Q Earnings Call and Investor Meeting September 8, 2016

Transcription

1 Q Earnings Call and Investor Meeting September 8, 2016

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 January 29, 2016 and January 30, 2015 as updated by its subsequent periodic reports (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 generally accepted accounting principles ( GAAP ). Please refer to the appendix for reconciliations of non-gaap financial measures to the most directly comparable GAAP measures. Non-GAAP financial measures in this presentation include adjusted EBITDA, lender adjusted EBITDA, contribution margin, adjusted general and administrative expenses and free cash flow. 2

3 Strategic Vision Bluestem Group is a consumer-direct, multi-brand retail platform company that selectively deploys credit as a differentiator Core competency around the intersection of consumer-direct retail marketing and credit Commitment to asset-lite business model Focused on the following strategic levers to execute this vision: Northstar Portfolio sub-prime credit-led (e.g., Fingerhut, Gettington) Receivables funding diversification Operational excellence Orchard Portfolio (e.g., Haband, Blair) Integration and synergies execution Improved marketing to drive sales Select applications of credit to enhance sales Deployment of Bluestem Group holding company cash 3 Targeted M&A (new categories, customers, channels) to augment existing retail brand platform through addition of asset-lite consumer-direct retail brands that are not driven by subprime credit Business evolution focused on core direct retail strengths, consumer credit capabilities and asset-lite model to position Bluestem Group for uplisting / IPO

4 Q2 Headlines Bluestem Group consolidated diluted loss per share of $0.09 Bluestem Brands net sales of $468.1 million for the quarter Northstar Portfolio sales down 9.6% Orchard Portfolio sales down approximately 4.5% compared to Q on an adjusted basis * PayCheck Direct sales up 63.8% Bluestem Brands Adjusted EBITDA of $27.7 million compared to $20.5 million in Q ** Bluestem Brands Free Cash Flow of $23.2 million compared to $16.4 million in Q ** S&P reaffirms Bluestem Brands B+ rating and removal from negative credit watch/moody s reaffirms B rating *Orchard's net sales for Q contains 14 weeks instead of 13 weeks due to differences between Orchard s pre-acquisition fiscal calendar and Bluestem's fiscal calendar. The year-over-year 4.5% decrease is estimated assuming Orchard net sales for the 13 weeks ended July 29, 2016 versus the 13 weeks ended July 31, The decrease based on 14 weeks in Q compared to 13 weeks Q is 11.0%. 4 **Adjusted EBITDA and Free Cash Flow for Q contains Orchard Brands Corporation beginning from July 10, 2015, the date of Bluestem's acquisition of Orchard Brands Corporation

5 Business Headwinds Sales 1. Increased supply of subprime credit continues to impact response rates of Northstar new customer prospect marketing and existing customer re-buy rates Mitigating Actions 1. Fingerhut price testing to optimize gross profit dollar contribution 2. Marketing spend optimization through continual model updates 2. Assortment misses in the Orchard Portfolio are impacting demand Mitigating Actions 1. Addressing assortment gaps 2. Refining Orchard s seasonal assortment planning process 3. Gettington repositioning continues to impact year-over-year growth of the Northstar Portfolio Mitigating Actions 1. Working aggressively to grow the off-price assortment and customer awareness of Gettington s new model 5

6 Business Headwinds (continued) Sales (continued) 4. As planned, our contact stream optimization testing will continue to negatively impact growth of the Orchard Portfolio Mitigating Actions None stay the course 5. Actions taken over the last ~18 months to tighten our credit underwriting standards are negatively impacting sales Mitigating Actions Continually evaluating decisioning criteria and credit/response models to mitigate sales impact without compromising risk tolerance 6

7 Business Headwinds (continued) Credit Portfolio 1. Charge-off rates are up year-over-year, driven by: Denominator effect of sales softness Increased level of bad and no phone rates due to additional limitations on dialing the July 2015 FCC guidance compounded challenges with bad and no phone rates Increased credit availability decreasing Northstar Portfolio payment priority Mitigating Actions Tightened new account underwriting including reduced mailings to riskiest prospect segments, Raised FICO floor for Fingerhut Advantage accounts Moderated credit line increase amounts Implemented new ability to contact and propensity to pay collection models 7

8 Expense Management/Synergy Realization In addition to the actions taken to improve sales and reduce credit risk, we ve undertaken (or realized synergies) from the following: (all numbers quoted are estimated annualized impact) Reduced overhead expenses by $11.9 million Reduced capital expenditures by $14.1 million Negotiated new enterprise print/paper contract driving $8.6 million in savings Renegotiated contracts in credit operations driving $6.4 million in savings 8

9 Bluestem Group Q2 Results unaudited in 000's, except per share amounts Q Q Total net sales and revenue $ 468,159 $ 304,266 Total costs and expenses 464, ,439 Gain from derivatives in our own equity 411 Operating profit (loss) 3,363 (5,584) Interest expense, net 13,682 8,754 Loss before income taxes (10,319) (14,338) Income tax expense (benefit) 967 (34,142) Net (loss) income $ (11,286) $ 19,804 Adjusted EBITDA $ 25,773 $ 17,763 Consolidated Q pre-tax loss includes: $8.9 million loss from Bluestem Brands versus $13.5 million loss in Q $1.4 million loss from Capmark activity versus $0.8 million loss in Q Basic and Diluted Income Per Share - Common Stockholders Basic and diluted loss per share $ (0.09) $ 0.14 Basic weighted average shares outstanding 131, ,141 Diluted weighted average shares outstanding 131, ,562 There was no gain/loss from derivatives in our own equity in Q as the exercise price of the warrants became fixed during the quarter at $4.10 Income tax expense of $1.0 million primarily reflects Q state tax expense Year-over-year decrease in weighted average shares outstanding is primarily due to the buyback of 4.5 million shares for $12.5 million in cash during Q NOTE: Q includes Orchard Brands Corporation beginning from July 10, 2015, the date of Bluestem's acquisition of Orchard Brands Corporation

10 Bluestem Brands Q2 Results unaudited in 000's Q Q Net sales $ 468,102 $ 301,375 Cost of goods sold 242, ,705 Gross profit 225, ,670 Sales and marketing expenses 131,208 65,077 Net credit expense 18,644 9,809 General and administrative expenses 52,430 46,425 Amortization and depreciation not included in cost of goods sold 18,687 15,102 Interest expense, net 13,682 8,754 Loss before income taxes (8,910) (13,497) Income tax benefit (1,439) (399) Net loss $ (7,471) $ (13,098) Margins and Expenses as a Percentage of Net Sales: Gross profit rate 48.2% 43.7% Sales and marketing expenses 28.0% 21.6% Net credit expense 4.0% 3.3% Contribution margin $ 75,890 $ 56,784 As a percentage of net sales 16.2% 18.8% Adjusted general and administrative expenses $ 49,453 $ 36,916 As a percentage of net sales 10.6% 12.2% Adjusted EBITDA $ 27,686 $ 20,514 As a percentage of net sales 5.9% 6.8% Selected Financial Data: Maintenance capital expenditures $ 4,510 $ 4,130 Free cash flow $ 23,176 $ 16,384 As a percentage of net sales 5.0% 5.4% Net Sales Northstar Portfolio decreased 9.6% Orchard net sales of $226.5 million versus $47.9 million Gross profit rate increased by 450 bps due to the addition of Orchard Portfolio partially offset by a 40 bps decrease in Northstar Portfolio Sales and marketing expense rate increased by 640 bps due to the addition of Orchard Portfolio Northstar Portfolio flat Orchard Portfolio improved 220 bps Net credit expense increased 70 bps over Q primarily due to lower profit sharing on our serviced credit portfolio Adjusted G&A expenses decreased 160 bps is primarily due to lower incentive compensation Adjusted EBITDA was 5.9% of net sales, a decrease of 90 bps from Q due to lower Northstar Portfolio gross margin and higher credit expense due to the revolving portfolio performance 10

11 11 SEGMENT RESULTS

12 Northstar Portfolio Q2 Performance unaudited in 000's Q Q Net sales $ 222,656 $ 246,408 Net sales (decline) growth YOY (9.6)% 8.8% Gross margin % 41.6% 42.0% Advertising expense as a % of net sales 18.5% 18.5% Net credit expense as a % of net sales [see page 12] 7.2% 3.7% Contribution margin as a % of net sales 15.9% 19.8% Revolving new credit accounts Freshstart new credit accounts Revolving active accounts 1,645 1, Net sales decline of $23.8 million or 9.6% over Q2 2015: Increased credit supply in the marketplace continues to negatively impact catalog response rates, website visits and rebuy rates, resulting in lower year over year Fingerhut net sales down $11.4 million or 5.1% compared to Q While a slight improvement from the Q1 year over year performance, the decrease reflects the increase credit supply and the impacts of tighter credit underwriting Gettington net sales down $12.4 million or 56.1% due to brand repositioning and associated advertising pullback Revolving new credit accounts and Freshstart new credit accounts lower year over year due to the reduced application volume resulting from the impacts of the increased credit supply Contribution margin decreased by 390 bps over Q2 2015, reflecting: Net credit expense as a percentage of net sales increased 350 bps due primarily to portfolio performance driving lower profit sharing Gross margin rate decreased 40 bps, primarily due to Fingerhut's gross margin decreasing 200 bps as a result of preliminary pricing adjustments which we are monitoring to determine long term impact on sales demand and gross margin dollars and higher shipping expenses in the period

13 Northstar Portfolio Net Credit Expense unaudited in 000's Q Q Net credit expense: Finance charge and fee income $ 141 $ (202) Provision for doubtful accounts* 4,849 1,316 Credit management expenses 17,865 18,077 Portfolio profit sharing and servicing fee income (6,727) (9,987) Net credit expense $ 16,128 $ 9,204 Net credit expense as a % of net sales 7.2% 3.7% Net credit expense as a % of average accounts receivable** 4.7% 2.9% Revolving average customer accounts receivable $ 1,377,563 $ 1,252,998 *The provision for doubtful accounts includes $2.8 million related to the Q merchant discount **Annualized to 52 week periods for comparability Net credit expense as a percentage of average accounts receivable increased 180 bps over Q2 2015, reflecting the following: The increase in the provision for loan losses was primarily due to a $2.8 million merchant discount associated with the sale of receivables to SCUSA Credit operating costs improved 40 bps over last year due primarily to lower collections and customer service costs The decrease in portfolio profit sharing and servicing fee income is due to portfolio performance reducing the company s profit sharing income 13

14 SCUSA Portfolio Performance unaudited in 000's Q Q Risk Adjusted Margin Net revenue 27.7% 29.4% Net credit losses 20.4% 19.8% Servicing fee 2.0% 2.0% Cost of bank debt 3.5% 3.4% Risk Adjusted Margin before the merchant fee 1.8% 4.2% Merchant fee (0.8)% % Risk Adjusted Margin after the merchant fee 2.6% 4.2% SCUSA average customer accounts receivable 1,345,339 1,225, day delinquency rate as of % of revolving customer accounts receivable 17.7% 16.3% Portfolio performance has been negatively impacted by a number factors including lower sales and increased consumer obligations as a result of the increased credit availability and increased bad phone rates in the portfolio. See pages in the business update section for further details on credit performance 30+ day delinquency rate increased 140 bps over Q2 2015, primarily due to higher delinquency rates on our more mature, higher balance customers. The delinquency rate was also impacted by the lower sales volume, which caused 20 bps of the increase Risk Adjusted Margin before the merchant fee was 1.8%, down 240 bps from Q bps reduction in net finance charge and fee rate due to higher charge-offs of finance charges/fees and lower billed late fee yield Net principal losses of 19.9% a 50 bps increase from Q

15 Orchard Portfolio Q2 Performance unaudited in 000's Q Q2 2015* Net sales $ 226,516 $ 254,499 Net sales decline YOY (11.0)% 2.6% Gross margin % 54.5% 55.4% Advertising expense as a % of net sales 37.1% 39.3% Contribution margin as a % of net sales 17.4% 16.1% New gross customers Active customers 7,718 7,980 * 2015 includes Orchard activity for the 14 weeks ended July 31, 2015 Note: This table includes an additional week of activity in 2015 compared to Q due to Orchard Portfolio changing fiscal periods to align with Bluestem s effective with the acquisition on July 10, Net sales for the 13 weeks ended July 29, 2016 versus the 13 weeks ended July 31, 2015 decreased by 4.5% The 4.5% year-over year decrease reflects the impact of lower marketing spend as part of our contact stream optimization testing during the quarter, as well as a difficult environment for apparel retailers, that resulted in less demand in our new merchandise assortment Contribution margin rate improved 130 bps reflecting: Gross margin decreased by 90 bps primarily due to higher free shipping promotions and discounts Reduction in marketing spend improved sales and marketing leverage by 220 bps during the quarter compared to Q

16 PayCheck Direct Q2 Performance unaudited in 000's Q Q Net sales $ 12,177 $ 7,433 Net sales growth YOY 63.8% 88.6% Gross margin % 34.5% 33.7% Advertising expense as a % of net sales 24.9% 26.6% Net credit expense as a % of net sales 20.7% 8.1% Contribution margin as a % of net sales (11.1)% (1.1)% Eligible client employees 7,562 4,316 Net sales growth of 63.8% over Q reflects the year-over-year growth in eligible client employees: Merchandise orders of 24,529 were up 74.1% over Q Average order size was $516, down 3.6% over Q Contribution margin decreased 1,000 bps over Q2 2015: Gross margin increased 80 bps due to higher mark-up partially offset by higher shipping expenses as a result of merchandise mix shift Advertising expense improved 170 bps as a result of advertising efficiencies realized as client relationships mature Net credit expense increased 1,260 bps due to a higher provision for loan losses. We increased our allowance for loan losses to 15.6% of account receivables in the quarter, up from 11.6% in Q1 of This increase partially relates to higher expected losses associated with a small group of clients on-boarded last fall. We have since adjusted our purchase standards on these clients 16

17 Bluestem Brands Inc. Q2 General Administrative Expenses unaudited in 000's Q Q Compensation and benefits $ 33,140 $ 26,519 Professional fees 8,173 11,595 Rent and occupancy costs 7,746 4,292 Other 3,371 4,019 Total general and administrative expenses $ 52,430 $ 46,425 Less: Stock-based compensation expense 1, Acquisition transaction costs 6,530 Integration costs 1,197 Lease termination costs 1,122 Other Adjusted general and administrative expenses $ 49,453 $ 36,916 Adjusted G&A as a % of net sales 10.6% 12.2% G&A expenses improved by 160 bps over Q primarily driven by the reduction of incentive compensation due to performance Integration costs are comprised of employee retention, severance and non-capitalizable technology integration expenses related to the Orchard acquisition NOTE: Q excludes the Orchard Portfolio for the periods prior to July 10, 2015, the date acquired by Bluestem 17

18 Bluestem Brands Inc. Balance Sheet 18 unaudited in 000's Q Q Cash and cash equivalents $ 10,487 $ 11,870 Restricted cash 22,002 22,485 Customer accounts receivable, net 33,622 44,446 Merchandise inventories 253, ,579 Promotional material inventories 56,492 53,253 Prepaid expenses and other assets 28,155 32,647 Total current assets 404, ,280 Property and equipment, net 134, ,001 Intangible assets, net 441, ,551 Goodwill 367, ,481 Other assets 3,643 3,405 Total Assets $ 1,352,335 $ 1,384,718 Accounts payable $ 176,007 $ 180,601 Current income taxes payable 21,039 34,583 Accrued costs and other liabilities 100, ,613 Short-term debt 82,586 47,981 Total current liabilities 380, ,778 Long-term debt 477, ,032 Deferred income taxes 153, ,428 Other long-term liabilities 9,199 6,171 Total liabilities 1,020,423 1,025,409 Stockholders' equity: Additional paid-in capital 369, ,602 Retained earnings (36,934) (10,293) Accumulated other comprehensive income (756) Total stockholders' equity $ 331,912 $ 359,309 Total Liabilities and Stockholders Equity $ 1,352,335 $ 1,384,718 Selected Financial Data: Liquidity* $ 81,372 $ 117,875 Availability on inventory line of credit $ 77,924 $ 115,392 Inventory turnover of 2.5 in Q compared to 2.9 in Q2 2015; this decrease reflects higher Orchard inventory levels to drive better fill rates as well as the impact of softer sales Q growth capex was $7.8 million versus $4.7 million in Q2 2015; the year-over-year increase is due to tenant improvements in our Eden Prairie office space which were completed in May 2016 Q Liquidity of $81.4 million, versus covenant of $40 million; decrease from year-end reflects normal seasonal trends We entered into a interest rate swap during the quarter with a $75.0 million notional value; total notional value of interest rate swaps outstanding were $175.0 million as of July 29th, 2016 *In accordance with our lender agreements liquidity excludes $7.0 million and $8.9 million of third party credit card receivables as of Q and Q4 2015, respectively, which is classified as cash and cash equivalents

19 Bluestem Brands Subsidiary Covenant Compliance and Working Capital Trailing Twelve Months unaudited in 000's Q Q Adjusted EBITDA $ 134,767 $ 95,567 Expected cost savings 23,425 Orchard pre-acquisition AEBITDA 64,805 Non-cash charges 689 Other 7,110 2,831 Lender Adjusted EBITDA $ 165,991 $ 163,203 Lender Leverage Ratio Debt: Short-term Portion of Term Loan, net of discount $ 24,877 $ 25,040 Asset backed line of credit 55,095 4,695 Capital lease obligation 2,614 1,967 Total short-term debt 82,586 31,702 Term Loan, net of discount 475, ,541 Capital lease obligation 2,775 2,747 Total long-term debt 477, ,288 Total Debt 560, ,990 Less: Original issuance discount and deferred charges 11,132 13,695 Less: Cash and cash equivalents (3,448) (8,349) Lender Leverage Ratio Debt $ 568,118 $ 547,336 Lender Leverage Ratio Liquidity $ 81,372 $ 112,002 Availability on inventory line of credit $ 77,924 $ 103,652 Working Capital $ 24,516 $ 45,182 Lender Adjusted EBITDA is calculated in accordance with the terms of our term debt agreement: Orchard pre-acquisition EBITDA reflects lender agreement defined Orchard preacquisition adjusted EBITDA for the period August 1, 2014 through July 10, 2015 Expected costs savings reflected the proforma impact of cost synergies with headcount reductions already implemented and anticipated vendor savings Other includes charges such as, strategic investment charges, system implementation charges, executive recruiting and public company costs Q Leverage Ratio of 3.4, versus a term debt covenant of 4.75; term debt leverage ratio covenant reduces to 4.5 at the end of Q Working capital decreased $20.7 million over last year primarily due to $37.6 million of term debt payments and $42.4 million of capital expenditures, partially offset by $59.3 million of cash flow from operations (including short term borrowings) 19

20 Cash & Capmark Portfolio unaudited in 000's Q Q Cash and cash equivalents $ 178,501 $ 179,432 Net commercial real estate assets $ 55,267 $ 60,675 Cash collected from commercial real estate assets $ 5,667 $ 5,387 Gains (losses) Net gains on loans $ 72 $ 13 Net losses on investments and real estate (6) Equity in joint ventures and partnerships (27) (70) Total gains (losses) $ 45 $ (63) Net commercial real estate assets ended the quarter at $55.3 million Current expectations are for the majority of these assets to be liquidated over the next 12 months Subsequent to the second quarter Bluestem Group purchased term debt of Bluestem Brands with a par value of $18.3 million, at an average discount of 16.8%. Total holding company cash used $15.2 million 20

21 21 OTHER BUSINESS UPDATES

22 Orchard Portfolio Areas of Focus 1. Contact stream optimization (aka CSO ) 1. Rollout of new, integrated prospect database 2. Revitalize growth of Orchard s Moderate Plus brands 22

23 Contact Stream Optimization Overview: Goal: to determine the optimal level of marketing contact frequency for existing customers for each of the Orchard Portfolio brands, balancing top line demand and advertising expense for maximum contribution margin Orchard Portfolio has historically pursued a heavy mail plan with most brands mailing catalogs weekly or bi-weekly We are testing broadly across the Orchard portfolio brands with customer contact reductions ranging from 20% 60% These tests must be read over a 6 to 12 month period in order to understand the impact on customer rebuy behavior Advertising savings can then be redeployed for new customer acquisition or other earnings-enhancement purposes, including bottom-line margin enhancement 23

24 CSO early results are quite promising Brands with heaviest mail plans showing positive contribution margin results without need for further optimization Remaining brands are showing a wide range of impact to contribution margin indicating opportunities to create further-segmented contact strategies to improve marketing spend efficiency We will utilize learnings from early test results in our 2017 marketing plans As has been the case with our Fingerhut brand for many years, CSO testing in the Orchard Portfolio will evolve into an everyday test-andlearn discipline of continual contact optimization 24

25 Integrated Prospect Database Overview: Goal: Implement a new prospect database to manage prospect marketing across all Orchard Portfolio brands, replacing existing tools/processes silo d within each brand. Result will be more-efficient and more-effective prospect marketing for the portfolio as a whole. Expected to be ready for use in Q Will give us insight into contact history by brand and across brands Provide ability to link data across data sources and build improved response models Assist in rationalizing advertising investments across brands Expect to redeploy Orchard's new customer acquisition circulation toward attracting younger (Boomer/Sr. Boomer) audience Market research will help identify which brands are best-suited to penetrate the Boomer/Sr. Boomer market Goal to identify brands and styles that appeal to the younger boomer customer and revitalize new customer growth in the largest growing segment of prospects 25

26 Orchard Moderate Plus Brand Growth Overview: Orchard s Moderate Plus brands performance has not held up as well as that of Orchard s Value brands. We believe a significant opportunity exists to improve the Moderate Plus brands' performance by increasing differentiation from the Value brands and restoring a level of uniqueness to each brand Over the last few years, Orchard has homogenized the shopping experiences and brand identities of its brands Significant increase in cross-brand marketing has dilluted individual brand value propositions Sharing a common cart may be hurting the premium perception of the Moderate Plus brands Utilizing identical phone experiences (scripts, up-selling offers, etc) which may be offputting for the Moderate Plus brand customers We are fielding research to help us develop a strategy to better-differentiate the Moderate Plus brands from the Value brands across brand positioning, customer experience, and marketing and operational execution 26

27 Credit Portfolio Increased subprime credit supply, coupled with our tightening of underwriting standards, has softened our sales and slowed receivable growth General Purpose and PLCC Card Issuers re-entering space (e.g., CapitalOne, Synchrony, etc.) Industry subprime year-over-year new account originations up 26% in Q1 2016* Monthly purchase volume in subprime credit cards increased 10% in Q1 2016* We re starting to see some degradation in performance of mature vintages in recent months (e.g., 2012 and older vintages) Increasing supply and utilization of general purpose cards is adversely impacting our collection effectiveness via new incremental payment obligations which has resulted in Bluestem moving lower in the consumers payment hierarchy Elevated level of Bad Phones or No Phones in the portfolio continues to impact the volume of accounts placed on our collections dialer We have been proactive in our efforts to battle this challenging environment by tightening our underwriting standards, modifying credit line increase strategies and improving collection efforts through investments in phone hygiene * Source: American Bankers Association Credit Card Market Monitor August

28 Increased Credit Competition Largest banks have increased their lending to subprime customers $ billions Subprime Credit Card Receivables of Top-7 Banks 1 ($ Billions) $115 $110 In each of the past three years, due to seasonality, receivables declined from Q4 to Q2; magnitude of decline has gradually shrunk and has reversed direction in $105 $100 $95 $90 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 28 Source: Bank 10Q, 10K SEC filings

29 Current Portfolio Trends Delinquency trends have recently deteriorated compared to last year (July 30+ rate 140 bps higher than Q2 2015) and we are seeing higher roll-rates across the portfolio Vintage level 30+ delinquency rates have historically improved year over year as vintages mature, this trend has reversed in 2016 Increased credit supply is decreasing engagement with Fingerhut customers resulting in lower sales from our best customers resulting in higher delinquency levels Mature vintages (2011 and prior) which were originated under tighter underwriting and have lower delinquency rates constitute a smaller % of the portfolio year over year 29

30 Recent Underwriting Actions Taken We ve taken further action in underwriting in July and August to reduce risk and return new account vintage 30+ delinquency trends to 2015 levels. Actions taken include: New Account Solicitations: (1) Canceled highest risk mailings and reallocated advertising dollars to better risk segments, and (2) added a High FICO first-pay default overlay to reduce fraud Unsolicited Application Underwriting: Tightened model score cut-offs and credit line assignment strategies Overall: Increased minimum FICO threshold on new revolving credit accounts 40% 35% 30% 25% 20% 15% 10% 5% 0% New Account 30+ Delinquency % Months since Origination Feb-14 Feb-15 Feb-16 Note: 2015 vintage improvement compared to 2014 vintage resulted from underwriting changes in Q3 of

31 Northstar Portfolio Variable Operating Costs unaudited in 000's Q % of Sales Q % of Sales Net sales $ 222, % $ 246, % Product costs 107, % 120, % Shipping expense 17, % 17, % Fulfillment expense 4, % 4, % Cost of goods sold 129, % 142, % Catalog direct mail 23, % 26, % TV and digital marketing 14, % 14, % Order entry and customer service 2, % 3, % Premium (free gift with purchase) and other % 1, % Sales and marketing expenses $ 41, % $ 45, % Q % of AR* Q % of AR* Finance charge and fee income $ 141 % $ % Provision for doubtful accounts 4, % % Account acquisition 2, % 2, % Account servicing 9, % 8, % Collections 5, % 6, % Servicing fee income & portfolio profit sharing (6,727) (2.0)% (9,987) (3.2)% Net credit expense $ 16, % $ 9, % Revolving average customer accounts receivable $ 1,377,563 $ 1,252,998 The company evaluates its business at the contribution margin level, which is the profit generated by an incremental dollar of sales Variable costs driven entirely by sales volume include: Product costs Shipping expense Order entry and customer service Free gift with purchase Semi-variable costs (include some fixed, yet are primarily driven by sales) include: Fulfillment Catalog direct mail TV and digital marketing Variable costs that are driven by the volume of customer accounts receivable include: Account acquisition Account servicing Collections * Percentage represents annualized percentage of revolving average customer accounts receivable 31

32 32 APPENDIX

33 Bluestem Group Inc. Stockholders Equity Table July 29, 2016 unaudited in 000's Series A Convertible* Common Stock 2014 Equity Incentive Plan Stock Common Stock Warrants Stock Total Stock, Options & Warrants Total outstanding stock 1, ,327 18,397 9, ,204 Stock available for grant 5,173 5,173 Total stock outstanding and available for grant 1, ,327 23,570 9, ,377 * On an as converted to common stock basis 33

34 Brand Contribution Margin Trends Northstar Portfolio Q Q Q Q Q Net sales in 000's $ 246,408 $ 233,957 $ 452,218 $ 183,177 $ 222,656 Gross margin % 42.0% 41.5% 41.6% 44.4% 41.6% Advertising expense as a % of net sales 18.5% 19.2% 15.6% 20.8% 18.5% Net credit expense as a % of net sales 3.7% 5.7% 6.8% 8.7% 7.2% Contribution margin as a % of net sales 19.8% 16.7% 19.2% 14.9% 15.9% PayCheck Direct Q Q Q Q Q Net sales in 000's $ 7,433 $ 10,949 $ 23,958 $ 10,053 $ 12,177 Gross margin % 33.7% 30.2% 32.9% 36.1% 34.5% Advertising expense as a % of net sales 26.6% 35.5% 13.4% 31.6% 24.9% Net credit expense as a % of net sales 8.2% 17.2% 9.2% 12.2% 20.7% Contribution margin as a % of net sales (1.1)% (22.5)% 10.2% (7.7)% (11.1)% Orchard Portfolio* Q ** Q Q Q Q Net sales in 000's $ 254,499 $ 245,641 $ 238,647 $ 249,277 $ 226,516 Gross margin % 55.4% 56.1% 53.8% 55.1% 54.5% Advertising expense as a % of net sales 39.3% 38.0% 36.8% 38.1% 37.1% Contribution margin as a % of net sales 16.1% 18.0% 17.1% 17.1% 17.4% * Orchard Portfolio financial information conforms with Bluestem Brands, Inc. basis of presentation **Contains 14 weeks 34

35 Northstar Portfolio Variable Operating Costs unaudited in 000's Q Q Q Q Q Net sales $ 246,408 $ 233,957 $ 452,218 $ 183,177 $ 222,656 Product costs 120, , ,357 84, ,509 Shipping expense 17,935 15,980 32,493 12,970 17,748 Fulfillment expense 4,727 6,284 11,360 4,732 4,719 Cost of goods sold 142, , , , ,976 Catalog direct mail 26,106 24,183 44,403 22,495 23,452 TV and digital marketing 14,724 15,886 17,811 12,308 14,470 Order entry and customer service 3,550 4,065 7,478 2,943 2,790 Premium (free gift with purchase) and other 1, Sales and marketing expenses 45,512 44,849 70,475 38,095 41,201 Finance charge and fee income 474 (253) (1,400) (1,568) 141 Provision for doubtful accounts 640 1,584 18,270 5,017 4,849 Account acquisition 2,801 3,223 4,267 2,790 2,870 Account servicing 8,900 10,185 10,720 10,135 9,301 Collections 6,376 5,811 6,606 6,461 5,694 Servicing fee income & portfolio profit sharing (9,987) (7,295) (7,889) (6,883) (6,727) Net credit expense 9,204 13,255 30,574 15,952 16,128 Contribution Margin $ 48,895 $ 39,079 $ 86,958 $ 27,321 $ 35,352 35

36 Orchard Portfolio Variable Operating Costs unaudited in 000's Q2 2015* Q Q Q Q Net sales $ 254,499 $ 245,641 $ 238,647 $ 249,277 $ 226,516 Product costs 91,626 86,471 87,016 87,698 80,618 Shipping expense 14,463 13,741 15,393 15,164 13,955 Fulfillment expense 7,369 7,663 7,727 9,013 8,564 Cost of goods sold 113, , , , ,137 Catalog direct mail 79,028 75,434 68,842 74,561 64,842 Digital marketing 4,550 2,949 4,518 4,411 4,605 Order entry and customer service 7,619 7,078 6,592 7,498 6,949 Retail sales expense 3,645 3,027 3,233 3,420 3,267 Premium (free gift with purchase) and other 5,104 4,974 4,600 4,974 4,347 Sales and marketing expenses 99,946 93,462 87,785 94,864 84,010 Contribution Margin $ 41,095 $ 44,304 $ 40,725 $ 42,538 $ 39,369 * Q includes Orchard activity for the 14 weeks ended July 31, Please refer to "Basis of Presentation" section on page 42 for additional information on the presentation of Q

37 PayCheck Direct Variable Operating Costs unaudited in 000's Q Q Q Q Q Net Sales $ 7,433 $ 10,949 $ 23,958 $ 10,053 $ 12,177 Product Costs 4,373 6,895 14,315 5,636 6,870 Shipping Expense , Fulfillment Expense Cost of Goods Sold 4,931 7,641 16,078 6,429 7,977 Catalog Direct Mail 857 2, ,005 1,519 Digital Marketing Order Entry and Customer Service Other , Sales and Marketing Expenses 1,980 3,888 3,214 3,179 3,031 Finance Charge and Fee Income Provision for Doubtful Accounts 574 1,840 2,139 1,062 2,329 Account Acquisition Account Servicing Collections Net Credit Expense 605 1,884 2,213 1,225 2,516 Contribution Margin $ (83) $ (2,465) $ 2,453 $ (779) $ (1,348) 37

38 Bluestem Group Non-GAAP Financial Measure To supplement the consolidated financial statements of Bluestem Group Inc. and its subsidiaries, which are presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we use the following measure that is not in accordance with, or an alternative to, measures prepared in accordance with GAAP ("non- GAAP measure"): unaudited in 000's Q Q Adjusted EBITDA reconciliation to GAAP net income: Net (loss) income $ (11,286) $ 19,804 Interest expense 13,683 8,757 Income tax benefit 967 (34,142) Amortization and depreciation expense 19,809 15,618 Stock-based compensation expense 1,403 1,527 Gain from derivatives in our own equity (411) Acquisition transaction costs 6,610 Integration costs 1,197 Adjusted EBITDA $ 25,773 $ 17,763 NOTE: Q excludes the Orchard Portfolio prior to July 10, 2015 the date acquired by Bluestem 38

39 Bluestem Brands Non-GAAP Financial Measure To supplement the condensed consolidated financial information of Bluestem Brands, Inc. and its subsidiaries, which are presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), Bluestem uses the following measures that are not in accordance with, or an alternative to, measures prepared in accordance with GAAP (non-gaap measures): unaudited in 000's Q Q Net loss $ (7,471) $ (13,098) Income tax benefit (1,439) (399) Interest Expense, net 13,682 8,754 Amortization and depreciation not included in cost of sales 18,687 15,102 General and administrative expenses 52,430 46,425 Contribution Margin $ 75,890 $ 56,784 General and administrative expenses $ 52,430 $ 46,425 Less: Stock-based compensation expense 1, Acquisition transaction costs 6,530 Integration costs 1,197 Lease termination costs 1,122 Other Adjusted General and Administrative Expenses $ 49,453 $ 36,916 NOTE: Q excludes the Orchard Portfolio for the periods prior to July 10, 2015 the date acquired by Bluestem 39

40 Bluestem Brands Non-GAAP Financial Measure unaudited in 000's Q Q Adjusted EBITDA: Net loss $ (7,471) $ (13,098) Income tax expense (1,439) (399) Interest expense 13,683 8,757 Amortization and depreciation expense 19,809 15,618 EBITDA 24,582 10,878 Stock-based compensation expense 1, Acquisition transaction costs 6,530 Integration costs 1,197 Lease termination costs 1,122 Other 660 1,045 Adjusted EBITDA $ 27,686 $ 20,514 Less: Maintenance capital expenditures 4,510 4,130 Free Cash Flow $ 23,176 $ 16,384 NOTE: Q excludes the Orchard Portfolio prior to July 10, 2015 the date acquired by Bluestem 40

41 BBI Historical Non-GAAP Financial Information Trailing Twelve Months unaudited in 000's Q Q Adjusted EBITDA: Net loss $ (28,588) $ (37,357) Income tax expense (17,995) (11,813) Interest expense 54,856 27,948 Amortization and depreciation expense 110,513 53,735 EBITDA 118,786 32,513 Stock-based compensation expense 4,685 10,207 Dividend equivalent expense 22,545 Acquisition transaction costs 16,695 Integration costs 8,862 Loss on early extinguishment of debt 9,298 Lease termination costs 1,122 Other 2,434 3,187 Adjusted EBITDA $ 134,767 $ 95,567 Expected cost savings 23,425 Orchard pre-acquisition AEBITDA 64,805 Non-cash charges 689 Other 7,110 2,831 Lender Adjusted EBITDA $ 165,991 $ 163,203 Note: Adjusted EBITDA for the Q contains Orchard Brands Corporation beginning from July 10, 2015, date of Bluestem's acquisition of Orchard Brands Corporation 41

42 Notice to Recipients - Basis of Presentation Bluestem Group Consolidated Financial Information Please refer to the Bluestem Group Inc. s Q Press Release (available at for a description of the basis of presentation. Bluestem Stand-alone Financial Information Please refer to the Bluestem Group Inc. s Q Press Release (available at for a description of the basis of presentation. Orchard Brands Corporation Non-GAAP Stand-alone Financial Information Orchard Portfolio's second quarter of fiscal 2015 contains 14 weeks, of which the first 10 weeks are based on Orchard Brands Corporation's calendar for the 10-weeks ended July 3, 2015 and remaining 4 weeks are based on Bluestem's calendar for the 4-weeks ended July 31, 2015 ("Combined"). The Orchard Brand's results for the 10 weeks ended July 3, 2015 are conformed to Bluestem Brands, Inc.'s basis of presentation. These measures are conformed to Bluestem Brands, Inc. basis of presentation and fiscal period ends for comparison purposes. Bluestem Brands, Inc. s basis of presentation is in accordance with GAAP. The Orchard Brand's results for the 10 weeks ended July 3, 2015 reported herein are not similar in presentation or fiscal periods to the 2015 Historical Orchard Results reported in the Q Press Release. We provide these Combined results because we believe they are useful to investors in evaluating Orchard Brands operating performance. As non-gaap measures, they have limitations in that they do not reflect all of the amounts associated with Orchard Brands results of operations as determined in accordance with GAAP. 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. 42

43 Definition of terms Liquidity represents unrestricted cash and cash equivalents as defined by our lender agreements plus availability on inventory line of credit. 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. 43