sales and revenue
Net sales $ 750,327 $ 737,682 $ 2,092,030 $ 1,720,189
Commercial real estate revenue 7,808   6,767   8,566   22,852  
Total net sales and revenue 758,135   744,449   2,100,596   1,743,041  
Costs and expenses
Cost of goods sold 428,014 403,947 1,130,352 937,841
Sales and marketing expenses 148,078 166,657 542,380 412,234
Net credit expense 86,701 32,784 146,420 64,035
General and administrative expenses 53,499 65,525 226,254 213,844
Amortization and depreciation not included in cost of goods sold 45,297 32,963 97,135 78,183
Loss on impairment 354,432 20,200 354,862 20,200
Loss (gain) on derivatives in our own equity 6,489 (548 ) 183
Gain on debt extinguishment     (2,509 )  
Total costs and expenses 1,116,021 728,565 2,494,346 1,726,520
 
Operating (loss) income (357,886 ) 15,884 (393,750 ) 16,521
 
Interest expense, net 13,611   13,701   54,005   43,920  
(Loss) income before income taxes (371,497 ) 2,183 (447,755 ) (27,399 )
Income tax benefit (61,262 ) (6,065 ) (60,043 ) (41,614 )
Net (loss) income $ (310,235 ) $ 8,248   $ (387,712 ) $ 14,215  
 
Other comprehensive (loss) income
Unrealized gain on interest rate swap, net of tax 1,131 621
Net change in unrealized gains/losses on investments securities, net
of tax
  (638 ) (231 ) (633 )
Comprehensive (loss) income $ (309,104 ) $ 7,610   $ (387,322 ) $ 13,582  
 
Basic and diluted (loss) income per share - common stockholders
Basic and diluted (loss) income per share $ (2.36 ) $ 0.06 $ (2.92 ) $ 0.10
Basic weighted average shares outstanding 132,036,278 136,382,570 132,880,118 136,202,218
Diluted weighted average shares outstanding 132,036,278 137,824,323 132,880,118 137,748,265
 
             

BLUESTEM GROUP INC.

Consolidated Balance Sheets

(unaudited - in thousands)

 
February 3, 2017 January 29, 2016
ASSETS
Current assets:
Cash and cash equivalents $ 212,942 $ 185,944
Restricted cash 15,797 22,569
Customer accounts receivable, net of allowance of $17,041 and $14,434 50,053 44,446
Merchandise inventories 229,970 263,579
Promotional material inventories 49,730 53,253
Other current assets 39,135   49,233  
Total current assets 597,627 619,024
Property and equipment, net 130,065 125,001
Intangibles, net 208,563 460,551
Goodwill 202,556 367,481
Other assets 41,926   85,785  
Total Assets $ 1,180,737   $ 1,657,842  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 221,539 $ 180,601
Accrued costs and other liabilities 154,095 129,361
Short-term debt 47,500   47,981  
Total current liabilities 423,134 357,943
Long-term debt 468,924 513,847
Deferred income taxes 37,474 98,275
Other long-term liabilities 37,470   14,531  
Total liabilities 967,002   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 289,789 361,935
Retained earnings (82,867 ) 304,875
Accumulated other comprehensive income, net of tax 621   231  
Total stockholders' equity 213,735   673,246  
Total Liabilities and Stockholders' Equity $ 1,180,737   $ 1,657,842  
 
       

BLUESTEM GROUP INC.

Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
Fiscal Years Ended
February 3, 2017       January 29, 2016
(53-weeks) (52-weeks)
Operating Activities
Net (loss) income $ (387,712 ) $ 14,215
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Amortization and depreciation expense 101,606 81,127
Loss on impairment 354,862 20,200
Provision for doubtful accounts 78,592 31,204
Provision for deferred income taxes (60,801 ) (39,199 )
Loss on servicing right 22,323
Net gains on loans held for sale, investment securities and other (2,690 ) (10,773 )
Gain on debt extinguishment (2,509 )
Stock-based compensation expense 5,310 5,393
Other, net (250 ) (3,046 )
Net change in assets and liabilities:
Customer account receivables (29,673 ) (42,810 )
Merchandise inventories 33,609 (39,893 )
Promotional material inventories 3,523 (8,693 )
Other assets 20,878 21,996
Accounts payable and other liabilities 4,395 4,512
Payments from loans held for sale 3,809   60,940  
Net cash provided by operating activities 145,272 95,173
 
Investing Activities
Purchases of customer accounts receivable (1,140,370 ) (1,197,537 )
Proceeds from sale of customer accounts receivable 1,085,844 1,198,146
Acquisitions, net of cash on hand (375,313 )
Net purchases of property and equipment (43,383 ) (35,935 )
Distributions from equity investments 36,732 75,009
Net decrease (increase) in restricted cash 6,772 (8,983 )
Other (565 ) 722  
Net cash used in investing activities (54,970 ) (343,891 )
 
Financing Activities
Borrowings of debt 269,246
Repayments of debt (30,048 ) (100,782 )
Extinguishment of debt (18,150 )
Borrowings on asset backed line of credit 840,760 481,712
Repayments on asset backed line of credit (843,330 ) (469,425 )
Payments for the repurchase of common stock (12,554 )
Treasury shares repurchased   (131 )
Net cash (used in) provided by financing activities (63,322 ) 180,620
 
Effect of Foreign Exchange Rates on Cash 18   (165 )
 
Net Increase (Decrease) in Cash and Cash Equivalents 26,998 (68,263 )
Cash and Cash Equivalents, Beginning of Period 185,944   254,207  
Cash and Cash Equivalents, End of Period $ 212,942   $ 185,944  
 

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

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

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

           
Fiscal Quarters Ended       Fiscal Years Ended
February 3, 2017       January 29, 2016 February 3, 2017       January 29, 2016
(14-weeks) (13-weeks) (53-weeks) (52-weeks)
Adjusted EBITDA:
Net (loss) income $ (310,235 ) $ 8,248 $ (387,712 ) $ 14,215
Income tax benefit (61,262 ) (6,065 ) (60,043 ) (41,614 )
Interest expense 13,628 13,704 54,023 43,927
Amortization and depreciation expense 46,465 34,066 101,606 81,127
Loss on impairment 354,432 20,200 354,862 20,200
Loss on servicing right 22,323 22,323
Stock-based compensation expense 1,132 1,360 5,310 5,393
Loss (gain) on derivatives in our own equity 6,489 (548 ) 183
Gain on debt extinguishment (2,509 )
Acquisition transaction costs 8,342
Integration costs 1,669 2,635 5,590 5,607
Other (1,955 )   (515 )  
Adjusted EBITDA $ 66,197   $ 80,637   $ 92,387   $ 137,380  
 

Bluestem Brands, Inc.
Results for the 14- and 53-weeks
ended February 3, 2017

           

BLUESTEM BRANDS, INC.

Consolidated Statements of Comprehensive Income and Selected
Operating Data

(unaudited - in thousands)

 
Fiscal Quarters Ended
February 3, 2017       January 29, 2016
(14-weeks) (13-weeks)

Change(a)

 

Net sales $ 750,327 $ 737,682 1.7 %
Cost of goods sold 428,014   403,947   6.0 %
Gross profit 322,313 333,735 (3.4 )%
Sales and marketing expenses 148,078 166,657 (11.1 )%
Net credit expense 86,701 32,784 164.5 %
General and administrative expenses 51,930 63,272 (17.9 )%
Amortization and depreciation not included in cost of goods sold (b) 45,297 32,963 37.4 %
Loss on impairment 354,432 20,200 1,654.6 %
Gain on debt extinguishment (3,456 ) n/m
Interest expense, net (c) 14,141   13,701   3.2 %
(Loss) income before income taxes (374,810 ) 4,158 n/m
Income tax (benefit) expense (69,872 ) 10,971   n/m
Net loss $ (304,938 ) $ (6,813 ) 4,375.8 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 43.0 % 45.2 % (220 ) bps
Sales and marketing expenses 19.7 % 22.6 % (290 ) bps
Net credit expense 11.6 % 4.4 % 720 bps
Contribution margin (d) $ 87,534 $ 134,294 (34.8 )%
As a percentage of net sales 11.7 % 18.2 % (650 ) bps
Adjusted general and administrative expenses (d) $ 50,738 $ 59,136 (14.2 )%
As a percentage of net sales 6.8 % 8.0 % (120 ) bps
Adjusted EBITDA (d) $ 60,432 $ 76,391 (20.9 )%
As a percentage of net sales 8.1 % 10.4 % (230 ) bps
 
Selected Financial Data:
Lender net liquidity (d) $ 104,403 $ 118,341 (11.8 )%
Availability on inventory line of credit $ 100,237 $ 115,392 (13.1 )%
Free cash flow (d) $ 57,608 $ 69,710 (17.4 )%
Lender leverage ratio (d) 3.51 3.34 5.1 %
Program agreement leverage ratio (d) 4.07 3.34 21.9 %
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (e) 223 266 (16.2 )%
Fingerhut FreshStart new customer credit accounts (e) 103 93 10.8 %
PayCheck Direct new customer credit accounts (e) 28 25 12.0 %
Orchard Portfolio new gross customers (f) 634 686 (7.6 )%
Northstar Portfolio active accounts (g) 1,590 1,683 (5.5 )%
Orchard Portfolio active customers (h) 7,498 7,845 (4.4 )%
PayCheck Direct eligible client employees (i) 7,833 6,323 23.9 %

(a) Changes in rates are presented as the basis point ("bps") increase
(decrease) from the prior period.
(b) Consists of amortization
expense of customer relationship finite-lived intangible assets.
Depreciation expense related to software, owned fulfillment facilities
and equipment in Bluestem's fulfillment facilities are included in cost
of goods sold.
(c) Interest expense is net of interest income.
(d)
Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial
Measures" within this release for a reconciliation of non-GAAP financial
measures to GAAP and why Bluestem believes these are important measures
of its performance.
(e) Customers that have made their initial
order on account during the fiscal period presented. Revolving new
customer credit accounts excludes FreshStart graduates initially
included in FreshStart new customer credit accounts when their initial
order was made.
(f) Customers who have made a first time purchase
from a particular brand within the Orchard Portfolio during the period
presented.
(g) Revolving credit customers that have made at least
one purchase on account within the previous twelve fiscal months and at
least one payment on account since origination.
(h) Customers that
have made at least one purchase within the previous twelve fiscal months.
(i)
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.

      Fiscal Years Ended      
February 3, 2017       January 29, 2016
(53-weeks) (52-weeks)

Change(a)

Net sales $ 2,092,030 $ 1,720,189 21.6 %
Cost of goods sold 1,130,352   937,841   20.5 %
Gross profit 961,678 782,348 22.9 %
Sales and marketing expenses 542,380 412,234 31.6 %
Net credit expense 146,420 64,035 128.7 %
General and administrative expenses 219,859 200,276 9.8 %
Amortization and depreciation not included in cost of goods sold (b) 97,135 78,183 24.2 %
Loss on impairment 354,862 20,200 1,656.7 %
Gain on debt extinguishment (3,456 ) n/m
Interest expense, net (c) 54,778   43,920   24.7 %
Loss before income taxes (450,300 ) (36,500 ) 1,133.7 %
Income tax benefit (97,829 ) (10,191 ) 860.0 %
Net loss $ (352,471 ) $ (26,309 ) 1,239.7 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit 46.0 % 45.5 % 50 bps
Sales and marketing expenses 25.9 % 24.0 % 190 bps
Net credit expense 7.0 % 3.7 % 330 bps
Contribution margin (d) $ 272,878 $ 306,079 (10.8 )%
As a percentage of net sales 13.0 % 17.8 % (480 ) bps
Adjusted general and administrative expenses (d) $ 209,335 $ 178,702 17.1 %
As a percentage of net sales 10.0 % 10.4 % (40 ) bps
Adjusted EBITDA (d) $ 90,864 $ 130,825 (30.5 )%
As a percentage of net sales 4.3 % 7.6 % (330 ) bps
 
Selected Financial Data:
Lender net liquidity (d) $ 104,403 $ 118,341 (11.8 )%
Availability on inventory line of credit $ 100,237 $ 115,392 (13.1 )%
Free cash flow (d) $ 71,640 $ 112,568 (36.4 )%
Lender leverage ratio (d) 3.51 3.34 5.1 %
Program agreement leverage ratio (d) 4.07 3.34 21.9 %
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (e) 618 728 (15.1 )%
Fingerhut FreshStart new customer credit accounts (e) 250 258 (3.1 )%
PayCheck Direct new customer credit accounts (e) 64 51 25.5 %
Orchard Portfolio new gross customers (f) 2,478 1,532 61.7 %
Northstar Portfolio active accounts (g) 1,590 1,683 (5.5 )%
Orchard Portfolio active customers (h) 7,498 7,845 (4.4 )%
PayCheck Direct eligible client employees (i) 7,833 6,323 23.9 %

(a) Changes in rates are presented as the basis point ("bps") increase
(decrease) from the prior period.
(b) Consists of amortization
expense of customer relationship finite-lived intangible assets.
Depreciation expense related to software, owned fulfillment facilities
and equipment in Bluestem's fulfillment facilities are included in cost
of goods sold.
(c) Interest expense is net of interest income.
(d)
Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial
Measures" within this release for a reconciliation of non-GAAP financial
measures to GAAP and why Bluestem believes these are important measures
of its performance.
(e) Customers that have made their initial
order on account during the fiscal period presented. Revolving new
customer credit accounts excludes FreshStart graduates initially
included in FreshStart new customer credit accounts when their initial
order was made.
(f) Customers who have made a first time purchase
from a particular brand within the Orchard Portfolio during the period
presented.
(g) Revolving credit customers that have made at least
one purchase on account within the previous twelve fiscal months and at
least one payment on account since origination.
(h) Customers that
have made at least one purchase within the previous twelve fiscal months.
(i)
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.

Consolidated Balance Sheets

(unaudited - in thousands)

 
February 3, 2017 January 29, 2016
ASSETS
Current assets:
Cash and cash equivalents $ 7,916 $ 11,870
Restricted cash 15,713 22,485
Customer accounts receivable, net of allowance of $17,041 and $14,434 50,053 44,446
Merchandise inventories 229,970 263,579
Promotional material inventories 49,730 53,253
Prepaid expenses and other assets 27,896   32,647  
Total current assets 381,278 428,280
Property and equipment, net 130,065 125,001
Intangible assets, net 208,563 460,551
Goodwill 202,556 367,481
Other assets 3,514   3,405  
Total Assets $ 925,976   $ 1,384,718  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 221,539 $ 180,601
Current income taxes payable 34,059 34,583
Accrued costs and other liabilities 83,055 111,613
Short-term debt 47,500   47,981  
Total current liabilities 386,153 374,778
Long-term debt 445,736 490,032
Deferred income taxes 56,758 154,428
Other long-term liabilities 29,870   6,171  
Total liabilities 918,517 1,025,409
 
Stockholders' equity:
Common stock
Additional paid-in capital 369,602 369,602
Retained earnings (362,764 ) (10,293 )
Accumulated other comprehensive loss, net of tax 621    
Total stockholders' equity 7,459   359,309  
Total Liabilities and Stockholders' Equity $ 925,976   $ 1,384,718  
 
     

BLUESTEM BRANDS, INC.

Consolidated Statements of Cash Flows

(unaudited - in thousands)

 
Fiscal Years Ended
February 3, 2017       January 29, 2016
(53-weeks) (52-weeks)
Operating Activities
Net loss $ (352,471 ) $ (26,309 )
Adjustments to reconcile net loss to net cash provided by operating
activities:
Amortization and depreciation expense 101,606 81,127
Loss on impairment 354,862 20,200
Provision for doubtful accounts 78,592 31,204
Provision for deferred income taxes (97,670 ) (28,346 )
Loss on servicing right 22,323
Gain on debt extinguishment (3,456 )
Stock-based compensation expense 4,946 4,106
Other, net 5,731 5,129
Net change in assets and liabilities:
Customer accounts receivable (29,673 ) (42,810 )
Merchandise inventories 33,609 (39,893 )
Promotional material inventories 3,523 (8,693 )
Prepaid expenses and other assets 4,087 2,606
Current income taxes payable (524 ) 16,016
Accounts payable and other liabilities 10,983   19,759  
Net cash provided by operating activities 136,468 34,096
 
Investing Activities
Purchase of customer accounts receivable (1,140,370 ) (1,197,537 )
Proceeds from sale of customer accounts receivable 1,085,844 1,198,146
Acquisitions, net of cash on hand (375,313 )
Net purchase of property and equipment (43,383 ) (35,935 )
Net decrease (increase) in restricted cash 6,772   (9,060 )
Net cash used in investing activities (91,137 ) (419,699 )
 
Financing Activities
Borrowings of debt 269,246
Repayments of debt (29,732 ) (43,282 )
Extinguishment of debt (16,983 )
Borrowings on asset backed line of credit 840,760 481,712
Repayments on asset backed line of credit (843,330 ) (469,425 )
Cash equity contributions   100,000  
Net cash (used in) provided by financing activities (49,285 ) 338,251  
 
Net Decrease in Cash and Cash Equivalents (3,954 ) (47,352 )
Cash and Cash Equivalents, Beginning of Period 11,870   59,222  
Cash and Cash Equivalents, End of Period $ 7,916   $ 11,870  
 
           

BLUESTEM BRANDS, INC.

Supplemental Financial Information - Segment Net Sales

(unaudited - in thousands, except average order size)

 
Fiscal Quarters Ended
February 3, 2017       January 29, 2016
(14-weeks) (13-weeks) Change
$       % of Sales $       % of Sales %
Total sales by merchandise category:
Home $ 183,952 23.8 % $ 184,222 24.2 % (0.1 )%
Entertainment 241,725 31.3 % 247,255 32.5 % (2.2 )%
Fashion 347,182   44.9 % 328,874   43.3 % 5.6 %
Total merchandise sales (a) 772,859 100.0 % 760,351 100.0 % 1.6 %
Corporate 16,680 22,022
Returns and allowances (63,118 ) (66,209 ) (4.7 )%
Commissions and other revenues 23,906   21,518   11.1 %
Net sales $ 750,327   $ 737,682   1.7 %
Gross profit rate 43.0 % 45.2 % (230 ) bps
Sales and marketing expense 19.7 % 22.6 % (290 ) bps
Contribution margin rate (b) 11.7 % 18.2 % (650 ) bps
Average order size (c) $ 132 $ 135
 
Northstar Portfolio sales by merchandise category:
Home $ 153,946 32.9 % $ 153,558 32.3 % 0.3 %
Entertainment 220,710 47.2 % 230,951 48.7 % (4.4 )%
Fashion 92,998   19.9 % 89,917   19.0 % 3.4 %
Total merchandise sales (a) 467,654 100.0 % 474,426 100.0 % (1.4 )%
Returns and allowances (25,523 ) (29,446 ) (13.3 )%
Commissions and other revenues 7,875   7,238   8.8 %
Net sales $ 450,006   $ 452,218   (0.5 )%
 
Gross profit rate 39.6 % 41.6 % (190 ) bps
Sales and marketing expense 11.3 % 15.6 % (430 ) bps
Contribution margin rate (b) 10.3 % 19.2 % (890 ) bps
Average order size (c) $ 233 $ 244
 
Orchard Portfolio sales by merchandise category:
Home $ 21,475 7.9 % $ 25,233 9.7 % (14.9 )%
Fashion 249,283   92.1 % 236,053   90.3 % 5.6 %
Total merchandise sales (a) 270,758 100.0 % 261,286 100.0 % 3.6 %
Returns and allowances (35,968 ) (35,571 ) 1.1 %
Commissions and other revenues 15,365   13,769   11.6 %
Net sales $ 250,155   $ 239,484   4.5 %
 
Gross profit rate 49.7 % 53.8 % (410 ) bps
Sales and marketing expense 36.1 % 36.7 % (60 ) bps
Contribution margin rate (b) 13.6 % 17.2 % (360 ) bps
Average order size (c) $ 71 $ 72
 
PayCheck Direct sales by merchandise category:
Home $ 8,531 24.8 % $ 5,431 22.0 % 57.1 %
Entertainment 21,015 61.0 % 16,304 66.2 % 28.9 %
Fashion 4,901   14.2 % 2,904   11.8 % 68.8 %
Total merchandise sales (a) 34,447 100.0 % 24,639 100.0 % 39.8 %
Returns and allowances (1,627 ) (1,192 ) 36.5 %
Commissions and other revenues 666   511   30.3 %
Net sales $ 33,486   $ 23,958   39.8 %
 
Gross profit rate 35.5 % 32.9 % 260 bps
Sales and marketing expense 8.2 % 13.4 % (520 ) bps
Contribution margin rate (b) 11.2 % 10.2 % 100 bps
Average order size (c) $ 546 $ 566

(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.

      Fiscal Years Ended      
February 3, 2017       January 29, 2016
(53-weeks) (52-weeks) Change
$       % of Sales $       % of Sales %
Total sales by merchandise category:
Home $ 566,907 25.4 % $ 554,355 30.3 % 2.3 %
Entertainment 509,166 22.8 % 538,616 29.4 % (5.5 )%
Fashion 1,155,992   51.8 % 736,201   40.3 % 57.0 %
Total merchandise sales (a) 2,232,065 100.0 % 1,829,172 100.0 % 22.0 %
Corporate 2,546 864
Returns and allowances (220,286 ) (162,466 ) 35.6 %
Commissions and other revenues 77,705   52,619   47.7 %
Net sales $ 2,092,030   $ 1,720,189   21.6 %
 
Gross profit rate 46.0 % 45.5 % 50 bps
Sales and marketing expense 25.9 % 24.0 % 190 bps
Contribution margin rate (b) 13.0 % 17.8 % (480 ) bps
Average order size (c) $ 115 $ 138
 
Northstar Portfolio sales by merchandise category:
Home $ 457,215 40.7 % $ 486,234 40.6 % (6.0 )%
Entertainment 468,532 41.8 % 507,643 42.4 % (7.7 )%
Fashion 196,460   17.5 % 203,933   17.0 % (3.7 )%
Total merchandise sales (a) 1,122,207 100.0 % 1,197,810 100.0 % (6.3 )%
Returns and allowances (70,245 ) (80,267 ) (12.5 )%
Commissions and other revenues 22,210   20,952   6.0 %
Net sales $ 1,074,172   $ 1,138,495   (5.6 )%
 
Gross profit rate 40.6 % 41.8 % (120 ) bps
Sales and marketing expense 15.8 % 17.7 % (190 ) bps
Contribution margin rate (b) 12.3 % 18.9 % (660 ) bps
Average order size (c) $ 231 $ 234
 
Orchard Portfolio sales by merchandise category:
Home $ 86,716 8.4 % $ 54,747 9.4 % 58.4 %
Fashion 950,553   91.6 % 527,627   90.6 % 80.2 %
Total merchandise sales (a) 1,037,269 100.0 % 582,374 100.0 % 78.1 %
Returns and allowances (146,697 ) (79,910 ) 83.6 %
Commissions and other revenues 54,073   30,573   76.9 %
Net sales $ 944,645   $ 533,037   77.2 %
 
Gross profit rate 52.9 % 54.8 % (190 ) bps
Sales and marketing expense 37.8 % 37.3 % 50 bps
Contribution margin rate (b) 15.1 % 17.6 % (250 ) bps
Average order size (c) $ 72 $ 73
 
PayCheck Direct sales by merchandise category:
Home $ 22,976 31.6 % $ 13,374 27.3 % 71.8 %
Entertainment 40,634 56.0 % 30,973 63.2 % 31.2 %
Fashion 8,979   12.4 % 4,641   9.5 % 93.5 %
Total merchandise sales (a) 72,589 100.0 % 48,988 100.0 % 48.2 %
Returns and allowances (3,344 ) (2,289 ) 46.1 %
Commissions and other revenues 1,422   1,094   30.0 %
Net sales $ 70,667   $ 47,793   47.9 %
 
Gross profit rate 35.2 % 32.4 % 280 bps
Sales and marketing expense 19.5 % 23.1 % (360 ) bps
Contribution margin rate (b) (0.4 )% (2.0 )% 160 bps
Average order size (c) $ 534 $ 571

(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)

 
Fiscal Quarters Ended
February 3, 2017       January 29, 2016      
(14-weeks) (13-weeks) Change
Net credit expense:
Credit management costs $ 21,697 $ 21,664 0.2 %
Provision for doubtful accounts - company-owned customer accounts
receivable
11,585 8,269 40.1 %
Provision for doubtful accounts - loss on sale of customer accounts
receivable sold to SCUSA
42,214   12,140   247.7 %
Provision for doubtful accounts 53,799 20,409 163.6 %
Finance charge and fee income (1,249 ) (1,400 ) (10.8 )%
Servicing fee income and portfolio profit sharing (9,869 ) (7,889 ) 25.1 %
Loss on servicing right 22,323     n/m
Net credit expense $ 86,701   $ 32,784   164.5 %
 
Serviced Portfolio Selected Credit Data: Fiscal Quarter Ended
February 3, 2017 (14-weeks)
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,928 157 79
Average balance outstanding $ 789 $ 112 $ 609
Customer accounts receivable $ 1,520,520 $ 17,474 $ 48,396
Balances 30+ days delinquent (d) $ 244,217 $ 3,726 $ 2,393
Balances 30+ days delinquent as a percentage of total customer
accounts receivable (e)
16.1 % 21.3 % 4.9 %
Average customer accounts receivable $ 1,475,963 $ 14,889 $ 42,909
Finance charge and fee income $ 89,374 $ 1,230 n/a
Finance charge and fee income rate (f) 24.2 % 16.0 % n/a
Net principal charge-offs $ 74,675 $ 2,406 $ 2,084
Net principal charge-off rate (g) 20.2 % 31.2 % 19.4 %
 
Fiscal Quarter Ended
January 29, 2016 (13-weeks)
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,984 159 56
Average balance outstanding $ 742 $ 118 $ 624
Customer accounts receivable $ 1,472,335 $ 18,754 $ 35,096
Balances 30+ days delinquent (d) $ 216,089 $ 4,684 $ 1,349
Balances 30+ days delinquent as a percentage of total customer
accounts receivable (e)
14.7 % 25.0 % 3.8 %
Average customer accounts receivable $ 1,414,723 $ 16,287 $ 30,637
Finance charge and fee income $ 93,524 $ 1,285 n/a
Finance charge and fee income rate (f) 26.4 % 14.3 % n/a
Net principal charge-offs $ 63,196 $ 2,801 $ 1,084
Net principal charge-off rate (g) 17.8 % 31.2 % 14.2 %

(a) Revolving serviced portfolio includes Northstar Portfolio revolving
credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's
installment accounts.
(c) PayCheck Direct ("PCD") installment
serviced portfolio is installment receivables issued to consumers who
are members and employees of participating organizations and employers
in the PCD program.
(d) Delinquent balances as of the customers'
statement cycle dates prior to or on fiscal period end.
(e)
Delinquent balances as of the customers' statement cycle dates prior to
or on fiscal period end as a percentage of total customer accounts
receivable as of the customers' statement cycle dates prior to or on
fiscal period end.
(f) Revolving finance charge and fee income rate
represents finance charge and fee income as a percentage of average
customer accounts receivable for the 14-weeks ended February 3, 2017 and
13-weeks ended January 29, 2016 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 14- and 13-week
periods ended February 3, 2017 and January 29, 2016, respectively.
(g)
Revolving and PCD Installment net principal charge-off rate represents
net principal charge-offs as a percentage of average customer accounts
receivable for the 14-weeks ended February 3, 2017 and 13-weeks ended
January 29, 2016 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 14- and 13-week periods ended February 3, 2017
and January 29, 2016, respectively.

      Fiscal Years Ended
February 3, 2017       January 29, 2016      
(53-weeks) (52-weeks) Change
Net credit expense:
Credit management costs $ 78,217 $ 78,133 0.1 %
Provision for doubtful accounts - company-owned customer accounts
receivable
23,785 19,064 24.8 %
Provision for doubtful accounts - loss on sale of customer accounts
receivable sold to SCUSA
54,807   12,140   351.5 %
Provision for doubtful accounts 78,592 31,204 151.9 %
Finance charge and fee income (2,674 ) (6,048 ) (55.8 )%
Servicing fee income and portfolio profit sharing (30,038 ) (39,254 ) (23.5 )%
Loss on servicing right 22,323     n/m
Net credit expense $ 146,420   $ 64,035   128.7 %
 
Serviced Portfolio Selected Credit Data: Fiscal Years Ended
February 3, 2017 (53-weeks)
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,928 157 79
Average balance outstanding $ 789 $ 112 $ 609
Customer accounts receivable $ 1,520,520 $ 17,474 $ 48,396
Balances 30+ days delinquent (d) $ 244,217 $ 3,726 $ 2,393
Balances 30+ days delinquent as a percentage of total customer
accounts receivable (e)
16.1 % 21.3 % 4.9 %
Average customer accounts receivable $ 1,402,481 $ 14,210 $ 35,014
Finance charge and fee income $ 365,147 $ 2,412 n/a
Finance charge and fee income rate (f) 26.0 % 5.8 % n/a
Net principal charge-offs $ 272,842 $ 13,229 $ 6,448
Net principal charge-off rate (g) 19.5 % 31.8 % 18.4 %
 
Fiscal Years Ended
January 29, 2016 (52-weeks)
Revolving(a) FreshStart(b) PCD Installment(c)
Balance active accounts 1,984 159 56
Average balance outstanding $ 742 $ 118 $ 624
Customer accounts receivable $ 1,472,335 $ 18,754 $ 35,096
Balances 30+ days delinquent (d) $ 216,089 $ 4,684 $ 1,349
Balances 30+ days delinquent as a percentage of total customer
accounts receivable (e)
14.7 % 25.0 % 3.8 %
Average customer accounts receivable $ 1,289,787 $ 17,187 $ 20,864
Finance charge and fee income $ 360,870 $ 3,038 n/a
Finance charge and fee income rate (f) 28.0 % 6.1 % n/a
Net principal charge-offs $ 235,735 $ 16,758 $ 2,962
Net principal charge-off rate (g) 18.3 % 33.5 % 14.2 %

(a) Revolving serviced portfolio includes Northstar Portfolio revolving
credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's
installment accounts.
(c) PayCheck Direct ("PCD") installment
serviced portfolio is installment receivables issued to consumers who
are members and employees of participating organizations and employers
in the PCD program.
(d) Delinquent balances as of the customers'
statement cycle dates prior to or on fiscal period end.
(e)
Delinquent balances as of the customers' statement cycle dates prior to
or on fiscal period end as a percentage of total customer accounts
receivable as of the customers' statement cycle dates prior to or on
fiscal period end.
(f) Revolving finance charge and fee income rate
represents finance charge and fee income as a percentage of average
customer accounts receivable for the fiscal years ended February 3, 2017
and January 29, 2016 annualized to 52-week periods for comparability.
FreshStart finance charge and fee income rate represents finance charge
and fee income as a percentage of the 52 weeks of FreshStart related
sales five months prior to the fiscal years ended February 3, 2017 and
January 29, 2016.
(g) Revolving and PCD Installment net
principal charge-off rate represents net principal charge-offs as a
percentage of average customer accounts receivable for the fiscal years
ended February 3, 2017 and January 29, 2016 annualized to 52-week
periods for comparability. FreshStart net principal charge-off rate
represents net principal charge-offs as a percentage of the 52 weeks of
FreshStart related sales five months prior to the fiscal years ended
February 3, 2017 and January 29, 2016.

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

To supplement the consolidated financial information of Bluestem Brands,
Inc. and its subsidiaries for the 14- and 53-weeks ended February 3,
2017, which are presented in accordance with GAAP, Bluestem uses the
following measures that are not in accordance with, or an alternative
to, measures prepared in accordance with GAAP ("non-GAAP measures"):

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

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

Adjusted EBITDA, as presented, represents net loss before income
tax (benefit) expense, interest expense, amortization and depreciation
expense, loss on impairment, loss on servicing right, gain on debt
extinguishment, 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.

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 print and paper, transportation,
credit operations and marketing. Other includes charges such as, but not
limited to or necessarily inclusive of, strategic investments, system
implementations, executive recruiting and public company cost.

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

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

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

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

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

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

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

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

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

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

           
Fiscal Quarters Ended Fiscal Years Ended
February 3, 2017       January 29, 2016 February 3, 2017       January 29, 2016
(14-weeks) (13-weeks) (53-weeks) (52-weeks)
Contribution margin:
Net loss $ (304,938 ) $ (6,813 ) $ (352,471 ) $ (26,309 )
Income tax (benefit) expense (69,872 ) 10,971 (97,829 ) (10,191 )
Interest expense, net 14,141 13,701 54,778 43,920
Gain on debt extinguishment (3,456 ) (3,456 )
Loss on impairment 354,432 20,200 354,862 20,200
Amortization and depreciation not included in cost of sales 45,297 32,963 97,135 78,183
General and administrative expenses 51,930   63,272   219,859   200,276  
Contribution margin $ 87,534   $ 134,294   $ 272,878   $ 306,079  
 
Contribution margin % of net sales 11.7 % 18.2 % 13.0 % 17.8 %
 

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

           
Fiscal Quarters Ended Fiscal Years Ended
February 3, 2017       January 29, 2016 February 3, 2017       January 29, 2016
(14-weeks) (13-weeks) (53-weeks) (52-weeks)
Adjusted general and administrative expenses:
General and administrative expenses $ 51,930 $ 63,272 $ 219,859 $ 200,276
Less:
Stock-based compensation expense 1,318 1,099 4,946 4,106
Acquisition transaction costs 8,342
Integration costs 1,669 2,635 5,590 5,607
Lease termination costs 1,122
Other (1,795 ) 402   (12 ) 2,397  
Adjusted general and administrative expenses $ 50,738   $ 59,136   $ 209,335   $ 178,702  
 
Adjusted general and administrative expenses % of net sales 6.8 % 8.0 % 10.0 % 10.4 %
 

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

           
Fiscal Quarters Ended Fiscal Years Ended
February 3, 2017       January 29, 2016 February 3, 2017       January 29, 2016
(14-weeks) (13-weeks) (53-weeks) (52-weeks)
Adjusted EBITDA:
Net loss $ (304,938 ) $ (6,813 ) $ (352,471 ) $ (26,309 )
Income tax (benefit) expense (69,872 ) 10,971 (97,829 ) (10,191 )
Interest expense 14,159 13,704 54,797 43,927
Amortization and depreciation expense 46,465 34,066 101,606 81,127
Loss on impairment 354,432   20,200   354,862   20,200  
EBITDA 40,246 72,128 60,965 108,754
Loss on servicing right 22,323 22,323
Gain on debt extinguishment (3,456 ) (3,456 )
Stock-based compensation expense 1,318 1,099 4,946 4,106
Acquisition transaction costs 8,342
Integration costs 1,669 2,635 5,590 5,607
Lease termination costs 1,122
Other (1,668 ) 529   496   2,894  
Adjusted EBITDA $ 60,432   $ 76,391   $ 90,864   $ 130,825  
 
Adjusted EBITDA % of net sales 8.1 % 10.4 % 4.3 % 7.6 %
 

The following table reconciles free cash flow from adjusted EBITDA:

           
Fiscal Quarters Ended Fiscal Years Ended
February 3, 2017       January 29, 2016 February 3, 2017       January 29, 2016
(14-weeks) (13-weeks) (53-weeks) (52-weeks)
Free cash flow:
Adjusted EBITDA $ 60,432 $ 76,391 $ 90,864 $ 130,825
Less:
Maintenance capital expenditures 2,824   6,681   19,224   18,257  
Free cash flow $ 57,608   $ 69,710   $ 71,640   $ 112,568  
 
Free cash flow % of net sales 7.7 % 9.4 % 3.4 % 6.5 %
 

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

     
Trailing Twelve Fiscal Months
February 3, 2017       January 29, 2016
(53-weeks) (52-weeks)
Adjusted EBITDA $ 90,864 $ 130,825
Expected cost savings (a) 18,002
Orchard pre-acquisition adjusted EBITDA 26,641
Non-cash charges 936
One-time charges 858
Other (b) 11,714   6,515  
Program agreement adjusted EBITDA 122,374   163,981  
Unrestricted subsidiary (c) 16,452
Incremental expected cost savings (a,d) 3,023    
Lender adjusted EBITDA $ 141,849   $ 163,981  
 
Leverage ratio debt:
Short-term debt
Current portion of term loan, net of discount $ 23,943 $ 24,877
Asset backed line of credit 21,154 20,790
Capital lease obligation and other 2,403   2,314  
Total short-term debt 47,500 47,981
Term loan, net of discount 443,488 487,560
Capital lease obligation 2,248   2,472  
Total long-term debt 445,736   490,032  
Total debt 493,236 538,013
Plus: Deferred charges 9,381 12,429
Less: Cash and cash equivalents (4,220 ) (2,949 )
Leverage ratio debt $ 498,397   $ 547,493  
 
Program agreement leverage ratio 4.07 3.34
Program agreement leverage ratio requirement 5.00 5.00
 
Lender leverage ratio 3.51 3.34
Lender leverage ratio requirement 4.50 5.00

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

The following table presents adjusted working capital and net
liquidities:

      February 3, 2017       January 29, 2016
Total current assets $ 381,278 $ 428,280
Total current liabilities 386,153   374,778  
Working capital $ (4,875 ) $ 53,502
Plus: Current income taxes payable (e) 34,059   34,583  
Adjusted working capital $ 29,184   $ 88,085  
 
Cash & cash equivalents $ 7,916 $ 11,870
Less: Third party credit card receivables (3,696 ) (8,921 )
Lender cash & cash equivalents 4,220 2,949
Plus: Asset backed line availability 100,237   115,392  
Program agreement net liquidity $ 104,457   $ 118,341  
Less: Unrestricted subsidiary cash (54 )  
Lender net liquidity $ 104,403   $ 118,341  
 
Program agreement and lender net liquidity requirement $ 40,000 $ 40,000

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

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