Q Earnings Call December 13, 2018

Transcription

1 Q Earnings Call December 13, 2018

2 Notice to Recipients This presentation 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 Inc. and its consolidated subsidiaries plans, strategies, prospects, and expectations regarding its business are forward-looking statements. These statements involve risks, uncertainties, and assumptions. Important factors that could cause actual results to be materially different from Bluestem Group Inc. and its consolidated subsidiaries expectations include the risks and uncertainties set forth in Risk Factors in the Bluestem Group Inc. and its consolidated subsidiaries report as of and for the years ended February 2, 2018 and February 3, 2017 (available at Accordingly, you should not place undue reliance on the forward-looking statements contained in this presentation. These forward-looking statements are made only as of the date of this presentation. Bluestem Group Inc. and its consolidated subsidiaries undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. This presentation also contains financial measures that are not prepared in accordance with U. S. Generally Accepted Accounting Principles ( GAAP ). Please refer to the Bluestem Group Inc. Consolidated Third Quarter Earnings Results press release ("2018 Q3 Earnings Release") (available at for the reconciliations of non-gaap financial measures to the most directly comparable GAAP measures. You should read the 2018 Q3 Earnings Release in addition to this presentation. Non-GAAP financial measures in this presentation include adjusted EBITDA, lender adjusted EBITDA, contribution margin, adjusted general and administrative expenses, leverage ratio debt, lender leverage ratio, lender net liquidity and adjusted free cash flow. 2

3 Q Bluestem Brands, Inc. Headlines Net sales of $407.8 million in Q increased 2.0% compared to Q Contribution margin of $59.4 million 1,2 in Q increased 150 bps as a percent of net sales compared to Q Adjusted EBITDA of $15.8 million 1 in Q increased $4.8 million compared to Q Compliant with lender covenants throughout and as of Q3 2018, net liquidity was $87.0 million and lender leverage ratio was 4.09x 1 Excludes impact of the fiscal 2018 adoption of new revenue recognition accounting standard (Topic 606) that resulted in a $6.8 million net increase of direct response advertising costs in fiscal Q3. Including the impact of Topic 606, contribution margin was $53.7 million and adjusted EBITDA was $9.0 million. See discussion of the impact of Topic 606 in the Bluestem Group 2018 Q3 Earnings Press Release. 2 Excludes favorable servicing rights valuation changes of $1.1 million in Q and $1.6 million in Q

4 Turnaround Strategy Update Reduce the cost of doing business Northstar Portfolio gross profit increased 70 bps compared to Q as a result of pricing and cost optimization efforts along with a mix shift into higher margin fashion products Eliminated unprofitable catalog marketing spend within the Orchard portfolio of brands Stabilize the Northstar credit portfolio Average merchant discount rate was 7.23% in Q compared to 9.51% in Q Mature vintage delinquency rates are stable and showing modest improvement to last year 2018 vintages continue to extend our trend of year-over-year delinquency improvements - the result of continued execution on our long-term credit turnaround plan Total portfolio 30+ day delinquency rate improved 50 bps from Q to 19.3% The APR charged to our Northstar customers increased from variable Prime % to a fixed rate of 29.99% in Q2 2018, increasing net credit revenue Orchard portfolio turnaround efforts Hired key business leaders in our e-commerce, marketing, and merchandising areas to support our transformation into a more digitally focused business Began implementation of our catalog marketing productivity initiatives across all brands Rolled out our digital expansion efforts across all brands 4

5 Bluestem Brands, Inc. Q3 Results 5 unaudited in 000's Q As Reported Q As Adjusted Q Net sales $ 407,777 $ 407,777 $ 399,798 Cost of goods sold 216, , ,003 Gross profit 191, , ,795 Sales and marketing expenses 1 110, , ,192 Net credit expense 2 26,697 27,844 31,194 General and administrative expenses 46,286 46,286 43,832 Amortization and depreciation not included in cost of goods sold 11,961 11,961 13,471 Interest expense, net 12,738 12,738 12,785 Loss before income taxes 1,2 (17,239) (11,578) (17,679) Income tax benefit 1 (2,882) (3,151) (5,318) Net loss 1,2 $ (14,357) $ (8,427) $ (12,361) Percentage of Net Sales: Gross profit rate 46.8% 46.8% 47.7% Sales and marketing expenses % 25.5% 26.8% Net credit expense (2) 6.5% 6.8% 7.8% Contribution margin 1,2 $ 53,746 $ 59,407 $ 52,409 As a percentage of net sales 1,2 13.2% 14.6% 13.1% Adjusted general and administrative expenses $ 44,515 $ 44,515 $ 42,420 As a percentage of net sales 10.9% 10.9% 10.6% Adjusted EBITDA 1 $ 8,974 $ 15,782 $ 10,979 As a percentage of net sales 1 2.2% 3.9% 2.7% Adjusted free cash flow $ (32,776) $ (32,776) $ (19,163) As a percentage of net sales (8.0)% (8.0)% (4.8)% 1 Q As Adjusted excludes the impact of adoption of Topic 606 accounting standard in fiscal 2018 that resulted in a net increase of direct response advertising costs, negatively impacting contribution margin and adjusted EBITDA by $6,808, partially offset by an income tax benefit of $ Excludes favorable servicing rights valuation changes of $1,147 in Q As Adjusted and $1,558 in Q Net sales increased 2.0% versus Q primarily due to marketing efforts targeting Northstar customers partially offset by decreased demand due to a reduction in catalog circulation for the Orchard Portfolio brands Gross profit rate decreased 90 bps due to increased promotional activity to drive demand and decreased enrollments in our Orchard loyalty programs, partially offset by Northstar pricing and optimization efforts Sales and marketing expense rate decreased 130 bps (1) due to decreased catalog circulation partially offset by increased investment in digital advertising Adjusted EBITDA as a percentage of net sales increased 120 bps (1)

6 Northstar Portfolio Q3 Performance Net sales increased 8.3% compared to Q Q As Reported Renewed marketing efforts targeted at inactive Northstar customers to activate or reactivate their credit accounts Maintained efforts to build out external partner relationships to acquire new customers Continued re-engaged marketing efforts under our Gettington brand Adjusted for Topic 606 adjustments and servicing rights valuation adjustments: Q As Adjusted Q unaudited in 000's Net sales $ 227,549 $ 227,549 $ 210,115 Net sales change YOY 8.3% 8.3% (3.8)% Gross profit % 43.8% 43.8% 43.1% Sales and marketing expense as a % of net sales % 14.0% 14.0% Net selling margin % % 29.8% 29.1% Net credit expense as a % of net sales % 12.2% 15.1% Contribution margin as a % of net sales 1,2 16.5% 17.6% 14.0% Revolving new credit accounts FreshStart new credit accounts Revolving active accounts 1,550 1,550 1,500 Net selling margin increased 70 bps primarily due to pricing and cost optimization efforts and a favorable sales mix shift toward higher margin fashion items and private label electronics Sales and marketing expense as a percentage of net sales was flat compared to Q Net credit expense as a percentage of net sales decreased 290 bps compared to Q due to lower collection costs and lower merchant discount rate Contribution margin improved 360 bps 1 Q As Adjusted excludes impact of adoption of Topic 606 accounting standard in fiscal 2018 that resulted in a net increase of direct response advertising costs, negatively impacting contribution margin, net loss and adjusted EBITDA by $3,598 in Q Excludes favorable servicing rights valuation changes of $1,147 in Q As Adjusted and $1,558 in Q

7 SCUSA Portfolio Q3 Performance % of SCUSA average customer accounts receivable Q Q Risk Adjusted Margin Net credit revenue 29.4% 25.2% Net credit losses 22.8% 21.7% Servicing fee 2.0% 2.0% Cost of bank debt 4.9% 4.2% Risk Adjusted Margin excluding the merchant fee (0.3)% (2.7)% SCUSA average customer accounts receivable (in 000's) $ 1,321,345 $ 1,324, day delinquency rate 19.3% 19.8% Average merchant discount rate applied to Q3 credit originations 7.2% 9.5% While we continue to see signs of credit supply moderation by the top issuing banks, the performance of the SCUSA portfolio continues to be adversely impacted by the elevated supply of third party general purpose credit obligations in the market 2018 vintages continue to show improvements compared to prior years based on credit underwriting actions previously taken 2018 vintage delinquency rates trending 4-6% lower than the comparable 2017 vintage. This trend is expected to continue throughout 2018 as a result of continued tighter acquisition underwriting and rollout of new underwriting models The 30+ day delinquency rate is 50 bps lower than Q3 2017, demonstrating a stabilization in performance of the portfolio Risk Adjusted Margin before the merchant fee improved 240 bps from Q

8 Orchard Portfolio Q3 Performance Net sales decreased 8.6% compared to Q Q As Reported Implemented our catalog marketing productivity efforts which reduced catalog circulation Reduction in other revenues as a result of decreased enrollments in our loyalty programs Q As Adjusted Q unaudited in 000's Net sales $ 184,332 $ 184,332 $ 201,703 Net sales change YOY (8.6)% (8.6)% (7.8)% Gross profit % 50.4% 50.4% 52.3% Sales and marketing expense as a % of net sales % 39.9% 40.1% Contribution margin as a % of net sales 1 9.5% 10.5% 12.2% New gross customers Gross active customers 7,155 7,155 7,533 Gross profit as a percentage of net sales decreased 190 bps compared to Q due to continued lower enrollments in our loyalty program, inventory obsolescence due to sales trends and increased promotional discounts to drive demand Excluding the Topic 606 impact, sales and marketing expense as a percentage of net sales decreased 20 bps compared to Q due to decreased catalog circulation, partially offset by increased investment in digital advertising. 8 1 Q excludes impact of adoption of Topic 606 accounting standard in fiscal 2018 that resulted in a net increase of direct response advertising costs, negatively impacting contribution margin, net loss and adjusted EBITDA by $1,716 in Q

9 Selected Balance Sheet and Covenant Information (Bluestem Brands, Inc.) unaudited in 000's, except Inventory Turnover & Lender Leverage Ratio Q Q Merchandise inventories $ 255,085 $ 234,856 Inventory Turnover Leverage Ratio Net Debt $ 484,727 $ 504,057 Lender Leverage Ratio Lender Leverage Ratio required covenant amount < 4.50 < 4.50 Lender Net Liquidity $ 86,982 $ 70,476 Lender Net Liquidity required covenant amount > $ 40,000 > $ 40,000 Merchandise inventories were up $20.2 million or 8.6% compared to Q Earlier build up in Northstar holiday related inventory in Q3 caused inventory turnover to decrease 0.8 turns to 2.5x in Q compared to Q In compliance with all covenants throughout and at the end of Q Lender leverage ratio of 4.09x reflects LTM Q Lender Adjusted EBITDA of $118.7 million and Leverage Ratio Net Debt of $484.7 million Lender net liquidity of $87.0 million reflects $3.8 million of cash and cash equivalents and $83.2 million of availability under our inventory asset based line of credit 9

10 10 APPENDIX

11 Selected Information (Bluestem Group - parent company only) unaudited in 000's Q Q Cash and cash equivalents $ 120,727 $ 119,123 Net commercial real estate investments 32,808 33,836 PayCheck Direct accounts receivables, net 7,009 unaudited in 000's Q Q Dividends paid year-to-date $ $ 80,201 11

12 Q3 Adjusted EBITDA (Bluestem Brands, Inc.) unaudited in 000's Q Q Net loss $ (14,357) $ (10,803) Income tax expense (benefit) (2,882) (5,318) Interest expense 12,743 12,787 Amortization and depreciation expense 12,846 14,459 Gain on servicing right (1,147) (1,558) Stock-based compensation expense Restructuring costs (207) Class action legal settlement 1,200 Other (27) 1,348 Adjusted EBITDA $ 8,974 $ 10,979 Adjusted EBITDA % of net sales 2.2% 2.7% Impact of adoption of Topic 606: Addback: Net increase of direct response advertising costs 6,808 Adjusted EBITDA, excluding impact of Topic 606 $ 15,782 $ 10,979 Adjusted EBITDA, excluding impact of Topic 606, % of net sales 3.9% 2.7% 12

13 Lender Adjusted EBITDA and Leverage Ratios (Bluestem Brands, Inc.) Trailing Twelve Months unaudited in 000's Q Q Adjusted EBITDA $ 82,468 $ 98,257 Expected cost savings (a) 17,241 18,281 Non-cash and one-time charges (103) (1,245) Acceleration of advertising expense due to adoption of Topic 606 (b) 9,249 Other (c) 9,168 6,728 Program agreement adjusted EBITDA 118, ,021 Unrestricted subsidiary (d) 527 7,655 Incremental expected cost savings (a, e) 105 1,531 Lender adjusted EBITDA $ 118,655 $ 131,207 Leverage ratio net debt: Asset backed line of credit $ 55,587 $ 48,346 Term loan, net of discount 427, ,935 Capital lease obligation 868 2,529 Total debt 483, ,810 Plus: Deferred charges 5,029 7,515 Less: Cash and cash equivalents (f) (3,913) (5,268) Leverage ratio net debt $ 484,727 $ 504,057 Program agreement leverage ratio 4.11X 4.13X Program agreement leverage ratio requirement 5.00X 5.00X Lender leverage ratio 4.09X 3.84X Lender leverage ratio requirement 4.50X 4.50X (a) Expected cost savings reflects the projected impact of savings in credit account repricing, print and paper, headcount reduction, and other operational improvements (b) The Company adopted Topic 606, which pertains to revenue recognition, on February 3, Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients (c) Other includes charges such as strategic investment charges, system implementation charges and executive recruiting charges (d) Bluestem Enterprises, Inc. ("BEI") is excluded from Bluestem's consolidated adjusted EBITDA calculation per the term loan agreement (e) Incremental expected cost savings above program agreement threshold limitations are able to be included in lender adjusted EBITDA (f) Excludes third party credit card receivables 13

14 Q3 General Administrative Expenses and CapEx (Bluestem Brands, Inc.) unaudited in 000's Q Q Compensation and benefits $ 30,812 $ 28,571 Professional fees and contract labor 5,841 7,135 Rent and occupancy costs 7,139 7,069 Other 2,494 1,057 Total general and administrative expenses $ 46,286 $ 43,832 Less: Stock-based compensation expense (598) (271) Restructuring costs 207 Class action legal settlement (1,200) Other 27 (1,348) Adjusted general and administrative expenses $ 44,515 $ 42,420 Adjusted G&A as a % of net sales 10.9% 10.6% Capital Expenditures: Growth $ 2,237 $ 3,335 Maintenance $ 3,071 $ 2,436 Adjusted G&A expenses increased $2.1 million primarily due to higher self-insured medical claims and higher severance payments 14

15 Portfolio Contribution Margin Trends (Bluestem Brands, Inc.) Northstar Portfolio Q Q Q Q Q Net sales in 000's $ 210,115 $ 399,009 $ 183,006 $ 224,496 $ 227,549 Gross profit % 43.1% 42.9% 43.9% 44.0% 43.8% Sales and marketing expense as a % of net sales* 14.0% 11.5% 13.9% 14.5% 14.0% Net credit expense as a % of net sales 14.3% 14.4% 13.7% 12.9% 11.7% Contribution margin as a % of net sales* 14.8% 17.1% 16.3% 16.6% 18.1% Orchard Portfolio Net sales in 000's $ 201,703 $ 207,739 $ 208,066 $ 194,489 $ 184,332 Gross profit % 52.3% 48.0% 52.6% 51.5% 50.4% Sales and marketing expense as a % of net sales* 40.1% 37.2% 43.5% 38.3% 39.9% Contribution margin as a % of net sales* 12.2% 10.7% 9.1% 13.2% 10.5% *To provide comparable information, fiscal 2018 excludes the impact of a $13.3 million increase in Q1, a $10.8 million decrease in Q2, and a $6.8 million increase in Q3 in direct response advertising costs resulting from the adoption new accounting standard (Topic 606) 15

16 Stockholders Equity Table (Bluestem Group Inc.) November 2, 2018 unaudited in 000's Series A Convertible* Common Stock 2018 Restricted Stock Unit Plan 2014 Equity Incentive Plan Stock Common Stock Warrants Total Convertible, Common, Incentive Stock & Warrants Total outstanding stock 1, ,016 10, , ,017 Stock available for grant 8,305 21,851 30,156 Total stock outstanding and available for grant 1, ,016 18,797 21,880 9, ,173 * On an as converted common stock basis 16

17 Large National Banks Show Continued Signs of Moderation in their Subprime Credit Card Portfolios Subprime Credit Card Receivables of Top-7 Banks 1 ($ Billions) 1 Largest seven credit card issuing banks: Capital One, Chase, Citi, Synchrony, Bank of America, Discover, Wells Fargo Amount of credit cards receivables to subprime consumers - defined as <660 FICO score 17 Source: Regulatory filings

18 Impact of Adoption of Topic 606 Revenue Recognition Accounting Standard Bluestem Brands, Inc. As reported 13-Weeks Ended November 2, 2018 % of net sales Topic 606 Adjustments Balances without Adoption of Topic 606 % of net sales Total net sales and revenue $ 407, % $ $ 407, % Costs and expenses Cost of goods sold 216, % 216, % Sales and marketing expenses 110, % (6,808) 103, % Net credit expense 26, % 26, % General and administrative expenses 46, % 46, % Amortization and depreciation not included in cost of goods sold 11, % 11, % Total costs and expenses 412, % (6,808) 405, % Operating loss (4,501) (1.1)% 6,808 2, % Interest expense, net 12, % 12, % Loss before income taxes (17,239) (4.2)% 6,808 (10,431) (2.6)% Income tax benefit (2,882) (0.7)% (269) (3,151) (0.8)% Net loss $ (14,357) (3.5)% $ 7,077 $ (7,280) (1.8)% 18

19 Impact of Adoption of Topic 606 Revenue Recognition Accounting Standard Bluestem Brands, Inc. As reported 39-Weeks Ended November 2, 2018 % of net sales Topic 606 Adjustments Balances without Adoption of Topic 606 % of net sales Total net sales and revenue $ 1,211, % $ $ 1,211, % Costs and expenses Cost of goods sold 632, % 632, % Sales and marketing expenses 335, % (9,249) 326, % Net credit expense 80, % 80, % General and administrative expenses 137, % 137, % Amortization and depreciation not included in cost of goods sold 36, % 36, % Total costs and expenses 1,222, % (9,249) 1,213, % Operating loss (11,628) (1.0)% 9,249 (2,379) (0.2)% Interest expense, net 37, % 37, % Loss before income taxes (49,481) (4.1)% 9,249 (40,232) (3.3)% Income tax benefit (7,336) (0.6)% 1,383 (5,953) (0.5)% Net loss $ (42,145) (3.5)% $ 7,866 $ (34,279) (2.8)% 19

20 Notice to Recipients Basis of Presentation Please refer to the Bluestem Group Inc. Q Press Release (available at for a description of the basis of presentation Definition of terms Maintenance capital expenditures represents capital expenditures related to maintaining existing capital assets Growth capital expenditures represents capital expenditures related to capital needs for continued growth Inventory turnover represents the rate at which inventory turns on an annual basis calculated by averaging the monthly inventory balances and dividing by the total cost of sales for the period 20