Q Earnings Call. June 20, 2018

Transcription

1 Q Earnings Call June 20, 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 First Quarter Earnings Results press release ("2018 Q1 Earnings Release") (available at for the reconciliations of non-gaap financial measures to the most directly comparable GAAP measures. You should read the 2018 Q1 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 100 bps compared to Q as a result of pricing and cost optimization efforts Adjusted general and administrative expenses down $5.2 million compared to Q Stabilize the credit portfolio 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 60 bps from Q to 16.3% The APR charged to our customers is increasing to a fixed 29.99% which will increase net credit revenue starting in the back half of 2018 Orchard portfolio turnaround efforts Align and develop our organizational capabilities to support a transformed business Improve catalog marketing productivity and develop digital capabilities Align our end-to-end merchandising, inventory and creative processes Clarify brand positioning across the portfolio 3

4 Q Bluestem Brands Headlines Revenue recognition accounting standard Topic 606 adopted Q resulted in acceleration of direct response advertising costs, negatively impacting contribution margin, net loss and adjusted EBITDA by $13.3 million Net sales of $381.1 million in Q1 2018, decreased 5.1% compared to Q adjusted net sales 1 Contribution margin of $47.0 million 2 in Q1 2018, an increase of 130 bps as a percent of net sales compared to Q Adjusted EBITDA $0.7 million 2 in Q1 2018, a decrease of $5.1 million compared to Q Merchandise inventories were $197.9 million as of Q1 2018, reduction of $20.1 million or 9.2% compared to Q Lender net liquidity was $81.4 million as of Q In compliance with all covenants throughout and as of Q Excludes net sales for businesses exited in Q (PayCheck Direct, Draper's & Damon's retail stores and LinenSource). 2 Excludes $13.3 million impact of the adoption of new accounting standard Topic

5 Bluestem Brands Q1 Results 5 unaudited in 000's Q Q Net sales $ 381,060 $ 427,622 Cost of goods sold 195, ,819 Gross profit 185, ,803 Sales and marketing expenses 127, ,045 Net credit expense 24,660 33,702 General and administrative expenses 46,430 65,035 Amortization and depreciation not included in cost of goods sold 12,304 15,413 Loss on impairment 230 Interest expense, net 12,602 12,865 Loss before income taxes (37,599) (46,487) Income tax benefit (6,855) (16,034) Net loss $ (30,744) $ (30,453) Margins and Expenses as a Percentage of Net Sales: Gross profit rate 48.7 % 47.7 % Sales and marketing expenses 33.3 % 28.8 % Net credit expense 6.5 % 7.9 % Contribution margin $ 33,737 $ 47,056 As a percentage of net sales 8.9 % 11.0 % Adjusted general and administrative expenses $ 44,457 $ 49,664 As a percentage of net sales 11.7 % 11.6 % Adjusted EBITDA $ (12,608) $ 5,779 As a percentage of net sales (3.3)% 1.4 % Adjusted free cash flow $ (14,396) $ 1,007 As a percentage of net sales (3.8)% 0.2 % * Excludes net sales for businesses exited in Q (PayCheck Direct, Draper's & Damon's retail stores and LinenSource). Net sales decreased 10.9% or 5.1% on an adjusted basis* versus Q1 2017, primarily due to reduced Orchard Portfolio sales demand, discontinuation of television advertising and tighter credit underwriting strategies Gross profit rate improved by 100 bps due to pricing and cost optimization efforts Sales and marketing expense rate, excluding impact of new revenue standard, increased 110 bps due to decreased customer response rates at Orchard Net credit expense rate, excluding servicing rights valuation changes and prior year restructuring charges, increased 100 bps due to higher provision offset by lower credit management costs Adjusted EBITDA, excluding impact of new revenue standard, declined 120 bps primarily due to the higher sales and marketing and net credit expenses

6 Northstar Portfolio Q1 Performance unaudited in 000's Q Q Net sales $ 183,006 $ 187,046 Net sales change YOY (2.2)% 2.1 % Gross profit % 43.9 % 42.3 % Sales and marketing expense as a % of net sales 15.1 % 15.3 % Net selling margin % 28.8 % 27.0 % Net credit expense as a % of net sales 13.7 % 13.9 % Contribution margin as a % of net sales 15.2 % 13.1 % Revolving new credit accounts Freshstart new credit accounts Revolving active accounts 1,464 1,577 Net sales decreased 2.2% compared to Q due to discontinued television advertising and tighter acquisition underwriting strategies implemented to improve future credit performance Net selling margin increased 180 bps compared to Q1 2017, 300 bps excluding Topic 606 impact We continue to closely manage our marketing investments in light of our tighter credit underwriting strategies Gross profit as a percentage of net sales increased 160 bps primarily due to pricing and cost optimization efforts, lower product returns, and a favorable sales mix shift toward higher margin fashion items Sales and marketing expenses as a percentage of net sales, excluding impact of new revenue standard, improved 140 bps largely due to the discontinuing TV advertising Contribution margin improved 210 bps compared to Q Adjusted for servicing right valuation changes and excluding impact of new revenue standard, contribution margin as a percentage of net sales was 14.8% in Q1 2018, a 110 bps decline compared to Q

7 SCUSA Portfolio Performance % of SCUSA average customer accounts receivable Q Q Risk Adjusted Margin Net credit revenue 27.1 % 26.5% Net credit losses 20.9 % 19.9% Servicing fee 2.0 % 2.0% Cost of bank debt 4.6 % 3.9% Risk Adjusted Margin excluding the merchant fee (0.4)% 0.6% SCUSA average customer accounts receivable (in 000's) $ 1,395,062 $ 1,421, day delinquency rate 16.3 % 16.9% Average merchant discount rate applied to Q1 credit originations 9.18 % 6.18% While we are seeing signs of credit supply moderation by the top issuing banks, the performance of the SCUSA portfolio continues to be negatively 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 taken 2018 vintage delinquency rates trending 3-5% 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 60 bps lower than Q1 2017, demonstrating a stabilization in performance of the overall portfolio Risk Adjusted Margin before the merchant fee decreased 100 bps from Q Net credit revenue increased 60 bps due to higher finance charge yield driven by increase in prime rate Net credit losses increased 100 bps from Q Cost of bank debt increased 70 bps from Q due to increasing market interest rates 7

8 Orchard Portfolio Q1 Performance unaudited in 000's Q Q Net sales $ 208,066 $ 245,802 Net sales change YOY (15.4)% (1.4)% Gross profit % 52.6 % 52.6 % Sales and marketing expense as a % of net sales 47.8 % 39.4 % Contribution margin as a % of net sales 4.7 % 13.2 % New gross customers Gross active customers 7,435 7,813 Net sales decreased 15.4% compared to Q as customers were less responsive to our promotional and marketing efforts On an adjusted basis*, net sales decreased 10.2% or $23.8 million compared to Q Gross profit as a percentage of net sales was unchanged compared to Q Contribution margin as a percentage of net sales, excluding impact of new revenue standard, decreased 410 bps compared to Q due to lower response rates to catalog marketing, partially offset by lower print and paper costs * Excludes net sales for businesses exited in Q (Draper's & Damon's retail stores and LinenSource). 8

9 Selected Balance Sheet and Covenant Compliance Information (Bluestem Brands Only) unaudited in 000's, except Inventory Turnover & Lender Leverage Ratio Q Q Merchandise inventories $ 197,914 $ 217,964 Inventory Turnover Leverage Ratio Net Debt $ 469,059 $ 506,738 Lender Leverage Ratio Lender Leverage Ratio required covenant amount < 4.50 < 4.50 Lender Net Liquidity $ 81,369 $ 86,247 Lender Net Liquidity required covenant amount > $ 40,000 > $ 40,000 Merchandise inventory was down $20.1 million or 9.2% compared to Q Inventory optimization strategy that was implemented in 2017 continues to take hold Northstar dropship percent increased to 42.6% in Q compared to 41.3% in Q Inventory turnover of 3.2 in Q improved by 0.1 turns compared to Q due to our efforts to optimize on-hand inventory for both Northstar and Orchard portfolios Bluestem Brands was in compliance with all covenants throughout and at the end of Q Lender leverage ratio of 4.16x compared to the lender covenant requirement of 4.50x; reflects LTM Q Lender Adjusted EBITDA of $112.7 million and Leverage Ratio Net Debt of $469.1 million Lender net liquidity of $81.4 million compared to the covenant requirement of $40.0 million; reflects $5.0 million of cash and cash equivalents and $76.5 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 $ 126,269 $ 115,774 Net commercial real estate investments * 32,636 13,964 PayCheck Direct accounts receivables, net 84 32,402 * Q includes investment in Irvine Distribution Center of $25.6 million, leased to Bluestem Brands in September 2017 unaudited in 000's Q Q Dividends paid year-to-date $ $ 80,023 11

12 Bluestem Brands, Inc. Q1 Adjusted EBITDA unaudited in 000's Q Q Net loss $ (30,744) $ (30,453) Income tax benefit (6,855) (16,034) Interest expense, net 12,605 12,865 Amortization and depreciation expense 13,237 16,801 Loss on impairment 230 Loss (gain) on servicing right (2,824) 1,250 Stock-based compensation expense 689 1,234 Restructuring costs 89 17,909 Other 1,195 1,977 Adjusted EBITDA $ (12,608) $ 5,779 Adjusted EBITDA as a % of net sales (3.3)% 1.4% 12

13 Bluestem Brands, Inc. Q1 General Administrative Expenses and CapEx unaudited in 000's Q Q Compensation and benefits $ 31,455 $ 39,549 Professional fees and contract labor 6,122 11,276 Rent and occupancy costs 7,229 11,843 Other 1,624 2,367 Total general and administrative expenses $ 46,430 $ 65,035 Less: Stock-based compensation expense (689) (1,234) Restructuring costs (89) (12,160) Other (1,195) (1,977) Adjusted general and administrative expenses $ 44,457 $ 49,664 Adjusted G&A as a % of net sales 11.7% 11.6% Capital Expenditures: Growth $ 2,580 $ 2,766 Maintenance $ 1,286 $ 1,077 Adjusted G&A expenses decreased $5.2 million primarily due to the 2017 reduction in force and cost reduction measures taken to reduce professional and contract labor fees and occupancy costs 13

14 Portfolio Contribution Margin Trends Northstar Portfolio Q Q Q Q Q Net sales in 000's $ 187,046 $ 221,056 $ 210,115 $ 399,009 $ 183,006 Gross profit % 42.3% 42.9% 43.1% 42.9% 43.9% Sales and marketing expense as a % of net sales* 15.3% 15.5% 14.0% 11.5% 13.9% Net credit expense as a % of net sales 13.9% 13.2% 14.3% 14.4% 13.7% Contribution margin as a % of net sales* 13.1% 14.1% 14.8% 17.1% 16.3% Orchard Portfolio Q Q Q Q Net sales in 000's $ 245,802 $ 204,903 $ 201,703 $ 207,739 $ 208,066 Gross profit % 52.6% 52.5% 52.3% 48.0% 52.6% Sales and marketing expense as a % of net sales* 39.4% 36.6% 40.1% 37.2% 43.5% Contribution margin as a % of net sales* 13.2% 15.9% 12.2% 10.7% 9.1% *Excludes impact of acceleration of direct response advertising costs following adoption new accounting standard (Topic 606) in Q

15 Impact of Adoption of Topic 606 Revenue Recognition Accounting Standard Bluestem Brands, Inc. As reported 13-Weeks Ended May 4, 2018 % of net sales Topic 606 Adjustments Balances without Adoption of Topic 606 % of net sales Total net sales and revenue $ 381, % $ $ 381, % Costs and expenses Cost of goods sold 195, % 195, % Sales and marketing expenses 127, % (13,262) 113, % Net credit expense 24, % 24, % General and administrative expenses 46, % 46, % Amortization and depreciation not included in cost of goods sold 12, % 12, % Total costs and expenses 406, % (13,262) 392, % Operating loss (24,997) (6.6)% 13,262 (11,735) (3.1)% Interest expense, net 12, % 12, % Loss before income taxes (37,599) (9.9)% 13,262 (24,337) (6.4)% Income tax expense (6,855) (1.8)% 2,416 (4,439) (1.2)% Net loss $ (30,744) (8.1)% $ 10,846 $ (19,898) (5.2)% 15

16 Bluestem Group Inc. Stockholders Equity Table May 4, 2018 Series A Convertible* Common Stock 2018 Restricted Stock Unit Plan 2014 Equity Incentive Plan Stock Common Stock Warrants Total Convertible, Common, Incentive Stock & Warrants unaudited in 000's Total outstanding stock 1, ,187 10,052 9, ,719 Stock available for grant 18,796 12,657 31,453 Total stock outstanding and available for grant 1, ,187 18,796 22,709 9, ,172 * On an as converted common stock basis 16

17 Large national banks show signs of moderating the aggressive growth in their subprime credit card loans. 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