Capmark Financial Group Inc. Announces Unaudited Consolidated First Quarter 2015 Earnings Results

EDEN PRAIRIE, Minn.--()--Capmark Financial Group Inc. (OTCMKTS: CPMK) today reported unaudited consolidated financial results that include its wholly-owned subsidiary, Bluestem Brands, Inc. and its subsidiaries, for the 13-week period ended May 1, 2015 (we refer to the 13-week periods ended May 1, 2015 and May 2, 2014 in this release as respectively the “first quarter” of fiscal 2015 and fiscal 2014). Bluestem, which merged with Capmark on November 7, 2014, is a multi-brand, online retailer of name-brand and private label general merchandise serving low- to middle-income consumers nationwide.

Capmark delivered another strong quarter, with Bluestem’s sales growing 20% year-over-year to $206.2 million and adjusted pro forma EBITDA growing 12% to $6.9 million. Our revolving credit portfolio continues to perform well, including a 60 basis-point year-over-year improvement in the 30+ day delinquency rate. We’re also excited about the Orchard Brands acquisition we announced last month and the value we believe this transaction will bring to our shareholders” said Steve Nave, Capmark’s Chief Executive Officer.

First Quarter 2015 Capmark Consolidated Highlights

  • Adjusted EBITDA for the first quarter of fiscal 2015 was $8.1 million compared to a loss of $0.1 million in first quarter of fiscal 2014.
  • Net loss for the first quarter of fiscal 2015 was $23.5 million compared to a net loss of $6.6 million for the first quarter of fiscal 2014. Included in the first quarter net loss was an $8.2 million loss on derivatives in our own equity related to outstanding warrants, $7.7 million amortization of acquired intangible assets related to Capmark’s acquisition of Bluestem last Fall, and $1.8 million in expenses related to the Orchard Brands acquisition. Diluted loss per share was $0.17 for the first quarter of fiscal 2015, compared to diluted loss per share of $0.04 for the same period in fiscal 2014.
  • Cash and cash equivalents were $233.5 million as of May 1, 2015, and net commercial real estate assets were approximately $108 million. During the quarter Capmark received $21.8 in cash from asset collections and revenue on commercial real estate-related assets and businesses, including $3.6 million from the partial redemption of the equity investment in the Federal Home Loan Bank of Seattle.

First Quarter 2015 Bluestem Stand-alone Highlights

  • Net sales for the first quarter of fiscal 2015 were $206.2 million, a 20% increase over net sales of $171.2 million for the same period in fiscal 2014.
  • Adjusted EBITDA was $6.9 million in the first quarter of fiscal 2015, a 13% increase compared to adjusted pro forma EBITDA of $6.1 million for the first quarter of fiscal 2014.
  • Net loss for the first quarter of fiscal 2015 was $11.3 million, compared to net income of $4.1 million for the first quarter of fiscal 2014.
  • Revolving new customer credit accounts were 143 thousand, a 4% increase over 138 thousand in the first quarter of fiscal 2014.
  • FreshStart new customer credit accounts were 60 thousand, a 22% increase over 49 thousand in the first quarter of fiscal 2014.
  • Active accounts increased to 1,686 thousand as of the end of the first quarter 2015, a 15% increase over the end of first quarter 2014.
  • 30+ day delinquent balances on the revolving portfolio were 15.4% for first quarter 2015 compared to 16.0% for first quarter 2014.

All financial information included in this release is unaudited. Information for Capmark is presented on a consolidated basis, including Bluestem beginning November 7, 2014. Information for Capmark’s wholly-owned subsidiary, Bluestem, is also presented on a stand-alone basis. The acquisition of Bluestem was accounted for as a business combination.

Adjusted pro forma EBITDA is defined in the accompanying financial information of Bluestem. Please see “Capmark Financial Group Inc. and Bluestem Brands, Inc. Financial Information-Overview and Basis of Presentation” below and accompanying disclosures for a more detailed explanation of the foregoing matters, reconciliations to results reported under GAAP and other important information for investors to consider.

Earnings Teleconference Information
Management will discuss the company’s 13-week period ended May 1, 2015 financial results during a teleconference tomorrow, June 17, 2015, at 8:00 AM ET. The conference call can be accessed at (888) 329-8862 or (719) 325-2354 (International). The call will also be broadcast simultaneously at http://www.capmark.com/investor-relations.

Following completion of the call, a recorded replay of the webcast will be available on Capmark’s website. To listen to the telephone replay, call toll-free (877) 870-5176 or (858) 384-5517 (International), replay pin # 5383157. The telephone replay will be available at 8:00 PM ET June 17, 2015. Additional investor information can be accessed at http://www.capmark.com/investor-relations.

About Capmark
Capmark Financial Group Inc. is a holding company whose businesses include Bluestem Brands, Inc., a multi-brand, online retailer of a broad selection of name-brand and private label general merchandise serving low- to middle-income consumers nationwide. Bluestem operates Fingerhut, Gettington and PayCheck Direct brands. Complementing each brand is a large selection of merchandise with a variety of payment options to provide customers with the flexibility of paying over time. Capmark is headquartered in Eden Prairie, MN. For additional information visit Capmark’s website at www.capmark.com.

Forward Looking Statements
This release 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 Capmark’s plans, strategies, prospects and expectations regarding its business and the expected closing and effects of the Orchard Brands acquisition are forward-looking statements. You should be aware that these statements and any other forward-looking statements in this document only reflect Capmark’s beliefs, assumptions and expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Many of these risks, uncertainties and assumptions are beyond Capmark’s control and may cause actual results and performance to differ materially from Capmark’s expectations.

Forward-looking statements are based on Capmark’s beliefs, assumptions and expectations of its future performance and actions, taking into account all information currently available to Capmark. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to Capmark or are within its control. If a change occurs, Capmark’s plans, business, financial condition, and liquidity may vary materially from those expressed in its forward-looking statements. Important factors that could cause the actual results to be materially different from Capmark’s expectations include the risks and uncertainties set forth in “Risk Factors” in Capmark’s Report as of and for the fiscal years ended January 30, 2015 and January 31, 2014.

Accordingly, you should not place undue reliance on the forward-looking statements contained in this release. These forward-looking statements are made only as of the date of this release. Capmark undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

CAPMARK FINANCIAL GROUP INC.
BLUESTEM BRANDS, INC.
FINANCIAL INFORMATION
13-weeks ended May 1, 2015 and May 2, 2014

Overview and Basis of Presentation

The accompanying financial information for Capmark is presented on a consolidated basis, including Bluestem beginning from November 7, 2014. The accompanying financial information for Capmark’s wholly-owned subsidiary, Bluestem, is also presented on a stand-alone basis. All such information is unaudited.

Capmark Consolidated Financial Information

On November 7, 2014, Capmark acquired Bluestem. As a result, the financial results of Bluestem for the 13-week period ended May 1, 2015 were included in the Capmark consolidated results, and Bluestem’s financial results were not included in the Capmark consolidated results for the 13-week period ended May 2, 2014. The acquisition of Bluestem was accounted for as a business combination.

In December 2014, Capmark changed its fiscal year from December 31 to the Friday closest to January 31 of the following year to conform to the fiscal year of Bluestem. Bluestem operates on a fiscal calendar widely used by the retail industry that results in fiscal years consisting of a 52- or 53-week period ending on the Friday closest to January 31 of the following year.

To supplement the historical financial data derived from Capmark’s consolidated financial statements, which are prepared in accordance with U.S. generally accepted accounting principles, or GAAP, this release uses non-GAAP net loss, non-GAAP diluted loss per share available to common stockholders and adjusted EBITDA of Capmark as non-GAAP performance measures. These measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP.

Bluestem Stand-alone Financial Information

As previously discussed, the acquisition of Bluestem was accounted for as a business combination. By the application of “push down” accounting, Bluestem’s assets and liabilities were adjusted to fair value as of November 7, 2014. The accompanying Bluestem financial results are presented as “Predecessor” or “Successor” to indicate the period preceding the acquisition or the period succeeding the acquisition, respectively.

The financial information in the accompanying report on Bluestem’s results of operations for the 13 weeks ended May 1, 2015 includes summary Bluestem consolidated adjusted pro forma EBITDA, pro forma net credit expense (income) and pro forma contribution margin data, which gives effect to the Santander Consumer USA transaction to which Bluestem became a party in April 2013. This information has been derived from internally prepared pro forma data, and is presented for informational purposes only and does not purport to represent what Bluestem’s consolidated financial position actually would have been had the events so described occurred on the dates indicated or to project its consolidated financial position as of any future date. This pro forma data does not relate in any way to or depict the effects in any way of the merger of Capmark and Bluestem.

To supplement the historical financial data derived from Bluestem’s consolidated financial statements, which are prepared in accordance with U.S. generally accepted accounting standards, or GAAP, the accompanying report on Bluestem’s results of operations for the 13 weeks ended May 1, 2015 uses, in addition to the above referenced adjusted pro forma data of Bluestem, adjusted EBITDA, contribution margin and adjusted general and administrative expenses, as non-GAAP performance measures. These measures are not in accordance with, or an alternative to, measures prepared in accordance with GAAP. Please see the accompanying report on Bluestem’s results of operations for the 13 weeks ended May 1, 2015 for further important information concerning these non-GAAP measures.

 
CAPMARK FINANCIAL GROUP INC.
Consolidated Statement of Comprehensive Income
(unaudited — in thousands, except share data)
     
13 Weeks Ended
May 1, 2015 May 2, 2014
Net sales and revenue
Net retail sales $ 206,175 $ -
Commercial real estate revenue
Net interest income 798 1,998
Net gains on investments and real estate 108 1,790
Other noninterest income   5,241     1,745  
Total net sales and revenue   212,322     5,533  
Costs and expenses
Retail cost of goods sold 120,260 -
Retail sales and marketing expenses 42,717 -
Retail net credit expense (income) 6,299 -
Commercial real estate operating expenses 677 1,420
General and administrative expenses 37,748 8,120
Amortization and depreciation not included in retail cost of goods sold 12,051 33
Loss from derivatives in our own equity   8,225     -  
Total costs and expenses 227,977 9,573
 
Operating loss (15,655 ) (4,040 )
 
Retail interest expense, net   7,520     -  
Loss from continuing operations before income taxes (23,175 ) (4,040 )
Income tax expense   (344 )   (290 )
Loss from continuing operations after income taxes (23,519 ) (4,330 )
Loss from discontinued operations, net of tax   -     (2,248 )
Net loss (23,519 ) (6,578 )
Plus: Net loss attributable to noncontrolling interests   -     2,142  
Net loss attributable to Capmark Financial Group Inc.   (23,519 )   (4,436 )
 
Other comprehensive income (loss)
Net change in unrealized gains and losses on investment securities   (215 )   67  
Other comprehensive (loss) income   (215 )   67  
Comprehensive loss attributable to Capmark Financial Group Inc. $ (23,734 ) $ (4,369 )
 
Basic and Diluted Loss Per Share - Common Stockholders
Basic and diluted loss per share - continuing operations

 

$ (0.17 ) $ (0.02 )
Basic and diluted loss per share attributable to Capmark Financial Group Inc.

 

$ (0.17 ) $ (0.04 )
Basic and diluted weighted average shares outstanding

 

136,124,970 99,803,233
 
 
CAPMARK FINANCIAL GROUP INC.
Condensed Consolidated Balance Sheets
(in thousands)
     
May 1, 2015 January 30, 2015
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 233,459 $ 254,207
Restricted cash 15,966 13,586
Customer accounts receivable — net of allowance for doubtful
accounts of $14,879 and $10,457, respectively 34,947 40,928
Commercial real estate accounts and other receivables 18,166 19,270
Retail merchandise inventories 95,732 96,431
Other current assets   41,939   34,999
Total current assets 440,209 459,421
Loans held for sale 50,432 78,080
Equity investments 106,266 114,736
Property and equipment — net 52,106 49,755
Intangible assets — net 370,190 377,892
Goodwill 201,642 201,642
Other assets   16,423   26,474
Total Assets $ 1,237,268 $ 1,308,000
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 82,053 $ 82,037
Accrued costs and other liabilities 82,876 92,823
Short-term debt   21,207   19,116
Total current liabilities 186,136 193,976
Long-term debt 324,781 359,484
Deferred income taxes 79,947 79,948
Other long-term liabilities   14,574   20,037
Total liabilities   605,438   653,445
 
Stockholders' Equity:
Series A participating convertible preferred stock 4,884 4,856
Common stock 1,364 1,364
Additional paid-in capital 357,706 356,697
Retained earnings 267,227 290,774
Accumulated other comprehensive income (loss), net of tax   649   864
Total Capmark Financial Group Inc. stockholders’ equity   631,830   654,555
Total Liabilities and Stockholders' Equity $ 1,237,268 $ 1,308,000
 
 
CAPMARK FINANCIAL GROUP INC.
Consolidated Statement of Changes in Stockholders’ Equity
(unaudited — in thousands, except share data)
                 
Capmark Financial Group, Inc. Stockholders

Series A Convertible
Preferred Stock

Common Stock

Additional
Paid-In

Retained

Accumulated
Other
Comprehensive

Noncontrolling

Total
Stockholders’

Shares   Amount Shares   Amount Capital Earnings Income Interest Equity
 
BALANCE — January 31, 2014 - $ - 100,182,419 $ 100 $ 189,970 $ 181,922

$

1,601

 

$ 32,503 406,096
Net income (loss) 108,936 $ (5,930 ) 103,006
Total other comprehensive income net of tax (737 ) (737 )
Common stock par value adjustment 902 (902 ) -
Issuance of preferred stock 1,000 5,000 5,000
Beneficial conversion feature associated with
preferred stock at issuance (228 ) 228 -
Issuance of common stock 2,081,357 21 8,317 8,338
Issuance of restricted common stock 249,623 2 2
Exercise of common stock warrants 33,861,194 339 135,311 135,650
Deemed dividend from beneficial conversion
feature associated with preferred stock 84 (84 ) -
Stock-based compensation 23,773 23,773
Other (includes impact from sale of
discontinued operations assets) (26,573 ) (26,573 )
                 
BALANCE — January 30, 2015 1,000   $ 4,856   136,374,593   $ 1,364 $ 356,697   $ 290,774   $ 864   $ -   $ 654,555  
 
Net loss (23,519 ) (23,519 )
Total other comprehensive loss net of tax (215 ) (215 )
Deemed dividend from beneficial conversion
feature associated with preferred stock 28 (28 ) -
Stock-based compensation 1,009 1,009
                 
BALANCE — May 1, 2015 1,000   $ 4,884   136,374,593   $ 1,364 $ 357,706   $ 267,227   $ 649   $ -   $ 631,830  
 
CAPMARK FINANCIAL GROUP INC.
Consolidated Statement of Cash Flows
(unaudited — in thousands)
     
13 Weeks Ended
May 1, 2015 May 2, 2014
Operating Activities of Continuing Operations
Net loss $ (23,519 ) $ (6,578 )
Net loss from discontinued operations   -     (2,248 )
Net loss from continuing operations (23,519 ) (4,330 )

Adjustments to reconcile net loss from continuing operations to net cash
provided by operating activities of continuing operations:

Uncertain tax positions 306 -
Net gains (4,450 ) (3,551 )
Equity in net (gains) losses of investees and cash return on investment (413 ) 88
Amortization and depreciation expense 12,335 33
Loss from derivatives in our own equity 8,225 -
Provision for doubtful accounts 5,267 -
Provision for retail merchandise returns 6,154 -
Stock-based compensation expense 1,421 450
Other, net 7,312 -
Net change in assets and liabilities which provided (used) cash:
Customer account and other receivables, net (4,825 ) 769
Retail merchandise inventories 2,527 -
Other assets (7,348 ) 1,974
Accounts payable and other liabilities (22,630 ) 3,632
Proceeds from sales of/payments from loans held for sale   31,949     1,277  
Net cash provided by operating activities of continuing operations   12,311     342  
 
Investing Activities of Continuing Operations
Net increase in restricted cash (2,380 ) (1 )
Proceeds from sales of investment securities classified as available for sale 51 -
Proceeds from repayments of investment securities classified as available for sale 58 1,795
Proceeds from sales of/capital distributions from equity investments 8,978 22,791
Purchase of customer accounts receivable (210,647 ) -
Proceeds from sale of customer accounts receivable 210,720 -
Net (purchase) disposition of property and equipment   (6,304 )   29  
Net cash provided by investing activities of continuing operations   476     24,614  
 
Financing Activities of Continuing Operations
(Repayments) borrowings of debt (34,898 ) 149
Borrowings on revolving credit facilities 86,923 -
Repayments on revolving credit facilities   (85,519 )   -  
Net cash (used in) provided by financing activities of continuing operations   (33,494 )   149  
   
Effect of Foreign Exchange Rates on Cash   (41 )   109  
Discontinued Operations
Net cash used in operating activities of discontinued operations - (1,218 )
Net cash provided by investing activities of discontinued operations   -     1,216  
Net cash used in discontinued operations   -     (2 )
Net (Decrease) Increase in Cash and Cash Equivalents   (20,748 )   25,212  
Cash and Cash Equivalents, Beginning of Period   254,207     169,444  
Cash and Cash Equivalents, End of Period $ 233,459   $ 194,656  
 
 

CAPMARK FINANCIAL GROUP INC.
Non-GAAP Financial Measures
(unaudited — in thousands)

     

To supplement the consolidated financial statements of Capmark Financial Group Inc. and its subsidiaries which are presented in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, we use the following measures that are not in accordance with, or an alternative to, measures prepared in accordance with GAAP (non-GAAP measures):

 
Adjusted EBITDA, as presented, represents net loss before interest expense, income tax (benefit) expense, amortization and depreciation expense, stock-based compensation expense, losses on derivatives in our own equity, acquisition transaction costs and costs related to the Centerbridge Investment Agreement.
 
Non-GAAP net loss, as we present it, represents net loss attributable to Capmark Financial Group Inc. before amortization of acquired intangible assets, stock-based compensation expense, losses on derivatives in our own equity, acquisition transaction costs and costs related to the Centerbridge Investment Agreement.
 
Non-GAAP diluted loss per share, as we present it, represents diluted loss per share before amortization of acquired intangible assets, stock-based compensation expense, losses on derivatives in our own equity, acquisition transaction costs and costs related to the Centerbridge Investment Agreement.
 

We provide these measures because we believe they are useful to investors in evaluating our operating performance compared to other companies in our industry. As non-GAAP measures, they have limitations in that they do not reflect all of the amounts associated with Capmark’s results of operations as determined in accordance with GAAP and are not based on any comprehensive set of accounting rules or principles. 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. In addition, our calculations of Adjusted EBITDA, non-GAAP net income and non-GAAP diluted earnings per share may not be comparable to the calculations of such measures by other companies.

13 Weeks Ended
May 1, 2015 May 2, 2014

Adjusted EBITDA reconciliation to GAAP net loss:

Net loss attributable to Capmark Financial Group Inc. $ (23,519 ) $ (4,436 )
Retail interest expense 7,520 -
Income tax (benefit) expense 344 290
Amortization and depreciation expense 12,336 33
Stock-based compensation expense 1,421 450
Losses on derivatives in our own equity 8,225 -
Acquisition transaction costs 1,812 -
Costs related to Centerbridge Investment Agreement   -     3,531  

Adjusted EBITDA

$ 8,139   $ (132 )
 

GAAP net loss attributable to Capmark Financial Group Inc.

$ (23,519 ) $ (4,436 )

Adjustments:

Amortization of acquired intangible assets 7,703 -
Stock-based compensation expense 1,421 450
Losses on derivatives in our own equity 8,225 -
Acquisition transaction costs 1,812 -
Costs related to Centerbridge Investment Agreement - 3,531
Tax effect of adjustments   -     -  

Non-GAAP net loss attributable to Capmark Financial Group Inc.

$ (4,358 ) $ (455 )
 

GAAP diluted loss per share available to common stockholders

$ (0.17 ) $ (0.04 )

Adjustments:

Amortization of acquired intangible assets 0.06 -
Stock-based compensation expense 0.01 -
Losses on derivatives in our own equity 0.06 -
Acquisition transaction costs 0.01 -
Costs related to Centerbridge Investment Agreement - 0.04

Tax effect of adjustments

  -     -  

Non-GAAP diluted loss per share available to common stockholders

$ (0.03 ) $ 0.00  
 

Fully diluted weighted-average shares outstanding

136,124,970 99,803,233
 
 
BLUESTEM BRANDS, INC.
Consolidated Statements of Operations and Selected Operating Data
(unaudited — in thousands, except average order size)
         
Successor
(13 Weeks Ended)
May 1, 2015
Predecessor
(13 Weeks Ended)
May 2, 2014

Change (a)

 
Net sales $ 206,175 $ 171,251 20.4 %
Cost of sales   120,260     98,753   21.8 %
Gross profit 85,915 72,498 18.5 %
Sales and marketing expenses 42,717 37,211 14.8 %
Net credit expense (income) 6,299 (12,706 ) n/m
General and administrative expenses 33,753 33,753 0.0 %

Amortization and depreciation not included incost of sales (b)

12,051 3,179 n/m
Interest expense, net (c)   7,520     4,636   62.2 %
(Loss) income before income taxes (16,425 ) 6,425 n/m
Income tax (benefit) expense   (5,159 )   2,305   n/m
Net (loss) income $ (11,266 ) $ 4,120   n/m
 
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit rate 41.7 % 42.3 % (66 ) bp
Sales and marketing expenses 20.7 % 21.7 % (100 ) bp
Pro forma net credit expense (income) (d) $ 6,299 $ 3,280 92.0 %
As a percentage of net sales 3.1 % 1.9 % 114 bp
Pro forma contribution margin (d) $ 36,899 $ 32,007 15.3 %
As a percentage of net sales 17.9 % 18.7 % (79 ) bp
Adjusted general and administrative expenses (d) $ 30,401 $ 26,250 15.8 %
As a percentage of net sales 14.7 % 15.3 % (58 ) bp
Adjusted EBITDA (d) $ 6,898 $ 22,339 (69.1 %)
As a percentage of net sales 3.3 % 13.0 % (970 ) bp
Adjusted pro forma EBITDA (d) $ 6,898 $ 6,115 12.8 %
As a percentage of net sales 3.3 % 3.6 % (23 ) bp
 
Selected Operating Data:
Revolving new customer credit accounts (e) 143 138 3.6 %
FreshStart new customer credit accounts (e) 60 49 22.4 %
PayCheck Direct new customer credit accounts (e) 6 1 500.0 %
Active accounts (f) 1,686 1,473 14.5 %
Average order size (g) $ 221 $ 214 3.3 %
PayCheck Direct eligible client employees (h) 2,648 1,815 45.9 %
 

(a) Changes in rates are presented as the basis point (bp) increase (decrease) from the prior period.
(b) Amortization and depreciation expense not included in cost of sales primarily consists of amortization expense of customer relationship finite-lived intangible assets and depreciation expense of software. Depreciation expense related to equipment in Bluestem's fulfillment facilities are included in cost of sales.
(c) Interest expense net of interest income.
(d) Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.
(e) Customers that have made their initial order on account during the fiscal period presented. Revolving new customer credit accounts excludes FreshStart graduates whom were initially included in FreshStart new customer credit accounts when their initial order was made.
(f) Revolving credit customers that have made at least one purchase on account within the previous twelve fiscal months and at least one payment on account since origination.
(g) Average order size represents retail merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.
(h) PayCheck Direct clients' full-time active employees with a tenure greater than six months, are at least 18 years old, and have met certain minimum annual earnings.

     

BLUESTEM BRANDS, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 
May 1, 2015 January 30, 2015
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,636 $ 59,222
Restricted cash 15,805 13,425
Customer accounts receivable — net of allowance for doubtful
accounts of $14,879 and $10,457, respectively 34,947 40,928
Merchandise inventories 95,732 96,431
Promotional material inventories 21,988 13,976
Deferred income taxes 8,543 14,914
Prepaid expenses and other assets   19,403   20,360
Total current assets 222,054 259,256
Property and equipment — net 52,106 49,755
Intangible assets — net 370,190 377,892
Goodwill 201,642 201,642
Other assets   5,449   5,377
Total Assets $ 851,441 $ 893,922
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 82,053 $ 82,037
Current income taxes payable 7,975 18,567
Accrued costs and other liabilities 48,512 65,109
Short-term debt   21,207   19,116
Total current liabilities 159,747 184,829
Long-term debt 274,616 278,169
Deferred income taxes 136,610 140,119
Other long-term liabilities 6,116 5,187
 
Stockholders' equity:
Common stock - -
Additional paid-in capital 269,602 269,602

  Retained earnings

4,750

16,016

Total stockholders' equity

274,352

285,618

Total Liabilities and Stockholders’ Equity

851,441

893,922

 
 
BLUESTEM BRANDS, INC.
Condensed Consolidated Statement of Cash Flows
(unaudited — in thousands)
       

Successor
(13 Weeks Ended)
May 1, 2015

Predecessor
(13 Weeks Ended)
May 2, 2014
 
Cash flows from operating activities:
Net (loss) income $ (11,266 ) $ 4,120
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization and depreciation expense 12,335 3,665
Amortization of deferred charges and original issue discount 915 757
Provision (benefit) for doubtful accounts 5,267 (7,373 )
Provision for merchandise returns 6,154 4,462
Deferred income taxes 2,862 1,008
Stock-based compensation expense 1,009 721
Other noncash items affecting income 7,301 4,596
Net change in assets and liabilities which provided (used) cash:
Customer accounts receivable (15,822 ) 1,362
Merchandise inventories 2,527 (13,979 )
Promotional material inventories (8,012 ) (3,745 )
Prepaid expenses and other assets 546 6,041
Current income taxes payable (10,593 ) (17,306 )
Accounts payable and other liabilities   (15,852 )   5,848  
Net cash used in operating activities   (22,629 )   (9,823 )
 
Cash flows from investing activities:
Purchase of customer accounts receivable (210,647 ) (179,611 )
Proceeds from sale of customer accounts receivable 210,720 180,025
Net purchase of property and equipment (6,304 ) (5,509 )
Net decrease in restricted cash   (2,380 )   (7,903 )
Net cash used in investing activities   (8,611 )   (12,998 )
 
Cash flows from financing activities:
Borrowings on revolving credit facilities 86,923 103,218
Repayments on revolving credit facilities (85,519 ) (102,857 )
Repayments on Successor Term Loan (3,750 ) -
Repayments on Predecessor Term Loan - (25,000 )
Issuance of Predecessor common stock   -     426  
Net cash used in financing activities   (2,346 )   (24,213 )
 
Net Decrease in Cash and Cash Equivalents   (33,586 )   (47,034 )
Cash and Cash Equivalents, Beginning of Period   59,222     132,388  
Cash and Cash Equivalents, End of Period $ 25,636   $ 85,354  
 
           
BLUESTEM BRANDS, INC.
Supplemental Financial Information
(unaudited — in thousands)
 
Successor
(13 Weeks Ended)
May 1, 2015
Predecessor
(13 Weeks Ended)
May 2, 2014

Change

Total sales by merchandise category:
Home $ 98,706 45.7 % $ 81,119 45.6 % 21.7 %
Entertainment 84,368 39.0 % 69,201 38.9 % 21.9 %
Fashion   32,996   15.3 %   27,604   15.5 % 19.5 %
Total merchandise sales (a) 216,070 100.0 % 177,924 100.0 % 21.4 %
Returns and allowances (13,949 ) (10,602 ) 31.6 %
Commissions   4,054     3,929   3.2 %
Net sales $ 206,175   $ 171,251   20.4 %
 
Gross profit rate 41.7 % 42.3 % (66 ) bp
Contribution margin rate (c) 17.9 % 28.0 % (1,013 ) bp
 
Fingerhut sales by merchandise category:
Home $ 89,061 46.3 % $ 74,291 45.9 % 19.9 %
Entertainment 73,237 38.0 % 61,736 38.1 % 18.6 %
Fashion   30,297   15.7 %   25,807   16.0 % 17.4 %
Total merchandise sales (a) 192,595 100.0 % 161,834 100.0 % 19.0 %
Returns and allowances (12,542 ) (9,609 ) 30.5 %
Commissions   3,723     3,772   (1.3 )%
Net sales $ 183,776   $ 155,997   17.8 %
 
Gross profit rate 43.6 % 44.0 % (40 ) bp
Contribution margin rate (c) 19.5 % 29.5 % (1,001 ) bp
 
Other sales by merchandise category: (b)
Home $ 9,645 41.1 % $ 6,828 42.4 % 41.3 %
Entertainment 11,131 47.4 % 7,465 46.4 % 49.1 %
Fashion   2,699   11.5 %   1,797   11.2 % 50.2 %
Total merchandise sales (a) 23,475 100.0 % 16,090 100.0 % 45.9 %
Returns and allowances (1,407 ) (993 ) 41.7 %
Commissions   331     157   110.8 %
Net sales $ 22,399   $ 15,254   46.8 %
 
Gross profit rate 25.4 % 24.8 % 61 bp
Contribution margin rate (c) 4.6 % 12.7 % (802 ) bp
 
 

(a) Total merchandise sales includes shipping and handling revenue and is net of sales discounts.
(b) Other includes Gettington.com and Paycheck Direct.
(c) Contribution margin rate represents contribution margin as a percentage of net sales. Please refer to the "Bluestem Brands, Inc. - Non-GAAP Financial Measures" within this release for a reconciliation of non-GAAP financial measures to GAAP and why Bluestem believes these are important measures of its performance.

   
BLUESTEM BRANDS, INC.
Supplemental Financial Information
(unaudited — in thousands)
   
Successor
(13 Weeks Ended)
May 1, 2015
Predecessor
(13 Weeks Ended)
May 2, 2014
Change
Net credit expense (income):
Finance charge and fee income $ (3,980 ) $ 5,322 (174.8 )%
Provision (benefit) for doubtful accounts 5,267 (7,373 ) (171.4 )%
Credit management costs 19,094 16,368 16.7 %
Portfolio profit sharing and servicing fee income   (14,082 )   (27,023 ) (47.9 )%
Net credit expense (income) $ 6,299   $ (12,706 ) (149.6 )%
 
Serviced Portfolio Selected Credit Data:
 
(13 Weeks Ended)
May 1, 2015
Revolving (a) FreshStart (b) PCD Installment (c)
Balance active accounts 1,808 178 28
Average balance outstanding $ 672 $ 121 $ 635
Customer accounts receivable (d) $ 1,214,618 $ 21,625 $ 17,788
Balances 30+ days delinquent (e) $ 186,478 $ 10,344 $ 1,355

 

Balances 30+ days delinquent as a percentage
of total customer accounts receivable (f)

15.4 % 47.8 % 7.6 %
Average customer accounts receivable $ 1,241,546 $ 22,407 $ 17,143
Finance charge and fee income 92,184 2,303 n/a
Finance charge and fee income rate (g) 29.7 % 20.1 % n/a
Net principal charge-offs $ 52,841 $ 3,046 $ 688
Net principal charge-off rate (h) 17.0 % 26.5 % 16.0 %
 
 
(13 Weeks Ended)
May 2, 2014
Revolving (a) FreshStart (b) PCD Installment (c)
Balance active accounts 1,653 127 6
Average balance outstanding $ 599 $ 111 $ 647
Customer accounts receivable (d) $ 990,008 $ 14,046 $ 3,815
Balances 30+ days delinquent (e) $ 158,300 $ 6,338 $ 387

Balances 30+ days delinquent as a percentage
of total customer accounts receivable (f)

16.0 % 45.1 % 10.1 %
Average customer accounts receivable $ 1,009,848 $ 14,108 $ 3,902
Finance charge and fee income $ 73,721 $ 1,729 n/a
Finance charge and fee income rate (g) 29.2 % 21.0 % n/a
Net principal charge-offs $ 37,820 $ 2,358 $ 16

Net principal charge-off rate (h)

15.0 % 28.6 % 1.7 %
 
 

(a) Revolving serviced portfolio includes Fingerhut and Gettington.com revolving credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's installment accounts.
(c) PCD installment serviced portfolio is installment receivables issued to consumers who are members and employees of participating organizations and employers in the Paycheck Direct program.
(d) Customer accounts receivable excludes impact from purchase accounting fair value adjustment.
(e) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.
(f) Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end as a percentage of total customer accounts receivable as of the customers' statement cycle dates prior to or on fiscal period end.
(g) Revolving finance charge and fee income rate represents finance charge and fee income as a percentage of average customer accounts receivable for the 13 weeks ended May 1, 2015 and May 2, 2014 annualized to 52-week periods for comparability. FreshStart finance charge and fee income rate represents finance charge and fee income as a percentage of the 13 weeks of FreshStart related sales five months prior to the 13 weeks ended May 1, 2015 and May 2, 2014.
(h) Revolving and PCD Installment net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13 weeks ended May 1, 2015 and May 2, 2014 annualized to 52-week periods for comparability. FreshStart net principal charge-off rate represents net principal charge-offs as a percentage of the 13 weeks of FreshStart related sales five months prior to the 13 weeks ended May 1, 2015 and May 2, 2014.

 
BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited — in thousands)
     
To supplement the consolidated financial information of Bluestem Brands, Inc. and its subsidiaries which are presented in accordance with U.S. Generally Accepted Accounting Principles, or 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):
 
Pro forma net credit expense (income), as presented, is defined as net credit expense (income) assuming that the Santander Consumer USA Inc. ("SCUSA") credit financing arrangement had been in place and all revolving customer accounts receivable were sold to SCUSA prior to the 2013 fiscal year. No pro forma adjustments were necessary for the first quarter of fiscal 2015 as the sale of receivables was fully transitioned by the end of fiscal 2014.
 
Contribution margin, as presented, is defined as net sales less cost of sales, sales and marketing expenses and net credit expense (income). Contribution Margin represents the combined performance of merchandising, marketing and credit management activities.
 
Pro forma contribution margin, as presented, is defined as net sales less cost of sales, sales and marketing expenses and pro forma net credit expense (income) assuming that the SCUSA credit financing arrangement had been in place and all revolving customer accounts receivable were sold to SCUSA prior to the 2013 fiscal year. No pro forma adjustments were necessary for the first quarter of fiscal 2015 as the sale of receivables was fully transitioned by the end of fiscal 2014.
 
Adjusted general and administrative expense, as presented, is defined as general and administrative expenses adjusted for dividend equivalent expense, stock-based compensation expense, strategic initiatives expense, acquisition transaction costs, specified litigation matters, and other.
 
Adjusted EBITDA, as presented, represents net (loss) income before interest expense, income tax (benefit) expense, amortization and depreciation expense, stock-based compensation expense, dividend equivalent expense, acquisition transaction costs, specified litigation matters, and other. Specified litigation matters are certain litigation contingencies that existed as of the November 7, 2014 acquisition of Bluestem by Capmark that are subject to limited indemnification by Bluestem's former stockholders.
 
Adjusted pro forma EBITDA, as presented, represents net (loss) income, assuming that the SCUSA credit financing arrangement had been in place and all revolving customer accounts receivable were sold to SCUSA prior to the 2013 fiscal year, before interest expense, income tax (benefit) expense, amortization and depreciation expense, stock-based compensation expense, dividend equivalent expense, acquisition transaction costs, specified litigation matters, and other. In April 2013, the Company entered into a new strategic relationship with SCUSA, under which the Company would sell all newly originated Fingerhut and Gettington revolving credit receivables to SCUSA at par on the same business day as its purchase from WebBank and shares the profit on the receivables with SCUSA. No pro forma adjustments were necessary for the first quarter of fiscal 2015 as the sale of receivables was fully transitioned by the end of fiscal 2014.
 
We provide these measures because we believe they are useful to investors in evaluating our operating performance (while giving effect to the SCUSA transaction) compared to other companies in our industry. As non-GAAP measures, they have limitations in that they do not reflect all of the amounts associated with Bluestem’s results of operations as determined in accordance with GAAP and are not based on any comprehensive set of accounting rules or principles. 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. In addition, our calculations of pro forma net credit expense (income), contribution margin, pro forma contribution margin, adjusted general and administrative expense, adjusted EBITDA, and adjusted pro forma EBITDA may not be comparable to the calculations of such measures by other companies.
 
The following table reconciles our pro forma Net Credit Expense (Income) to the nearest GAAP performance measure, which is net credit expense (income):
 
13 Weeks Ended
May 1, 2015 (a) May 2, 2014
Pro forma Net Credit Expense (Income):
Net credit expense (income) $ 6,299 $ (12,706 )
Less:
Finance charge and fee income adjustment (b) - (7,052 )
Provision for doubtful accounts adjustment (b) - 10,638
Servicing income adjustment (c) - (175 )
Profit sharing adjustment (c)   -     12,575  
Total net credit expense (income) pro forma adjustments   -     15,986  
Pro forma Net Credit Expense (Income) $ 6,299   $ 3,280  
 
Pro forma net credit expense (income) % of net sales 3.1 % 1.9 %
 

(a) No pro forma adjustments were necessary for the 13 weeks ended May 1, 2015 as the sale of receivables was fully transitioned by the end of fiscal 2014.
(b) Finance charge and fee income and provision (benefit) for doubtful accounts shifted to SCUSA for all revolving receivables. Bluestem Brands, Inc. retains finance charge and fee income and provision (benefit) for doubtful accounts for retained receivables (FreshStart and PayCheck Direct).
(c) Bluestem Brands, Inc. receives a 2% servicing fee and profit sharing (based on Risk Adjusted Margin) from SCUSA.

 
BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited — in thousands)
     
The following table reconciles our Contribution Margin to the nearest GAAP performance measure, which is net (loss) income:
 
13 Weeks Ended
May 1, 2015 May 2, 2014
Contribution Margin:
Net (loss) income $ (11,266 ) $ 4,120
Income tax (benefit) expense (5,159 ) 2,305
Interest expense, net 7,520 4,636
General and administrative expenses 33,753 33,753
Amortization and depreciation not included in cost of sales   12,051     3,179  
Contribution Margin $ 36,899   $ 47,993  
 
Contribution margin % of net sales 17.9 % 28.0 %
 
The following table reconciles Contribution Margin to pro forma Contribution Margin:
 
13 Weeks Ended
May 1, 2015 (a) May 2, 2014
Pro forma Contribution Margin:
Contribution margin 36,899 47,993
Less:
Net credit expense (income) pro forma adjustments (b)   -     15,986  
Pro forma Contribution Margin $ 36,899   $ 32,007  
 
Pro forma contribution margin % of net sales 17.9 % 18.7 %
 
The following table reconciles Adjusted General and Administrative expenses to the nearest GAAP performance measure, which is general and administrative expenses:
 
13 Weeks Ended
May 1, 2015 May 2, 2014
Adjusted General and Administrative Expenses:
General and administrative expenses $ 33,753 $ 33,753
Less:
Dividend equivalent expense - 3,160
Stock-based compensation expense 1,009 722
Acquisition transaction costs 1,812 1,549
Specified litigation matters - 2,017
Other   531     55  
Adjusted General and Administrative Expenses $ 30,401   $ 26,250  
 
Adjusted general and administrative expenses % of net sales 14.7 % 15.3 %
 

(a) No pro forma adjustments to Contribution Margin was necessary for the 13 weeks ended May 1, 2015 as the sale of receivables was fully transitioned by the end of fiscal 2014.
(b) Net credit expense (income) pro forma adjustments are described in pro forma net credit expense (income) section.

 
BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited — in thousands)
     
 
The following table reconciles our Adjusted EBITDA to the nearest GAAP performance measure, which is net (loss) income:
 
13 Weeks Ended
May 1, 2015 May 2, 2014
Adjusted EBITDA:
Net (loss) income $ (11,266 ) $ 4,120
Interest expense 7,520 4,643
Income tax (benefit) expense (5,159 ) 2,305
Amortization and depreciation expense 12,336 3,663
Stock-based compensation expense 1,009 722
Dividend equivalent expense - 3,160
Acquisition transaction costs 1,812 1,549
Specified litigation matters - 2,017
Other   646     160  
Adjusted EBITDA $ 6,898   $ 22,339  
 
Adjusted pro forma EBITDA % of net sales 3.3 % 13.0 %
 
The following table reconciles our Adjusted EBITDA to Adjusted pro forma EBITDA:
 
13 Weeks Ended
May 1, 2015 (a) May 2, 2014
Adjusted pro forma EBITDA:
Adjusted EBITDA $ 6,898 $ 22,339
Less:
Net credit expense (income) pro forma adjustments (b) - (15,986 )
Other pro forma adjustments (c)   -     (238 )
Adjusted pro forma EBITDA $ 6,898   $ 6,115  
 
Adjusted pro forma EBITDA % of net sales 3.3 % 3.6 %
 

(a) No pro forma adjustments were necessary for the 13 weeks ended May 1, 2015 as the sale of receivables was fully transitioned by the end of fiscal 2014.
(b) Net credit expense (income) pro forma adjustments are described above in pro forma net credit expense (income).
(c) Amortization and depreciation decrease due to elimination of amortization of deferred SCUSA transaction-related expenses.

MANAGEMENT’S COMMENTARY ON RESULTS OF OPERATIONS OF BLUESTEM BRANDS, INC.

The following management commentary presents the Company’s detailed analysis of the results of operations of Bluestem Brands, Inc. and its consolidated subsidiaries (“Bluestem” or “we”) on a stand-alone basis for the (unaudited) thirteen weeks ended May 1, 2015 and May 2, 2014.

Results of Operations – Thirteen Weeks Ended May 1, 2015 Compared to Thirteen Weeks Ended May 2, 2014

Net Income (Loss): For the thirteen weeks ended May 1, 2015, net loss was $11.3 million, a decrease of $15.4 million as compared to net income of $4.1 million for the same period ended May 2, 2014. We reported a net loss for the quarter due to a $19.0 million increase in net credit expense, an $8.9 million increase in amortization and depreciation not included in costs of sales, a $5.5 million increase in sales and marketing expenses and a $2.9 million increase in interest expense, net, partially offset by a $13.4 million increase in gross profit and a $7.5 million decrease in income tax expense.

Adjusted EBITDA / Adjusted Pro Forma EBITDA: Adjusted EBITDA for the thirteen weeks ended May 1, 2015 was $6.9 million, an increase of $0.8 million as compared to adjusted pro forma EBITDA of $6.1 million for the same period ended May 2, 2014. Adjusted EBITDA increased by $0.8 million for the thirteen weeks ended May 1, 2015 as compared to adjusted pro forma EBITDA for the thirteen weeks ended May 2, 2014 due to a $13.5 million increase in gross profit offset by a $5.5 million increase in sales and marketing expenses, a $4.2 million increase in general and administrative expenses and a $3.0 million increase in net credit expense (income).

Net Sales: For the thirteen weeks ended May 1, 2015, net sales were $206.2 million, an increase of $34.9 million or 20.4% as compared to net sales of $171.3 million for the same period ended May 2, 2014. We fulfilled 977 thousand orders with an average order size of $221 for the thirteen weeks ended May 1, 2015 compared to 833 thousand orders and an average order size of $214 for the thirteen weeks ended May 2, 2014. We added 203 thousand new credit customers in the thirteen weeks ended May 1, 2015 compared to 187 thousand new credit customers in the thirteen weeks ended May 2, 2014. The $34.9 million net sales increase was due to strong sales to both new and existing customers. New customer accounts acquired were driven by broader visibility of our website through TV advertising and assortment expansion. Sales to existing customers increased due to a 14.5% increase in the number of active accounts and improved rebuy rates.

Gross Profit Rate: The gross profit rate decreased 66 basis points to 41.7% for the thirteen weeks ended May 1, 2015 as compared to 42.3% for the thirteen weeks ended May 2, 2014. The decrease in gross profit reflects lower mark-up due to an increase in Gettington and PayCheck Direct net sales, which have lower mark-ups, and a mix shift out of our higher mark-up fashion merchandise category into our lower mark-up electronics merchandise category and an increase in merchandise returns, partially offset by a decrease in shipping expense due to lower carrier rates.

Sales and Marketing Expenses: For the thirteen weeks ended May 1, 2015, sales and marketing expenses were $42.7 million, an increase of $5.5 million or 14.8% as compared to $37.2 million for the same period ended May 2, 2014. As a percent of net sales, our sales and marketing costs were 20.7%, compared to 21.7% in the prior year.

Net Credit Expense (Income): Net credit expense was $6.3 million for the thirteen weeks ended May 1, 2015 compared to a net credit income of $12.7 million for the thirteen weeks ended May 2, 2014. Pro forma net credit expense for the thirteen weeks ended May 2, 2014 was $3.3 million. Pro forma net credit expense for the thirteen weeks ended May 1, 2015 increased 114 basis points as compared to pro-forma net credit expense for the same period ended May 2, 2014 primarily due to our decision in the fourth quarter of fiscal 2014 to temporarily move our collections platform to manual dialing to enhance our compliance with existing regulations regarding the calling of mobile phones and our conversion to a new receivables platform in March of 2014. As a result, pro forma net credit expense had $1.0 million higher credit operating costs and $1.2 million in lower profit sharing on the SCUSA-owned portfolio.

General and Administrative Expenses: General and administrative expenses were $33.8 million for both the thirteen weeks ended May 1, 2015 and the thirteen weeks ended May 2, 2014. Adjusted general and administrative expenses for the thirteen weeks ended May 1, 2015 were $30.4 million or 14.7% of net sales, compared to $26.3 million or 15.3% of net sales for the same period ended May 2, 2014. Adjusted general and administrative expenses as a percent of net sales decreased 58 basis points primarily due to an increase in net sales.

Amortization and Depreciation not Included in Cost of Sales: Amortization and depreciation not included in costs of sales were $12.1 million for the thirteen weeks ended May 1, 2015 as compared to $3.2 million for the thirteen weeks ended May 2, 2014. This increase was primarily due to the recognition of $7.7 million of amortization expense related to the customer relationship intangible asset as a result of the Acquisition.

Interest Expense: For the thirteen weeks ended May 1, 2015, interest expense was $7.5 million, an increase of $2.9 million as compared to $4.6 million for the same period ended May 2, 2014. The increase is a result of weighted average borrowings outstanding for the thirteen weeks ended May 1, 2015 of $296.1 million compared to $213.2 million for the thirteen weeks ended May 2, 2014. The increase in weighted average borrowings was due to borrowings in connection with the Acquisition.

Income Tax Expense (Benefit): For the thirteen weeks ended May 1, 2015, income tax benefit was $5.2 million as compared to income tax expense of $2.3 million for the thirteen weeks ended May 2, 2014. The $5.2 million income tax benefit was primarily a result of our $16.4 million loss before income taxes, whereas we had income before income taxes of $6.4 million for the thirteen weeks ended May 2, 2014.

Contacts

Investor Relations:
ICR
Denise Garcia, 215-328-1555

Contacts

Investor Relations:
ICR
Denise Garcia, 215-328-1555