Q Earnings Call September 13, 2017

Transcription

1 Q Earnings Call September 13, 2017

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 3, 2017 and January 29, 2016 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 U. S. Generally Accepted Accounting Principles ( GAAP ). Please refer to the Bluestem Group Inc. Condensed Consolidated Second Quarter Earnings Results press release ("2017 Q2 Earnings Release") (available at for the reconciliations of non-gaap financial measures to the most directly comparable GAAP measures. You should read the 2017 Q2 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 free cash flow. 2

3 Turnaround Strategy Update Reduce the cost of doing business Cost of goods sold and marketing initiatives to accelerate in the second half of the year Exit non-core businesses LinenSource wind-down in progress, expect to complete liquidation of inventory in the third quarter PayCheck Direct receivables monetizing as expected Stabilize the credit portfolio through continued underwriting tightening Year-over-year loss rates continue higher but the rate of deterioration has improved from first quarter New 2017 vintages continue to demonstrate improved year over year delinquency levels Migrate to a true ecommerce Site Merchandising execution model On schedule to begin migration of Orchard Portfolio to the Bluestem Commerce Platform (BCP) in first quarter 2018, Fingerhut experienced a 8% increase in site revenue per visit following conversion to BCP Northstar continues to recognize significant leverage from the investment in our mobile platform, mobile conversion rates are up 16% in the quarter as compared to last year and mobile sales per visit have increased by 21% compared to Q

4 Q2 Headlines Bluestem Brands net sales were $438.9 million for the quarter down 6.2% compared to Q Comparative sales excluding exited businesses* were $431.0 million in the quarter, a 2.5% decrease compared to Q Bluestem Group cash and cash equivalents at the end of Q were $129.1 million Bluestem Brands ended Q with merchandise inventories of $183.1 million a reduction of $70.7 million or 27.8% from Q Bluestem Brands Lender net liquidity was $66.3 million at the end of Q Turnaround efforts continue to exceed initial expectations Bluestem Brands was in compliance with all covenants throughout and at the end of Q * Exited businesses include PayCheck Direct, Solutions, Draper's & Damon's retail stores and LinenSource

5 Bluestem Brands Q2 Results unaudited in 000's Q Q Net sales $ 438,893 $ 468,102 Cost of goods sold 228, ,361 Gross profit 210, ,741 Sales and marketing expenses 113, ,208 Net credit expense 28,399 18,644 General and administrative expenses 54,314 52,430 Amortization and depreciation not included in cost of goods sold 13,913 18,257 Impairment charge 430 Interest expense, net 12,751 13,682 Loss before income taxes (12,591) (8,910) Income tax benefit (5,822) (1,439) Net loss $ (6,769) $ (7,471) Margins and Expenses as a Percentage of Net Sales: Gross profit rate 47.9% 48.2% Sales and marketing expenses 25.8% 28.0% Net credit expense 6.5% 4.0% Contribution margin $ 68,387 $ 75,889 As a percentage of net sales 15.6% 16.2% Adjusted general and administrative expenses $ 47,893 $ 49,453 As a percentage of net sales 10.9% 10.6% Adjusted EBITDA $ 21,071 $ 27,686 As a percentage of net sales 4.8% 5.9% Free cash flow $ 19,126 $ 23,176 As a percentage of net sales 4.4% 5.0% Net sales decreased 6.2% yearover-year, Northstar Portfolio second quarter net sales decrease $1.6 million or 0.7%, Orchard Portfolio sales decreased $21.6 million or 9.5% Gross profit rate decreased by 30 bps primarily due to higher shipping expense and increased inventory obsolescence in the Orchard Portfolio Sales and marketing expense rate decreased by 220 bps due to reduced acquisition catalog volume in both portfolios and reduced television spend for Fingerhut Net credit expense rate increased by 250 bps due to higher revolving portfolio losses Adjusted G&A expenses decreased $1.6 million primarily due to reduced compensation and benefits expenses as a result of the March reduction in force partially offset by increased bonus accrual in the quarter 5

6 Northstar Portfolio Q2 Performance unaudited in 000's Q Q Net sales $ 221,056 $ 222,656 Net sales growth (decline) YOY (0.7)% (9.6)% Gross margin % 42.9% 41.6% Sales and marketing expense as a % of net sales 15.5% 18.5% Net selling margin % 27.4% 23.1% Net credit expense as a % of net sales 13.2% 7.2% Contribution margin % 14.1% 15.9% Revolving new credit accounts Freshstart new credit accounts Revolving active accounts 1,546 1,645 Net sales decreased 0.7% over Q Net sales decreased $1.6 million compared to Q2 2016, the impact of tighter credit underwriting and reduced acquisition catalog circulation was substantially offset by higher customer catalog response rates, increased website conversion rates and lower product returns Net selling margin up 430bps over Q We continue to manage our marketing investments very tightly utilizing positive net selling margin dollars to offset impact of higher losses in the credit portfolio Gross margin as a percentage of net sales up 130 bps primarily due to lower product returns, lower fulfillment expense and lower obsolescence Sales and marketing expenses as a percentage of net sales down 300 bps as a result of a reduction in catalog print and paper rates and reduced television advertising Contribution margin down 180 bps from Q2 2016: Net credit expense up 600 bps primarily due to higher losses in the revolving credit portfolio 6

7 SCUSA Portfolio Performance % of SCUSA average customer accounts receivable Q Q Risk Adjusted Margin Net credit revenue 26.2% 27.7% Net credit losses 22.2% 20.4% Servicing fee 2.0% 2.0% Cost of bank debt 4.1% 3.6% Risk Adjusted Margin before the merchant fee (2.1)% 1.8% Merchant fee 5.6% 0.8% Risk Adjusted Margin after the merchant fee 3.5% 2.6% SCUSA average customer accounts receivable (in 000's) $ 1,371,249 $ 1,345, day delinquency rate 18.2% 17.7% SCUSA portfolio performance continues to be negatively impacted by the increased supply of third party general purpose credit and increased general purpose obligations, however, the portfolio performance trends are beginning to reflect the positive impact resulting from credit underwriting adjustments executed over the last twelve months 7 Early reads on 2017 vintages continue to demonstrate improved delinquency rates compared to last year as a result of the tighter acquisition underwriting Portfolio performance appears to be stabilizing, 30+ delinquency rate of 18.2% 50 bps higher than last year, Q1 30+ delinquency rate was 100 bps worse year over year Risk Adjusted Margin before the merchant fee was down 390 bps from Q Net credit revenues down 150 bps from Q due to higher charge-offs of finance charges/fees and lower billed late fee yield Net credit losses increased 180 bps from Q2 2016

8 Orchard Portfolio Q2 Performance unaudited in 000's Q Q Net sales $ 204,903 $ 226,516 Net sales decline YOY (9.5)% (11.0)% Gross margin % 52.5% 54.5% Sales and marketing expense as a % of net sales 36.6% 37.1% Contribution margin as a % of net sales 15.9% 17.4% New gross customers Gross active customers 7,710 7,718 Net sales decreased 9.5% from Q primarily due to exiting the Solutions and the Draper s & Damon s stores combined with lower sales as a result of reduced new customer acquisition catalog circulation Comparative sales excluding exited businesses were $197.4 million in the quarter, a 7.2% decrease compared to Q Gross margin as a percentage of net sales down 200 bps due to increased shipping and fulfillment expenses combined with an increase in inventory obsolescence 8

9 Selected Balance Sheet and Covenant Compliance Information unaudited in 000's, except Inventory Turnover & Lender Leverage Ratio Q Q Merchandise inventories $ 183,103 $ 253,764 - Inventory Turnover Lender Leverage Ratio Lender Leverage Ratio required covenant amount Leverage Ratio Debt $ 491,501 $ 568,118 Lender Net Liquidity $ 66,253 $ 81,372 - Liquidity required covenant amount $ 40,000 $ 40,000 Inventory down $70.7 million or 27.8% compared to Q Initiatives to improve inventory productivity taking hold Northstar dropship percent increased from 29.9% in Q to 40.0% in Q Inventory turnover of 3.2 in Q increased compared to 3.1 in Q Bluestem Brands was in compliance with all covenants throughout and at the end of Q Lender net leverage ratio of 3.84x compared to the lender covenant requirement of 4.50x; reflects LTM Q Lender Adjusted EBITDA of $128.1 million compared to Leverage Ratio Debt of $491.5 million Lender net liquidity of $66.3 million compared to the covenant requirement of $40.0 million; reflects $3.9 million of cash and $62.4 million of revolving credit line availability 9

10 10 APPENDIX

11 Bluestem Group Q2 Results unaudited in 000's, except per share amounts Q Q Net loss $ (14,343) $ (11,286) Basic and diluted loss per share $ (0.11) $ (0.09) Basic and diluted weighted average shares outstanding 132, ,957 Bluestem Group Inc. cash and cash equivalents $ 129,064 $ 178,501 Net commercial real estate assets $ 9,351 $ 55,267 - Cash collected from commercial real estate assets $ 4,253 $ 5,667 Bluestem Group Inc. cash of $129.1 million, which increased $13.3 million from Q Commercial asset collection proceeds of $4.3 million Collections on PayCheck Direct account receivables of $15.2 million 11

12 Bluestem Brands, Inc. Q2 Adjusted EBITDA unaudited in 000's Q Q Net loss $ (6,769) $ (7,471) Income tax benefit (5,822) (1,439) Interest expense, net 12,752 13,683 Amortization and depreciation expense 15,077 19,379 Loss on impairment 430 EBITDA $ 15,238 $ 24,582 Gain on servicing right (660) Stock-based compensation expense 1,166 1,247 Integration costs 1,197 Restructuring costs 1,770 Orchard Portfolio segmentation & positioning research 2,502 Other 1, Adjusted EBITDA $ 21,071 $ 27,686 Adjusted EBITDA % of net sales 4.8% 5.9% 12

13 Bluestem Brands, Inc. Q2 General and Administrative Expenses unaudited in 000's Q Q Compensation and benefits $ 33,943 $ 33,139 Professional fees and contract labor 9,203 8,173 Rent and occupancy costs 7,099 7,746 Other 4,069 3,372 Total general and administrative expenses $ 54,314 $ 52,430 Less: Stock-based compensation expense 1,166 1,247 Integration costs 1,197 Restructuring costs 1,698 Orchard Portfolio segmentation & positioning research 2,502 Other 1, Adjusted general and administrative expenses $ 47,893 $ 49,453 Adjusted G&A as a % of net sales 10.9% 10.6% Capital Expenditures: Growth $ 2,581 $ 7,775 Maintenance $ 1,945 $ 4,510 Adjusted G&A expenses decreased $1.6 million as a result of saving from reduction in force offset by increased bonus accrual in the quarter of $5.2 million and lower capitalized expenses of $4.3 million compared to Q Q growth capex decreased to $2.6 million versus $7.8 million in Q due to the inclusion of capitalized headquarter move expenses in

14 Bluestem Group Inc. Stockholders Equity Table August 4, 2017 Series A 2014 Equity Convertible* Common Stock Incentive Plan Common Stock Total Stock, Warrants Stock Options & unaudited in 000's Stock Warrants Total outstanding stock 1, ,327 12,701 9, ,508 Stock available for grant 10,869 10,869 Total stock outstanding and available for grant 1, ,327 23,570 9, ,377 * On an as converted to common stock basis 14

15 Brand Contribution Margin Trends Northstar Portfolio Q Q Q Q Q Net sales in 000's $ 222,656 $ 218,333 $ 450,006 $ 187,046 $ 221,056 Gross margin % 41.6% 38.4% 39.6% 42.3% 42.9% Advertising expense as a % of net sales 18.5% 18.0% 11.3% 15.3% 15.5% Net credit expense as a % of net sales 7.2% 9.9% 18.1% 13.9% 13.2% Contribution margin as a % of net sales 15.9% 10.5% 10.3% 13.1% 14.1% Orchard Portfolio Q Q Q Q Q Net sales in 000's $ 226,516 $ 218,696 $ 250,155 $ 245,802 $ 204,903 Gross margin % 54.5% 52.3% 49.7% 52.6% 52.5% Advertising expense as a % of net sales 37.1% 40.0% 36.1% 39.4% 36.6% Contribution margin as a % of net sales 17.4% 12.3% 13.6% 13.2% 15.9% 15

16 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 16 Source: Regulatory filings

17 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 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. 17