Q Earnings Call. April 26, 2018

Transcription

1 Q Earnings Call April 26, 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 Fourth Quarter Earnings Results press release ("2017 Q4 Earnings Release") (available at for the reconciliations of non-gaap financial measures to the most directly comparable GAAP measures. You should read the 2017 Q4 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, comparative sales excluding exited businesses, lender net liquidity and adjusted free cash flow. 2

3 Turnaround Strategy Update Reduce the cost of doing business Gross profit improved 230 bps compared to Q as a result of pricing and cost optimization efforts Net credit expense ratio improved 240 bps compared to Q primarily on lower servicing right losses and lower credit operating expenses Exit non-core businesses Liquidated Solutions in Q4 2016, LinenSource in Q and Drapers & Damon's retail stores in Q PayCheck Direct receivables monetizing as expected Stabilize the credit portfolio through continued underwriting restraint Mature vintage delinquency rates are stable and showing small improvement to last year 2017 vintages continue to demonstrate improved year over year delinquency levels 3

4 Q4 Bluestem Brands Headlines Net sales of $621.3 million in Q4 2017, decreased 6.9% compared to Q adjusted net sales* Adjusted EBITDA was $54.5 million in Q4 2017, a decrease of $6.0 million compared to Q4 2016, an improvement of 70 bps as a percent of net sales Merchandise inventories were $194.7 million as of Q4 2017, reduction of $35.3 million or 15.3% compared to Q Lender net liquidity was $97.1 million as of Q In compliance with all covenants throughout and as of Q * Excludes net sales for exited businesses (PayCheck Direct, Solutions, Draper's & Damon's retail stores and LinenSource) and the additional fiscal week (Q contains 14 weeks due to an additional week in our 2016 fiscal calendar compared to Q with 13 weeks). Year-over-year changes are estimated using net sales for the 13 weeks ended February 2, 2018 and February 3, 2017, respectively.

5 Bluestem Brands Q4 Results 5 unaudited in 000's Q Q Net sales $ 621,341 $ 750,327 Cost of goods sold 340, ,014 Gross profit 281, ,313 Sales and marketing expenses 127, ,078 Net credit expense 57,040 86,701 General and administrative expenses 49,836 51,930 Amortization and depreciation not included in cost of goods sold 15,284 45,297 Loss on impairment 191, ,432 Gain on debt extinguishment (3,456) Interest expense, net 12,291 14,141 Loss before income taxes (172,447) (374,810) Income tax benefit (12,685) (69,872) Net loss $ (159,762) $ (304,938) Margins and Expenses as a Percentage of Net Sales: Gross profit rate 45.3% 43.0 % Sales and marketing expenses 20.5% 19.7 % Net credit expense 9.2% 11.6 % Contribution margin $ 96,883 $ 87,534 As a percentage of net sales 15.6% 11.7 % Adjusted general and administrative expenses $ 48,091 $ 50,738 As a percentage of net sales 7.7% 6.8 % Adjusted EBITDA $ 54,464 $ 60,432 As a percentage of net sales 8.8% 8.1 % Adjusted free cash flow $ 42,887 $ 58,687 As a percentage of net sales 6.9% 7.8 % Net sales decreased 17.2% yearover-year, primarily due to exited businesses and one less fiscal week in Q Gross profit rate improved by 230 bps due to favorable product costs Sales and marketing expense rate increased 80 bps due to decreased response rates and a non-recurring benefit from a vendor contract in Q Net credit expense rate improved 20 bps due to lower credit operating expense excluding the loss on servicing rights Amortization decreased primarily due to intangibles impairments Intangible impairment charge recorded in Q and Q primarily due to the decline in Orchard and Northstar performance, respectively Adjusted EBITDA improved 70 bps as a percent of net sales

6 Northstar Portfolio Q4 Performance 6 unaudited in 000's Q Q Net sales $ 399,009 $ 450,006 Net sales decline YOY (11.3)% (0.5)% Gross profit % 42.9 % 39.6 % Sales and marketing expense as a % of net sales 11.5 % 11.3 % Net selling margin % 31.4 % 28.3 % Net credit expense as a % of net sales 14.4 % 18.1 % Contribution margin as a % of net sales 17.1 % 10.3 % Revolving new credit accounts Freshstart new credit accounts Revolving active accounts 1,465 1,590 Net sales decreased 11.3% compared to Q On an adjusted basis*, net sales decreased 7.3% or $31.6 million compared to Q4 2016, due to discontinued television advertising and tighter acquisition underwriting strategies to improve credit performance Net selling margin increased 310 bps compared to Q We continue to closely manage our marketing investments in light of our tighter credit underwriting standards Gross profit as a percentage of net sales increased 330 bps primarily due to pricing and cost optimization efforts, lower product returns and lower inventory obsolescence Sales and marketing expenses as a percentage of net sales remained roughly flat Contribution margin as a percentage of net sales improved 680 bps compared to Q Adjusted for loss on servicing right contribution margin as a percentage of net sales was 18.2%, a 290 bps improvement compared to Q Adjusted for loss on servicing right net credit expense as a percentage of net sales was 13.2%, a decline of 10 bps compared to Q * Excludes net sales for exited business (PayCheck Direct) and the additional fiscal week (Q contains 14 weeks due to an additional week in our 2016 fiscal calendar compared to Q with 13 weeks). Year-over-year changes are estimated using net sales for the 13 weeks ended February 2, 2018 and February 3, 2017, respectively.

7 SCUSA Portfolio Performance % of SCUSA average customer accounts receivable Q Q Risk Adjusted Margin Net credit revenue 25.1 % 25.0 % Net credit losses 21.4 % 20.7 % Servicing fee 2.0 % 2.0 % Cost of bank debt 4.4 % 3.7 % Risk Adjusted Margin before the merchant fee (2.7)% (1.5)% Merchant fee 11.9 % 11.6 % Risk Adjusted Margin after the merchant fee 9.1 % 10.1 % SCUSA average customer accounts receivable (in 000's) $ 1,417,503 $ 1,431, day delinquency rate 16.3 % 16.1 % Overall performance of the SCUSA portfolio continues to be negatively impacted by the increased supply of third party general purpose credit and increased general purpose obligations 2017 vintages continue to show improvements compared to prior years based on credit underwriting actions taken 2017 vintage delinquency rates trending 5-10% lower than the 2016 vintage. This trend is expected to continue into 2018 as a result of continued tighter acquisition underwriting and rollout of new underwriting models The 30+ day delinquency rate is 20 bps higher than Q but similar to Q demonstrating a stabilization in performance Risk Adjusted Margin before the merchant fee decreased 120 bps from Q Net credit losses increased 70 bps from Q due to higher portfolio delinquency rates throughout 2017 Cost of bank debt increased 70 bps from Q due to variable market interest rates increasing from Q

8 Orchard Portfolio Q4 Performance unaudited in 000's Q Q Net sales $ 207,739 $ 250,155 Net sales (decline) growth YOY (17.0)% 4.5% Gross profit % 48.0 % 49.7% Sales and marketing expense as a % of net sales 37.2 % 36.1% Contribution margin as a % of net sales 10.7 % 13.6% New gross customers Gross active customers 7,374 7,498 Net sales decreased 17.0% compared to Q On an adjusted basis*, net sales decreased 5.5% or $12.2 million compared to Q as customers were less responsive to our promotional and marketing offers Gross profit as a percentage of net sales decreased 170 bps compared to Q primarily due to higher promotional discounts to drive demand and move excess merchandise inventories, increased shipping and fulfillment expenses, partially offset by lower inventory obsolescence costs Contribution margin as a percentage of net sales decreased 290 bps compared to Q due to lower gross margin and lower response rates to catalog marketing 8 * Excludes net sales for exited businesses (Solutions, Draper's & Damon's retail stores and LinenSource) and the additional fiscal week (Q contains 14 weeks due to an additional week in our 2016 fiscal calendar compared to Q with 13 weeks). Year-over-year changes are estimated using net sales for the 13 weeks ended February 2, 2018 and February 3, 2017, respectively.

9 Selected Balance Sheet and Covenant Compliance Information unaudited in 000's, except Inventory Turnover & Lender Leverage Ratio Q Q Merchandise inventories $ 194,693 $ 229,970 - Inventory Turnover Lender Leverage Ratio Lender Leverage Ratio required covenant amount < 4.50 < 4.75 Leverage Ratio Net Debt $ 448,695 $ 498,397 Lender Net Liquidity $ 97,092 $ 104,403 - Lender Net Liquidity required covenant amount < $ 40,000 < $ 40,000 Merchandise inventory was down $35.3 million or 15.3% compared to Q Initiative to optimize merchandise inventory taking hold Northstar dropship percent increased to 36.8% in Q compared to 36.3% in Q Inventory turnover of 3.2 in Q improved by 0.2 turns compared to Q Bluestem Brands was in compliance with all covenants throughout and at the end of Q Lender leverage ratio of 3.67x compared to the lender covenant requirement of 4.50x; reflects LTM Q Lender Adjusted EBITDA of $122.2 million and Leverage Ratio Net Debt of $448.7 million Lender net liquidity of $97.1 million compared to the covenant requirement of $40.0 million; reflects $4.7 million of cash and cash equivalents and $92.4 million of revolving credit line availability 9

10 10 APPENDIX

11 Bluestem Group Selected Information (Parent company only) unaudited in 000's Q Q Cash and cash equivalents $ 123,398 $ 212,942 Net commercial real estate investments * 32,101 22,954 PayCheck Direct accounts receivables, net 1,733 * Includes investment in Irvine Distribution Center of $25.1 million leased to Bluestem Brands in September 2017 unaudited in 000's Q Q Dividends paid year-to-date $ 80,201 $ 11

12 Bluestem Brands, Inc. Q4 Adjusted EBITDA unaudited in 000's Q Q Net loss $ (159,762) $ (304,938) Income tax benefit (12,685) (69,872) Interest expense, net 12,351 14,159 Amortization and depreciation expense 16,263 46,465 Loss on impairment 191, ,432 Loss on servicing right 4,633 22,323 Gain on debt extinguishment (3,456) Stock-based compensation expense 854 1,318 Integration costs 1,669 Restructuring costs 175 Orchard Portfolio segmentation and positioning research 168 Other 548 (1,668) Adjusted EBITDA $ 54,464 $ 60,432 Adjusted EBITDA as a % of net sales 8.8% 8.1% 12

13 Bluestem Brands, Inc. Q4 General Administrative Expenses unaudited in 000's Q Q Compensation and benefits $ 31,801 $ 33,223 Professional fees and contract labor 6,884 8,317 Rent and occupancy costs 7,443 7,753 Other 3,708 2,637 Total general and administrative expenses $ 49,836 $ 51,930 Less: Stock-based compensation expense 854 1,318 Integration costs 1,669 Restructuring costs 175 Orchard Portfolio segmentation & positioning research 168 Other 548 (1,795) Adjusted general and administrative expenses $ 48,091 $ 50,738 Adjusted G&A as a % of net sales 7.7% 6.8% Capital Expenditures: Growth $ 3,077 $ 4,427 Maintenance $ 2,316 $ 2,824 Adjusted G&A expenses decreased $2.6 million primarily due to the 2017 reduction in force partially offset by increased bonus compensation compared to Q Q growth capex decreased to $3.1 million compared to $4.4 million in Q due to the inclusion of capitalized headquarter move expenses in

14 Portfolio Contribution Margin Trends Northstar Portfolio Q Q Q Q Q Net sales in 000's $ 450,006 $ 187,046 $ 221,056 $ 210,115 $ 399,009 Gross profit % 39.6% 42.3% 42.9% 43.1% 42.9% Sales and marketing expense as a % of net sales 11.3% 15.3% 15.5% 14.0% 11.5% Net credit expense as a % of net sales 18.1% 13.9% 13.2% 14.3% 14.4% Contribution margin as a % of net sales 10.3% 13.1% 14.1% 14.8% 17.1% Orchard Portfolio Q Q Q Q Q Net sales in 000's $ 250,155 $ 245,802 $ 204,903 $ 201,703 $ 207,739 Gross profit % 49.7% 52.6% 52.5% 52.3% 48.0% Sales and marketing expense as a % of net sales 36.1% 39.4% 36.6% 40.1% 37.2% Contribution margin as a % of net sales 13.6% 13.2% 15.9% 12.2% 10.7% 14

15 Bluestem Brands Full Year Results unaudited in 000's FISCAL 2017 FISCAL 2016 Net sales $ 1,887,655 $ 2,092,030 Cost of goods sold 1,001,596 1,130,352 Gross profit 886, ,678 Sales and marketing expenses 470, ,380 Net credit expense 148, ,420 General and administrative expenses 213, ,859 Amortization and depreciation not included in cost of goods sold 58,081 97,135 Loss on impairment 192, ,862 Gain on debt extinguishment (3,456) Interest expense, net 50,692 54,778 Loss before income taxes (247,645) (450,300) Income tax benefit (39,859) (97,829) Net loss $ (207,786) $ (352,471) Margins and Expenses as a Percentage of Net Sales: Gross profit rate 46.9% 46.0 % Sales and marketing expenses 25.0% 25.9 % Net credit expense 7.9% 7.0 % Contribution margin $ 266,294 $ 272,878 As a percentage of net sales 14.1% 13.0 % Adjusted general and administrative expenses $ 188,068 $ 209,335 As a percentage of net sales 10.0% 10.0 % Adjusted EBITDA $ 92,294 $ 90,864 As a percentage of net sales 4.9% 4.3 % Adjusted free cash flow $ 40,836 $ 62,718 As a percentage of net sales 2.2% 3.0 % 15

16 Bluestem Group Inc. Stockholders Equity Table February 2, 2018 Series A Convertible* Common Stock 2014 Equity Incentive Plan Stock Common Stock Warrants Total Convertible, Common, Incentive Stock & Warrants unaudited in 000's Total outstanding stock 1, ,187 10,345 9, ,012 Stock available for grant 12,364 12,364 Total stock outstanding and available for grant 1, ,187 22,709 9, ,376 * On an as converted common stock basis 16

17 Subprime Credit Supply Continues to Grow 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 Notice to Recipients Basis of Presentation Please refer to the Bluestem Group Inc. s 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 18