Q Earnings Call April 1, 2016

Transcription

1 Q Earnings Call April 1, 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 30, 2015 and January 31, 2014 as updated by its subsequent periodic reports (available at Accordingly, you should not place undue reliance on the forwardlooking 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 Bluestem Group Inc. s earnings release for the 13- and 52- weeks ended January 29, 2016 and January 30, 2015 ( Q Press Release ) (available at for reconciliations of non-gaap financial measures to the most directly comparable GAAP measures. Non-GAAP financial measures in this presentation include adjusted EBITDA, contribution margin, adjusted general and administrative expenses, net credit expense, liquidity, free cash flow, pro forma adjusted EBITDA and unlevered pro forma free cash flow. 2

3 3 Q HIGHLIGHTS

4 Q4 Highlights Bluestem Group consolidated diluted income per share from continuing operations of $0.06 Bluestem Brands net retail sales of $737.7 million for the quarter Fingerhut sales up 3.2% Gettington sales up 1.9% Paycheck Direct sales up 132.1% Orchard Portfolio sales down 5.7% using Bluestem s fiscal calendar for 2015 and Orchard s fiscal calendar for 2014 (GAAP basis). Sales were down approximately 3% using Bluestem s fiscal calendar in both years 1. Bluestem Brands Adjusted EBITDA was $76.4 million compared to $56.6 million in Q4 last year Revolving net principal credit losses of 17.8%, a 143 basis point improvement over Q $20.2 million non-cash Gettington trade name impairment charge related to the business model pivot 4 1 Orchard s 2014 Q4 was the 13 week period ended January 24, 2015 while Bluestem s 2014 calendar was the 13 week period ended January 30, 2015.

5 Bluestem Group Q4 Results unaudited in 000's, except per share amounts Q Q Total net sales and revenue $ 744,449 $ 442,454 Total costs and expenses 722, ,267 Loss from derivatives in our own equity 6,489 15,353 Operating income (loss) 15,884 (4,166) Interest expense, net 13,701 7,091 Income (loss) from continuing operations before income taxes 2,183 (11,257) Income tax benefit (6,065) (69,969) Income from continuing operations after income taxes $ 8,248 $ 58,712 Adjusted EBITDA $ 80,637 $ 63,430 Basic and Diluted Income Per Share - Common Stockholders Basic income per share from continuing operations $ 0.06 $ 0.43 Diluted income per share from continuing operations* $ 0.06 $ 0.43 Basic weighted average shares outstanding 136, ,658 Diluted weighted average shares outstanding* 137, ,124 *The loss from derivatives in our own equity is excluded from the diluted earnings per share calculation Consolidated Q income from continuing operations before taxes includes: $4.2 million income from Bluestem Brands which includes a $20.2 million loss from non-cash Gettington trade name impairment versus $25.2 million in Q $4.5 million income from Legacy Capmark activity versus $21.1 million loss in Q which includes a $20.1 million loss from non-cash stock based compensation expense related to the exercise of warrants $6.5 million loss from derivatives in our own equity versus $15.4 million in Q Q results include an income tax benefit related to Gettington trade name impairment and Q results include an income tax benefit associated with the acquisition of Bluestem Brands, Inc. 5

6 Bluestem Brands Q4 Results unaudited in 000's Q Q Net sales $ 737,682 $ 456,474 Cost of goods sold 403, ,635 Gross profit 333, ,839 Sales and marketing expenses 166,657 74,010 Net credit expense 32,784 20,713 General and administrative expenses 63,272 63,116 Amortization and depreciation not included in cost of goods sold 53,163 21,847 Loss on early extinguishment of debt - 9,298 Interest expense, net 13,701 7,419 Income (loss) before income taxes 4,158 (11,564) Income tax expense (benefit) 10,971 (2,960) Net loss $ (6,813) $ (8,604) Margins and Expenses as a Percentage of Net Sales: Gross profit rate 45.2% 40.5% Sales and marketing expenses 22.6% 16.2% Net credit expense 4.4% 4.5% Contribution margin $ 134,294 $ 90,116 As a percentage of net sales 18.2% 19.7% Adjusted general and administrative expenses $ 59,136 $ 33,900 As a percentage of net sales 8.0% 7.4% Adjusted EBITDA $ 76,391 $ 56,637 As a percentage of net sales 10.4% 12.4% Bluestem legacy businesses Net sales grew 6.1% Contribution margin 19.2% Orchard Portfolio Net sales $253.2 million Contribution margin 16.3% Gross profit rate increased due to the addition of Orchard Portfolio and a 68 bps increase in legacy Bluestem gross profit rate over Q Sales and marketing expense increased 638 bps due to the addition of Orchard Portfolio; on a Q4 year over year basis, Legacy Bluestem improved 96 bps Orchard Portfolio improved 80 bps Contribution margin decreased 154 bps year over year due to the Orchard Portfolio acquisition and legacy Bluestem incurred higher net credit expense Adjusted EBITDA margin was 10.4% in Q4 2015, down 205 bps from the prior year due to the lower contribution margin and higher G&A expenses of the Orchard Portfolio 6

7 7 BUSINESS REVIEW

8 Fingerhut Q4 Performance unaudited in 000's Q Q Net sales $ 416,973 $ 403,874 Net sales growth YOY 3.2% 19.9% Gross margin % 43.3% 42.8% Advertising expense as a % of net sales 15.8% 16.6% Net credit expense as a % of net sales 6.9% 4.9% Contribution margin as a % of net sales 20.6% 21.3% Revolving new credit accounts Freshstart new credit accounts Net sales growth of 3.2%, total new accounts decreased 11% Sales growth rate declined from Q mostly due to extraordinarily high growth in 2014 driven by the launch of national TV advertising Revolving accounts down as a result of lower unsolicited application volume FreshStart new credit accounts lower due to underwriting adjustments and lower application volume Contribution margin decreased by 70 bps Gross margin rate increased 50 bps as a result of reduced discounts, lower cost of goods sold and improved obsolescence Advertising leverage of 85 bps primarily from reduced TV advertising spend and increased catalog marketing efficiency from ongoing contact stream optimization strategies Net credit expense increased 205 bps over last year as the reduction in net principal losses was more than offset by a reduction in finance charge and fee rate (see page 12 for further discussion). Fourth quarter results also include a merchant discount associated with the sale of receivables to SCUSA to enhance the portfolio Risk Adjusted Margin (which reflects the 3 rd quarter SCUSA amendment) 8

9 Gettington Q4 Performance unaudited in 000's Q Q Net sales $ 42,768 $ 41,966 Net sales growth YOY 1.9% 24.7% Contribution margin as a % of net sales 9.7% 7.5% Revolving new credit accounts Gettington sales grew 1.9% in the quarter Lower sales growth the result of lower advertising spend as we prepare for the business model pivot Contribution margin improved by 218 bps due to higher markup and shipping revenue partially offset by higher net credit expense New revolving credit accounts decreased 36% for the quarter Acquisition advertising pulled back in preparation for business model pivot 9

10 PayCheck Direct Q4 Performance unaudited in 000's Q Q Net sales $ 24,688 $ 10,636 Net sales growth YOY 132.1% 239.9% Gross margin % 32.9% 33.4% Advertising expense as a % of net sales 13.1% 19.8% Net credit expense as a % of net sales 9.0% 5.6% Contribution margin as a % of net sales 10.8% 8.0% Eligible client employees 6,323 2,348 PayCheck Direct strong growth continued with sales increasing by 132.1% in the quarter compared to last year Gross margin decreased by 59 bps due to higher returns and higher shipping expense due to mix of products sold Advertising improved primarily from increased leverage in direct mail performance and timing of recognition of catalog expense Credit expense increased due to higher provision in the quarter due in part to sales mix and adjustments made to our provisioning rate to reflect updated historical performance data 10

11 Net Credit Expense unaudited in 000's Q Q Net credit expense: Finance charge and fee income $ (1,400) $ (3,376) Provision for doubtful accounts* 20,409 12,494 Credit management expenses 21,664 20,556 Portfolio profit sharing and servicing fee income (7,889) (8,961) Net credit expense $ 32,784 $ 20,713 Net credit expense as a % of average accounts receivable** 9.2% 6.8% Revolving average customer accounts receivable $ 1,418,984 $ 1,220,616 *The provision for doubtful accounts includes $12.1 million related to the merchant discount **Annualized to 52 week periods for comparability Net credit expense as a percentage of average accounts receivable increased 245 bps over Q4 2014, reflecting the following activity: Higher provision for doubtful accounts of 165 bps, which includes a $12.1 million merchant discount associated with the sale of receivables to SCUSA. This discount was required as a result of the 3 rd quarter SCUSA amendment in order to enhance the portfolio s Risk Adjusted Margin performance for the period September through January Lower portfolio profit sharing and servicing fee income of 72 bps Improvement in our credit management expenses of 63 bps 11

12 Revolving Portfolio Performance unaudited in 000's, except average balance Q Q Total accounts receivable $ 1,472,335 $ 1,287,526 Average balance $ 742 $ Delinquency rate as a % of total accounts receivable 14.7% 14.7% Net finance charge and fee rate 26.4% 28.7% Principal loss rate 20.0% 21.0% Recovery rate 2.2% 1.7% Net principal loss rate 17.8% 19.2% SCUSA Risk Adjusted Margin before the merchant fee 3.5% 4.9% 30+ delinquency rate ended the year flat to 2014 continuing a trend of stable delinquency performance SCUSA Risk Adjusted Margin before the merchant fee for the quarter was 3.5%, down 144 bps Net finance charge and fee rate is impacted by lower net late fee yield and higher debt waiver claims Principal loss rate decreased by 94 bps over last year continuing the improving trend we have seen over the last three quarters Fourth quarter recovery rate benefited from better terms on the sale of charged-off receivables compared to

13 Revolving Portfolio Fee Yield Net Finance Charge and Fee % Average Revolving Balance 32% 30% 28% 26% 24% 22% 20% Q1 Q2 Q3 Q4 $800 $750 $700 $650 $600 $550 $500 $450 $400 Q1 Q2 Q3 Q Decreasing finance charge and fee income negatively impacts risk adjusted margin Late fees are capped at the lower of the monthly minimum payment due or $37 With the capping of late fees, average balance growth creates late fee yield compression As our portfolio continues to mature, we expect the growth rate of the average revolving balance to decelerate, resulting in the late fee yield deterioration to moderate 13

14 Revolving Portfolio Principal Losses Net Principal Charge-off % 30+ Delinquency % 24% 22% 20% 18% 16% 14% 20% 18% 16% 14% 12% 10% 12% 8% 10% Q1 Q2 Q3 Q4 6% Q1 Q2 Q3 Q Principal losses dropped below 2014 levels in the quarter as expected 30+ dollar delinquency rates continue to perform near 2014 levels While the performance of the portfolio is stable, we continue to focus on improving the portfolio s financial performance The new FCC ruling from late summer continues to place pressure on the percentage of phone numbers that can be dialed We continue to invest in technology solutions and processes to support compliance in a challenging regulatory environment 14

15 Orchard Portfolio Q4 Performance unaudited in 000's Q Q Net sales* $ 253,252 $ 268,518 Net sales growth YOY * (5.7)% 2.9% Gross margin %* 53.0% 53.3% Advertising expense as a % of net sales* 36.6% 37.3% Contribution margin as a % of net sales * 16.3% 16.0% New gross customers Active customers 7,845 7,905 * 2014 adjusted to conform to Bluestem's basis of presentation Net sales decreased by 5.7% (decreased 3% on a fully adjusted basis)* In the fourth quarter we executed adjustments to catalog mail plans which contributed to the sales decline but resulted in improved advertising leverage Contribution margin rate improved 28 bps Gross margin decreased by 30 bps due to higher free shipping promotions partially offset by lower product costs 15 * The Fully adjusted basis results of Orchard Portfolio are adjusted to 13 weeks ended January 30, 2015 instead of January 24, 2015.

16 Bluestem Brands Inc. Q4 General Administrative Expenses unaudited in 000's Q Q Compensation and benefits $ 44,691 $ 48,871 Professional fees 8,051 7,728 Rent and occupancy costs 6,899 3,953 Other 3,631 2,564 Total general and administrative expenses 63,272 63,116 Less: Stock-based compensation expense 1,099 7,553 Dividend equivalent expense - 19,628 Acquisition transaction costs - 1,581 Integration costs 2,635 - Other Adjusted general and administrative expenses $ 59,136 $ 33,900 Adjusted G&A as a % of net sales 8.0% 7.4% Year over year increase of 59 bps due to Orchard Portfolio acquisition (50 basis points) Increased Legacy Bluestem headcount (9 basis points) Integration costs relate entirely to the Orchard Portfolio acquisition and primarily reflect retention, severance and project management costs 16

17 Bluestem Brands Inc. Balance Sheet 17 unaudited in 000's, except Inventory turnover Q Q Cash and cash equivalents $ 11,870 $ 59,222 Restricted cash 22,485 13,425 Customer accounts receivable, net 44,446 36,494 Merchandise inventories 263,579 96,431 Promotional material inventories 53,253 13,976 Prepaid expenses and other assets 32,647 23,465 Total current assets 428, ,013 Property and equipment, net 125,001 49,755 Intangible assets, net 460, ,892 Goodwill 367, ,642 Other assets 3, Total Assets $ 1,384,718 $ 872,399 Accounts payable $ 180,601 $ 82,037 Current income taxes payable 34,583 18,567 Accrued costs and other liabilities 111,613 65,109 Short-term debt 47,981 17,787 Total current liabilities 374, ,500 Long-term debt 490, ,889 Deferred income taxes 154, ,205 Other long-term liabilities 6,171 5,187 Total liabilities 1,025, ,781 Stockholders' equity: Additional paid-in capital 369, ,602 Retained earnings (10,293) 16,016 Total stockholders' equity 359, ,618 Total Liabilities and Stockholders Equity $ 1,384,718 $ 872,399 Selected Financial Data: Liquidity $ 117,875 $ 102,344 Availability on inventory line of credit $ 115,392 $ 43,122 Maintenance capital expenditures $ 6,681 $ 2,549 Growth capital expenditures $ 5,210 $ 3,366 Free cash flow $ 69,710 $ 54,088 Inventory turnover Material year-over-year increases are the result of the Orchard Portfolio acquisition Total term debt $512.4 million outstanding Q4 Liquidity of $117.9 million, covenant of $40.0 million Q4 Leverage Ratio of 3.3, covenant of full year capex $37.9 million, of which $19.7 million is growth, versus $26.0 million and $19.1 million in 2014, respectively

18 Cash & Legacy Commercial Real Estate unaudited in 000's Q Q Cash and cash equivalents $ 185,944 $ 164,892 Net commercial real estate assets * 64,935 74,877 Cash collected from commercial real estate assets 14,945 7,200 Gains (losses) Net (losses) gains on loans (14) 552 Net gains on investments and real estate Equity in joint ventures and partnerships 5,857 1,374 Total $ 5,891 $ 2,327 * excludes the derivative liability Net commercial assets for the quarter ended at $64.9 million Cash collected during the fourth quarter totaled $14.9 million Activities related to the legacy commercial real estate business resulted in a $5.9 million gain in the quarter Current expectations are for the majority of these assets to be liquidated over the next 18 months 18

19 19 STRATEGY REVIEW

20 2015 Highlights Completed Orchard acquisition Significant progress toward the full integration of the two companies Legacy Bluestem assortment expansion SKU count increased from 200k to 600k Private label sales expansion Legacy Bluestem s private label sales grew 27% to $132 million Mobile Launched mobile servicing app (ios and Android) Re-architected Fingerhut website to incorporate responsive design PayCheck Direct market acceptance Net sales grew 118% Eligible client employees up 169% 20

21 2016 Strategic Initiatives Funding diversification Launched marketing in March 2016 Off-Price Business Model Aggressively pursuing this customer value proposition Stock Repurchase Board authorized the repurchase of up to 4.5 million shares Orchard Integration Aggressively testing-into contact stream optimization across all 13 brands Cross sell expected to offer 130k SKUs on Fingerhut Expected expense savings for 2016 unchanged at $10 million 21

22 22 APPENDIX

23 Bluestem Group, Inc. Stockholders Equity Table January 29, Equity Total Stock, Series A Common Stock Common Stock Incentive Plan Options and Convertible* Warrants Stock unaudited in 000's Stock Warrants Total outstanding 1, ,556 19,711 9, ,746 Available for grant - - 4,130-4,130 Total outstanding and available for grant 1, ,556 23,841 9, ,876 *On an as-converted to common stock basis 23

24 Brand Contribution Margin Trends Fingerhut Q Q Q Q Q Q Q Q Net sales in 000's $ 155,997 $ 208,275 $ 189,545 $ 403,874 $ 183,776 $ 223,679 $ 208,653 $ 416,973 Gross margin % 44.0% 44.5% 44.0% 42.8% 43.6% 43.8% 43.2% 43.3% Advertising expense as a % of net sales 22.3% 19.0% 20.3% 16.6% 21.0% 19.2% 20.3% 15.8% Net credit expense (7.8)% (0.2)% 4.3% 4.9% 3.1% 3.8% 6.0% 6.9% Contribution margin as a % of net sales 29.5% 25.6% 19.4% 21.3% 19.5% 20.7% 17.0% 20.6% Gettington.com Net sales in 000's $ 14,218 $ 18,258 $ 17,529 $ 41,966 $ 17,042 $ 21,987 $ 21,787 $ 42,768 Gross margin % 24.6% 21.4% 21.1% 20.0% 23.2% 24.7% 24.4% 25.2% Advertising expense as a % of net sales 12.2% 12.7% 12.0% 11.5% 12.4% 11.7% 11.1% 11.5% Net credit expense (4.5)% 0.8% 1.1% 1.0% (0.6)% 2.9% 3.7% 4.0% Contribution margin as a % of net sales 16.8% 7.8% 8.0% 7.5% 11.3% 10.1% 9.6% 9.7% PayCheck Direct Net sales in 000's $ 1,036 $ 3,941 $ 6,248 $ 10,636 $ 5,358 $ 7,267 $ 10,266 $ 24,688 Gross margin % 28.3% 27.7% 28.9% 33.4% 32.6% 33.7% 30.1% 32.9% Advertising expense as a % of net sales 70.6% 26.1% 31.9% 19.8% 36.0% 27.2% 37.8% 13.1% Net credit expense 2.1% 9.5% 7.6% 5.6% 13.2% 8.3% 18.3% 9.0% Contribution margin as a % of net sales (44.5)% (7.9)% (10.6)% 8.0% (16.6)% (1.8)% (26.1)% 10.8% Orchard Portfolio ** Net sales in 000's $ 257,173 $ 248,166 $ 247,777 $ 268,518 $ 256,630 $ 259,570 $ 234,252 $ 253,252 Gross margin % 55.3% 56.2% 54.8% 53.3% 55.3% 55.7% 56.6% 53.0% Advertising expense as a % of net sales 38.5% 37.4% 36.4% 37.3% 39.5% 39.3% 38.1% 36.6% Contribution margin as a % of net sales 16.8% 18.8% 18.4% 16.0% 15.8% 16.3% 18.5% 16.3% **Orchard Portfolio financial information conforms with Bluestem Brands Inc. basis of presentation, a full disclosure regarding the Orchard Portfolio basis of presentation is presented in the appendix of this presentation 24

25 Serviced Revolving Portfolio Credit Statistics unaudited in 000's, except average balance Q Q Q Q Q Q Q Q Total accounts receivable $ 990,008 $ 1,035,927 $ 1,038,208 $ 1,287,526 $ 1,214,618 $ 1,237,579 $ 1,225,964 $ 1,472,335 Balance active accounts 1,653 1,665 1,678 1,878 1,808 1,800 1,812 1,984 Average balance $ 599 $ 622 $ 619 $ 686 $ 672 $ 688 $ 677 $ Delinquency % 16.0% 16.7% 17.8% 14.7% 15.4% 16.3% 17.6% 14.7% Net finance charge and fee % 29.2% 30.4% 28.6% 28.7% 29.7% 28.8% 27.2% 26.4% Principal loss % 17.1% 19.4% 20.1% 21.0% 19.7% 21.6% 20.7% 20.0% Recovery % 2.1% 4.1% 2.6% 1.7% 2.6% 2.2% 1.9% 2.2% Net principal loss % 15.0% 15.4% 17.5% 19.2% 17.0% 19.4% 18.8% 17.8% Revolving active accounts 1,473 1,519 1,534 1,593 1,686 1,682 1,686 1,683 New revolving credit accounts New FreshStart accounts

26 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 The financial information in this presentation includes results of Orchard Brands Corporation and its subsidiaries for the 14 weeks ended July 31, 2015 and 13 weeks ended April 25, 2015, January 24, 2015, October 25, 2014 and July 26, 2014 (collectively the Adjusted Five Quarters of Orchard Results ). The Adjusted Five Quarters of Orchard Results are based on Bluestem Brands, Inc.'s basis of presentation and fiscal second quarter ended July 31, 2015, first quarter ended April 25, 2015 and fiscal year ended January 24, 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 Adjusted Five Quarters of Orchard Results reported herein are not similar in presentation or fiscal periods to the Six Quarters of Historical Orchard Results reported in the Q Press Release. To supplement the adjusted financial data derived from the results of Orchard Brands Corporation this presentation uses contribution margin as a non-gaap measure. We provide these results and measures 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. 26

27 Definition of terms Contribution Margin represents gross profit less sales and marketing expenses and net credit expenses. Liquidity represents unrestricted cash and cash equivalents 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 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. 27