Bluestem Group Inc. Announces Unaudited Consolidated Fourth Quarter Fiscal 2019 Earnings Results

EDEN PRAIRIE, Minn--()--Bluestem Group Inc. ("Bluestem Group" or the "Company")(OTCMKTS:BGRP) today reported unaudited consolidated financial results that include its wholly-owned subsidiary, Bluestem Brands, Inc. and its subsidiaries (“Bluestem Brands”), for the fiscal year ended February 1, 2019 and February 2, 2018. We refer to the 13-week periods in this release as the "fourth quarter." Bluestem is a multi-brand, direct-to-consumer online retailer of a broad selection of name-brand and private label general merchandise serving the boomer and senior demographic, generally considered age 50 and over, and low- to middle-income consumers across all age demographics.

Fourth Quarter Fiscal 2018 Bluestem Brands Highlights

  • The Company made the strategic decision to exit six of its eleven Orchard brands: Bedford Fair, Gold Violin, Norm Thompson, Sahalie, The Tog Shop and Winter Silks. In connection with this action, we recorded $8.9 million of restructuring and restructuring related charges.
  • The new revenue recognition accounting standard ("Topic 606") adopted in Q1 2018 resulted in a net decrease of $13.9 million of direct response advertising costs and a corresponding increase in AEBITDA.
  • Net sales were $584.8 million, a 5.9% decrease compared to the fourth quarter of fiscal 2017.
  • Gross margin was 42.6% compared to 45.3% in the fourth quarter of fiscal 2017. Excluding the impact of inventory write-downs and provisions relating to the announced exiting of six orchard Brands, gross margin was 43.7%.
  • Selling and marketing expenses as a percent of net sales was 16.0% compared to 20.5% in the fourth quarter of fiscal 2017. Excluding the impact of Topic 606, selling and marketing expenses as a percent of net sales was 18.4% compared to 20.5% in the fourth quarter of fiscal 2017.
  • Adjusted EBITDA was $74.6 million compared to $54.5 million in the fourth quarter of fiscal 2017, an increase of 400 basis points as a percent of net sales*. Excluding the impact from the adoption of Topic 606, Adjusted EBITDA was $60.7 million or 10.4% of net sales in the fourth quarter of fiscal 2019.
  • An intangible asset impairment $25.6 million was recognized related to both the exited retail brands and the go-forward Orchard brands
  • Compliant with lender covenants throughout and as of the end of the fourth quarter, net liquidity was $85.4 million compared to a covenant requirement of $40.0 million and lender leverage ratio was 2.99x compared to a covenant requirement of 4.50x.

Bruce Cazenave, CEO, stated, “Over the course of 2018, a great deal had been accomplished to restructure and strengthen many aspects of the business. There was significant progress in the Northstar portfolio as a result of strategic steps taken to increase the quality of the credit portfolio and drive improved profitability. In addition, the work done to streamline the Orchard portfolio will enable greater focus on improving results within the go forward brands. Fourth quarter operating results are validation that the key strategies implemented are beginning to work, as evidenced by improved credit metrics and increased contribution margin in both portfolio businesses. With this solid progress already underway, I look forward to working with the team to formulate and execute a strategic plan that will yield long term profitable growth and drive shareholder value. "

Fourth Quarter Fiscal 2018 Bluestem Group Consolidated Information

                unaudited in millions (except loss per share)       Q4 2018   Q4 2017
Bluestem Group net income (loss)* $ 12.5 $ (140.5 )
Bluestem Group basic and diluted income (loss) per share* $ 0.09 $ (1.06 )
Bluestem Group Adjusted EBITDA* $ 74.2 $ 53.3
Bluestem Group cash and cash equivalents $ 119.5 $ 123.4

Fourth Quarter Fiscal 2019 Bluestem Brands Stand-Alone Information

                    unaudited in millions       Q4 2018   Q4 2017
Bluestem Brands net sales $ 584.8 $ 621.3
Bluestem Brands net income (loss)* $ 13.1 $ (159.8 )
Bluestem Brands Adjusted EBITDA* $ 74.6 $ 54.5
 
Northstar Portfolio net sales $ 386.1 $ 399.0
Orchard Portfolio net sales $ 179.6 $ 207.7
Northstar portfolio active customers 1.5 1.5
Orchard Portfolio gross active customers 6.8 7.4
 
Northstar Portfolio revolving credit portfolio:
30+ day delinquency rate 16.6 % 16.3 %
Net principal charge-off rate 23.4 % 20.7 %
 

*Fourth quarter of fiscal 2018 includes a $13.9 million impact from the net decrease of certain advertising costs as a result of the adoption of Topic 606.

Full Year Fiscal 2018 Bluestem Brands Highlights

  • Net Sales were $1,795.9 million, a decrease of 4.9% compared to fiscal 2017, partially attributable to our circulation reduction strategies in our Orchard Brands portfolio.
  • Adjusted gross margin was 46.4%, down from 46.9% in the prior year, primarily due to incremental discounting at Orchard Brands, offset to some extent by higher gross margin rate at Northstar.
  • Adjusted selling and marketing expenses declined by 80 bps to 24.2%, related to discontinuing television advertising at Northstar and circulation cuts in the fourth quarter at Orchard Brands.
  • Adjusted Net credit expense decreased by $15.7 million to 6.9% of sales reflecting the results of our ongoing efforts to improve the credit quality of the SCUSA portfolio.
  • Adjusted EBITA was $98.0 million, a 6.2% increase from $92.3 million in Fiscal 2017.

All financial information included in this release is unaudited. Information for Bluestem Group is presented on a consolidated basis. Consolidated information for Bluestem Group’s wholly-owned subsidiary, Bluestem Brands, Inc., is also presented on a stand-alone basis.

Adjusted EBITDA is defined in the accompanying financial information of Bluestem Group and Bluestem Brands. Please see “Bluestem 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

The Company will host a conference call at 8:00 AM ET on Friday, April 12, 2019. The conference call can be accessed at (888) 394-8218 or (323) 701-0225 (International), conference ID # 8554122 and broadcast simultaneously at http://www.bluestem.com/investor-relations. Following completion of the call, a recorded replay of the webcast will be available on Bluestem’s website. To listen to the telephone replay, call toll-free (844) 512-2921 or (412) 317-6671 (International), replay pin # 8554122. The telephone replay will be available at 11:00 AM ET April 12, 2019. Additional investor information can be accessed at http://www.bluestem.com/investor-relations.

About Bluestem Group

Bluestem Group Inc., a holding company headquartered in Eden Prairie, MN, operates multiple direct to consumer retail brands through its subsidiary Bluestem Brands. The Northstar Portfolio includes Fingerhut and Gettington, both of which are national multi-channel retail brands offering a broad selection of name brand and private label merchandise serving low- to middle-income consumers by offering multiple payment plans through revolving credit lines or installment loans offered by WebBank. The Orchard Portfolio consists of multi-channel brands that offer apparel, accessories, and home products for the boomer and senior demographic, generally considered age 50 and over and provide customers with the ability to obtain credit through a third-party private label credit card. Go forward brands include Appleseed’s, Blair, Draper’s & Damon’s, Haband, and Old Pueblo Traders. At the end of fiscal 2018, the Company has announced that it would be exiting from six legacy retail brands in fiscal 2019: Bedford Fair, Gold Violin, Norm Thompson, Sahalie, Tog Shop and WinterSilks. All of Sahalie's inventory assortment is now and will continue to be offered through our Gettington Retail Brand. The remaining exited retail brands will be sold or liquidated. For additional information visit the Bluestem Group website at www.bluestem.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 Bluestem Group’s plans, strategies, prospects and expectations regarding its business are forward-looking statements. You should be aware that these statements and any other forward-looking statements in this document only reflect Bluestem Group’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 Bluestem Group’s control and may cause actual results and performance to differ materially from Bluestem Group’s expectations. Forward-looking statements are based on Bluestem Group’s beliefs, assumptions and expectations of its future performance and actions, taking into account all information currently available to Bluestem Group. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to Bluestem Group or are within its control. If a change occurs, Bluestem Group’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 Bluestem Group’s expectations include the risks and uncertainties set forth in “Risk Factors” in Bluestem Group’s Report as of and for the fiscal years ended February 1, 2019 and February 2, 2018.

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. Bluestem Group undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

     
BLUESTEM GROUP INC.
Table of Contents
 
Page
Overview and Basis of Presentation

5

Bluestem Group Inc.

6

Consolidated Statements of Comprehensive Income (Loss)

7

Consolidated Balance Sheets (Unaudited)

8

Consolidated Statements of Cash Flows (Unaudited)

9

Non-GAAP Financial Measure

10

Impact of Topic 606 Adoption

11

Bluestem Brands, Inc.

13

Consolidated Statements of Comprehensive Income (Loss) and Selected Operating Data

14

Consolidated Balance Sheets (Unaudited)

17

Consolidated Statements of Cash Flows (Unaudited)

18

Supplemental Financial Information
Segment Net Sales

19

Credit Portfolio

22

Non-GAAP Financial Measures

24

Impact of Topic 606 Adoption

29

 

BLUESTEM GROUP INC.
BLUESTEM BRANDS, INC.
FINANCIAL INFORMATION
13-Weeks and Fiscal Years Ended February 1, 2019 and February 2, 2018

Overview and Basis of Presentation

As used in this release:

  • “Bluestem Group,” "BGI," “we,” “us,” “our,” or “the Company” refers to Bluestem Group Inc. with its consolidated subsidiaries
  • “BGI Holding Company” refers to the Bluestem Group Inc. legal entity, excluding its subsidiaries
  • "Bluestem Brands" or “Bluestem” refers to Bluestem Brands, Inc., an indirect subsidiary of Bluestem Group, which consists of Northstar Portfolio, Orchard Portfolio and PayCheck Direct (which was exited in the first quarter of fiscal 2017)
  • "Northstar Portfolio” refers to the consolidated Fingerhut and Gettington retail brands
  • “Orchard Portfolio” refers to the consolidated Appleseed’s, Bedford Fair, Blair, Draper’s & Damon’s (retail stores were exited during the first quarter of fiscal 2017), Gold Violin, Haband, LinenSource (which was exited in the second quarter of fiscal 2017), Norm Thompson, Old Pueblo Traders, Sahalie, Tog Shop, and WinterSilks retail brands

The accompanying financial information for Bluestem Group Inc. is presented on a consolidated basis, including its wholly owned subsidiary Bluestem Brands, Inc. and its consolidated subsidiaries. The accompanying financial information for Bluestem Brands, Inc. is also presented on a stand-alone basis. All financial information included in this release is unaudited.

The business results for 2018 reflect the adoption of the new revenue recognition accounting standard (Topic 606). The primary impact of the adoption of Topic 606 was to accelerate the timing of recognizing direct mail catalog advertising costs, which were capitalized and amortized over their expected period of future benefit prior to adoption and are now recognized upon mailing to recipients.

At the end of the fourth quarter of fiscal 2018, the Company announced that it had made the strategic decision to exit six of its thirteen retail brands: Bedford Fair, Gold Violin, Norm Thompson, Sahalie, The Tog Shop and Winter Silks ("the 2018 Restructuring Plan"). This decision was made to streamline the business, enabling Company management to focus resources on the core Orchard portfolio brands, consisting of Appleseed’s, Blair, Drapers & Damon’s, Haband and Old Pueblo Traders. All of Sahalie's inventory assortment is now and will continue to be offered through our Gettington Retail Brand. The remaining exited retail brands will be sold or liquidated. Restructuring costs consisting primarily of employee severance costs were recorded as restructuring costs and a restructuring liability was established. There was no impact on fiscal 2018 net sales related to this decision. Restructuring costs related to pending exit of the brands were recorded in the Corporate and other segment.

The Company reviews and presents the consolidated business results based on the organizational structure management uses to evaluate performance and make decisions on allocating resources and assessing performance.

Financial Information

To supplement the historical financial data derived from Bluestem Group’s and Bluestem’s consolidated financial statements, which are prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), this release uses adjusted EBITDA as a non-GAAP performance measure. In addition, Bluestem’s stand-alone consolidated financial statements include contribution margin, adjusted general and administrative expenses, adjusted free cash flow, program agreement adjusted EBITDA, lender adjusted EBITDA, leverage ratio net debt, program agreement leverage ratio, lender leverage ratio, working capital, adjusted working capital, program agreement net liquidity and lender net liquidity 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 Group’s and Bluestem’s results for further important information concerning these measures.

Bluestem Group Inc.
Results for the 13-Weeks and Fiscal Years Ended
February 1, 2019 and February 2, 2018

       
BLUESTEM GROUP INC.
Consolidated Statements of Comprehensive Income (Loss)
(unaudited - in thousands, except shares and per share amounts)
 
13-Weeks Ended Fiscal Year Ended
February 1, 2019   February 2, 2018 February 1, 2019   February 2, 2018
Net sales $ 585,817 $ 622,716 $ 1,798,120 $ 1,891,552
Costs and expenses
Cost of goods sold 335,159 339,575 966,658 1,000,765
Sales and marketing expenses 93,798 127,352 429,641 470,988
Net credit expense 39,926 57,474 120,759 147,295
General and administrative expenses 54,850 52,971 198,884 221,090
Amortization and depreciation not included in cost of goods sold 13,202 15,284 49,510 58,081
Loss on impairment 25,601   191,919   25,601   192,149  
Total costs and expenses 562,536 784,575 1,791,053 2,090,368
Operating income (loss) 23,281 (161,859 ) 7,067 (198,816 )
Interest expense, net 12,283   12,291   50,136   50,692  
Income (loss) before income taxes 10,998 (174,150 ) (43,069 ) (249,508 )
Income tax expense (benefit) (1,512 ) (33,684 ) (7,592 ) (35,198 )
Net income (loss) $ 12,510   $ (140,466 ) $ (35,477 ) $ (214,310 )
 
Income (loss) per share - common stockholders
Basic loss per share $ 0.09 $ (1.06 ) $ (0.27 ) $ (1.62 )
Diluted loss per share $ 0.09 $ (1.06 ) $ (0.27 ) $ (1.62 )
Weighted average shares outstanding
Basic weighted average shares outstanding 133,186,691 132,326,876 132,865,441 132,217,503
Diluted weighted average shares outstanding 133,680,706 132,326,876 132,865,441 132,217,503
Other comprehensive income (loss)
Unrealized (loss) gain on interest rate swap, net of tax (779 ) 1,586   (837 ) 1,710  
Comprehensive income (loss) $ 11,731   $ (138,880 ) $ (36,314 ) $ (212,600 )
 
       
BLUESTEM GROUP INC.
Condensed Consolidated Balance Sheets
(unaudited - in thousands)
 
February 1, 2019 February 2, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 119,507 $ 123,398
Restricted cash 13,508 15,759
Customer accounts receivable, net of allowance of $7,801 and $8,233 8,154 9,008
Merchandise inventories 210,658 194,693
Promotional material inventories 13,810 34,660
Other current assets 29,742   28,399  
Total current assets 395,379 405,917
Property and equipment, net 90,376 106,246
Intangibles, net 120,921 163,377
Goodwill 36,717 36,717
Other assets 5,966   11,222  
Total Assets $ 649,359   $ 723,479  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 140,992 $ 160,300
Accrued costs and other liabilities 73,349 67,754
Short-term debt 49,903   26,434  
Total current liabilities 264,244 254,488
Long-term debt 395,819 420,297
Deferred income taxes 616 4,245
Other long-term liabilities 30,309   39,349  
Total liabilities 690,988   718,379  
 
Stockholders' Equity:
Series A participating convertible preferred stock 5,000 5,000
Common stock 1,340 1,332
Treasury stock (131 ) (131 )
Additional paid-in capital 297,310 293,892
Accumulated deficit (346,642 ) (297,324 )
Accumulated other comprehensive income, net of tax 1,494   2,331  
Total stockholders’ equity (41,629 ) 5,100  
Total Liabilities and Stockholders' Equity $ 649,359   $ 723,479  
 
     
BLUESTEM GROUP INC.
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
 
Fiscal Year Ended
February 1, 2019   February 2, 2018
Operating Activities
Net loss $ (35,477 ) $ (214,310 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation expense 54,000 62,962
Loss on impairment 25,601 192,149
Provision for doubtful accounts 97,467 107,017
Provision for deferred income taxes (3,643 ) (33,227 )
(Gain) loss on servicing right (3,182 ) 3,665
Net losses (gains) on loans held for sale, investment securities and other 266 (1,834 )
Stock-based compensation expense 3,197 4,391
Other, net 4,837 3,501
Net change in assets and liabilities:
Customer account receivables (10,307 ) 27,274
Merchandise inventories (15,965 ) 35,277
Promotional material inventories 7,009 15,070
Other assets (344 ) 11,752
Accounts payable and other liabilities (19,224 ) (67,896 )
Net cash provided by operating activities 104,235 145,791
 
Investing Activities
Purchases of customer accounts receivable (1,080,963 ) (1,072,357 )
Proceeds from sale of customer accounts receivable 994,657 979,111
Net purchases of property and equipment (21,244 ) (20,462 )
Distributions from equity investments 3,142 9,979
Other   (13 )
Net cash used in investing activities (104,408 ) (103,742 )
 
Financing Activities
Borrowings of debt 1,802
Repayments of debt (32,006 ) (28,802 )
Borrowings on asset backed line of credit 364,314 373,887
Repayments on asset backed line of credit (339,978 ) (396,665 )
Payment of dividends   (80,201 )
Net cash used in by financing activities (5,868 ) (131,781 )
 
Effect of Foreign Exchange Rates on Cash (101 ) 150  
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash (6,142 ) (89,582 )
Cash, Cash Equivalents and Restricted Cash, Beginning of Period 139,157   228,739  
Cash, Cash Equivalents and Restricted Cash, End of Period $ 133,015   $ 139,157  
 

BLUESTEM GROUP INC.
Non-GAAP Financial Measure
(unaudited - in thousands)

To supplement the consolidated financial statements of Bluestem Group Inc. and its subsidiaries, which are presented in accordance with GAAP, we use the following measure that is not in accordance with, or an alternative to, measures prepared in accordance with GAAP ("non-GAAP measure"):

Adjusted EBITDA, as presented, represents net loss attributable to Bluestem Group Inc. before income tax benefit, interest expense, amortization and depreciation expense, inventory write-downs related to restructuring activity,loss on impairment, gain or loss on servicing right, stock-based compensation expense, restructuring costs, Orchard Portfolio segmentation and positioning research, a one-time class action legal settlement and other.

We provide this measure because we believe it is useful to investors in evaluating our operating performance compared to other companies in our industry. As a non-GAAP measure, it has limitations in that it does not reflect all of the amounts associated with Bluestem Group Inc.'s results of operations as determined in accordance with GAAP and is not based on any comprehensive set of accounting rules or principles. This non-GAAP measure 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 calculation of Adjusted EBITDA may not be comparable to the calculation of such measure by other companies.

The following table reconciles Adjusted EBITDA from the nearest GAAP performance measure, which is net loss:

       
13-Weeks Ended Fiscal Year Ended
February 1, 2019   February 2, 2018 February 1, 2019   February 2, 2018
Adjusted EBITDA:
Net income (loss) $ 12,510 $ (140,466 ) $ (35,477 ) $ (214,310 )
Income tax expense (benefit) (1,512 ) (33,684 ) (7,592 ) (35,198 )
Interest expense 12,359 12,351 50,224 50,755
Amortization and depreciation expense 14,336 16,477 54,000 62,962
Loss on impairment 25,601 191,919 25,601 192,149
(Gain) loss on servicing right 1,155 4,633 (3,182 ) 3,665
Stock-based compensation expense 730 1,227 3,196 4,391
Inventory write-down, exited brands 6,450 6,450
Restructuring costs 2,472 175 2,566 15,860
Class action legal settlement 1,200
Other 87   716   1,763   7,598  
Adjusted EBITDA $ 74,188   $ 53,348   $ 98,749   $ 87,872  
 

BLUESTEM GROUP INC.
Non-GAAP Financial Measure
(unaudited - in thousands)

Impact of Adoption of Topic 606

The Company adopted Topic 606 which pertains to revenue recognition, on February 3, 2018.

The adoption of Topic 606 had a material impact on the timing of advertising expense recognition related to direct response advertising. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. In addition, the estimated realizable value of future product returns was reclassified from current liabilities to current assets.

The following tables present the impact the adoption of Topic 606 had on the Company's Consolidated Statements of Comprehensive Loss and Condensed Consolidated Balance Sheet:

     
13-Weeks Ended February 1, 2019
As reported  

% of net
sales

 

Topic 606
Adjustments

 

Balances
without
Adoption of
Topic 606

 

% of net
sales

Total net sales and revenue $ 585,817 100.0 % $ $ 585,817 100.0 %
Costs and expenses
Cost of goods sold 335,159 57.2 % 335,159 57.2 %
Sales and marketing expenses 93,798 16.0 % 13,914 107,712 18.4 %
Net credit expense 39,926 6.8 % 39,926 6.8 %
General and administrative expenses 54,850 9.4 % 54,850 9.4 %
Amortization and depreciation not included in cost of goods sold 13,202 2.3 % 13,202 2.3 %
Loss on impairment 25,601   4.4 %   25,601   4.4 %
Total costs and expenses 562,536   96.0 % 13,914   576,450   98.4 %
Operating income (loss) 23,281 4.0 % (13,914 ) 9,367 1.6 %
Interest expense, net 12,283   2.1 %   12,283   2.1 %
Income (loss) before income taxes 10,998 1.9 % (13,914 ) (2,916 ) (0.5 )%
Income tax expense (1,512 ) (0.3 )%   (1,512 ) (0.3 )%
Net income (loss) $ 12,510   2.1 % $ (13,914 ) $ (1,404 ) (0.2 )%
 
 
Fiscal Year Ended February 1, 2019
As reported

% of
net sales

Topic 606
Adjustments

Balances
without
Adoption of
Topic 606

% of net
sales

Total net sales and revenue $ 1,798,120 100.0 % $ $ 1,798,120 100.0 %
Costs and expenses
Cost of goods sold 966,658 53.8 % 966,658 53.8 %
Sales and marketing expenses 429,641 23.9 % 4,666 434,307 24.2 %
Net credit expense 120,759 6.7 % 120,759 6.7 %
General and administrative expenses 198,884 11.1 % 198,884 11.1 %
Amortization and depreciation not included in cost of goods sold 49,510 2.8 % 49,510 2.8 %
Loss on impairment 25,601   1.4 %   25,601   1.4 %
Total costs and expenses 1,791,053   99.6 % 4,666   1,795,719   99.9 %
Operating loss 7,067 0.4 % (4,666 ) 2,401 0.1 %
Interest expense, net 50,136   2.8 %   50,136   2.8 %
Loss before income taxes (43,069 ) (2.4 )% (4,666 ) (47,735 ) (2.7 )%
Income tax benefit (7,592 ) (0.4 )%   (7,592 ) (0.4 )%
Net loss $ (35,477 ) (2.0 )% $ (4,666 ) $ (40,143 ) (2.2 )%
 
     
As of February 1, 2019
As Reported   Topic 606 Adjustment  

Balances Without
Adoption of Topic 606

Promotional material inventories $ 13,810 $ 9,175 $ 22,985
Other current assets 29,742 (3,770 ) 25,972
Accrued costs and other liabilities 73,349 (3,770 ) 69,579
Accumulated deficit (346,642 ) 9,175 (337,467 )
 

Bluestem Brands, Inc.
Results for the 13-Weeks and Fiscal Years Ended
February 1, 2019 and February 2, 2018

       
BLUESTEM BRANDS, INC.

Consolidated Statements of Comprehensive Income (Loss) and Selected Operating Data (unaudited)

(in thousands)
 
13-Weeks Ended  
February 1, 2019   February 2, 2018 Change(a)
Net sales $ 584,817 $ 621,341 (5.9 )%
Cost of goods sold 335,611   340,066   (1.3 )%
Gross profit(b) 249,206 281,275 (11.4 )%
Sales and marketing expenses(c) 93,798 127,352 (26.3 )%
Net credit expense 39,932 57,040 (30.0 )%
General and administrative expenses 52,410 49,836 5.2 %
Amortization and depreciation not included in cost of goods sold(d) 13,202 15,284 (13.6 )%
Loss on impairment 25,601 191,919 (86.7 )%
Interest expense, net (e) 12,283   12,291   (0.1 )%
Income (loss) before income taxes 11,980 (172,447 ) 106.9 %
Income tax expense (benefit) (1,132 ) (12,685 ) 91.1 %
Net income (loss) $ 13,112   $ (159,762 ) 108.2 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit(b) 42.6 % 45.3 % (270 ) bps
Sales and marketing expenses(c) 16.0 % 20.5 % (450 ) bps
Net credit expense 6.8 % 9.2 % (240 ) bps
Contribution margin (b, c, f) $ 115,476 $ 96,883 19.2 %
As a percentage of net sales(b, c, f) 19.7 % 15.6 % 410 bps
Adjusted general and administrative expenses (f) $ 49,392 $ 48,091 2.7 %
As a percentage of net sales(f) 8.4 % 7.7 % 70 bps
Adjusted EBITDA (c,f) $ 74,646 $ 54,464 37.1 %
As a percentage of net sales(b) 12.8 % 8.8 % 400 bps
 
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (g) 192 157 22.3 %
Fingerhut FreshStart new customer credit accounts (g) 83 55 50.9 %
Orchard Portfolio new gross customers (h) 433 489 (11.5 )%
Northstar Portfolio active customers (i) 1,480 1,465 1.0 %
Orchard Portfolio gross active customers (j) 6,809 7,374 (7.7 )%
 
(a)   Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.
(b) Includes $6,450 of inventory write-downs related to exited retail brands.
(c) Fiscal 2018 amounts and percentages include the impact of the adoption of Topic 606, which pertains to revenue recognition. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. The impact of adopting Topic 606 was an increase in sales and marketing expense of $13,914 for the 13-weeks ended February 1, 2019.
(d) Consists of amortization expense of customer relationship finite-lived intangible assets and depreciation expense related to software and office equipment. Owned fulfillment facilities and equipment depreciation is included in cost of goods sold.
(e) Interest expense is net of interest income.
(f) 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.
(g) Customers that have made their initial order on account during the fiscal period presented. Revolving new customer credit accounts excludes FreshStart graduates initially included in FreshStart new customer credit accounts when their initial order was made.
(h) Individual customers, counted once for each brand from which a purchase has been made, who have made a first-time purchase from a during the period presented. Unique new customers,counted only once without regard for purchases from multiple brands, who have made a first-time purchase from the Orchard Portfolio, during the 13-weeks ended February 1, 2019 and February 2, 2018, were 194 and 175, respectively.
(i) 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.
(j) Individual customers, counted once for each brand from which a purchase has been made, that have made at least one purchase from a particular brand within the Orchard Portfolio during the previous twelve fiscal months. Unique active customers, counted only once without regard for purchases from multiple brands, who have made at least one purchase from the Orchard Portfolio during the twelve fiscal months ended February 1, 2019 and February 2, 2018, were 4.2 million and 4.5 million, respectively.
 
       
BLUESTEM BRANDS, INC.

Consolidated Statements of Comprehensive Income (Loss) and Selected Operating Data (unaudited)

(in thousands)
 
Fiscal Year Ended
February 1, 2019   February 2, 2018

Change(a)

Net sales $ 1,795,852 $ 1,887,655 (4.9 )%
Cost of goods sold 968,534   1,001,596   (3.3 )%
Gross profit(b) 827,318 886,059 (6.6 )%
Sales and marketing expenses(c) 429,641 470,988 (8.8 )%
Net credit expense 120,374 148,777 (19.1 )%
General and administrative expenses 189,559 213,017 (11.0 )%
Amortization and depreciation not included in cost of goods sold(d) 49,510 58,081 (14.8 )%
Loss on impairment 25,601 192,149 (86.7 )%
Interest expense, net (e) 50,136   50,692   (1.1 )%
Loss before income taxes (37,503 ) (247,645 ) 84.9 %
Income tax expense (benefit) (8,468 ) (39,859 ) 78.8 %
Net loss $ (29,035 ) $ (207,786 ) 86.0 %
 
Margins and Expenses as a Percentage of Net Sales:
Gross profit(b) 46.1 % 46.9 % (80 ) bps
Sales and marketing expenses(c) 23.9 % 25.0 % (110 ) bps
Net credit expense 6.7 % 7.9 % (120 ) bps
Contribution margin (b, c, f) $ 277,303 $ 266,294 4.1 %
As a percentage of net sales(b, c, f) 15.4 % 14.1 % 130 bps
Adjusted general and administrative expenses (f) $ 181,558 $ 188,067 (3.5 )%
As a percentage of net sales(f) 10.1 % 10.0 % 10 bps
Adjusted EBITDA (c,f) $ 102,647 $ 92,294 11.2 %
As a percentage of net sales(b) 5.7 % 4.9 % 80 bps
Selected Financial Data:
Lender net liquidity (e) $ 85,372 $ 97,092 (12.1 )%
Availability on inventory line of credit $ 81,529 $ 92,407 (11.8 )%
Adjusted free cash flow (e) $ 10,604 $ 40,836 (74.0 )%
Lender leverage ratio (e) 2.99 3.67
Lender leverage ratio requirement < 4.50 < 4.50
Program agreement leverage ratio (e) 2.99 3.85
Program agreement leverage ratio requirement < 5.00 < 5.00
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (g) 563 459 22.7 %
Fingerhut FreshStart new customer credit accounts (g) 235 197 19.3 %
Orchard Portfolio new gross customers (h) 1,858 2,091 (11.1 )%
Northstar Portfolio active customers (i) 1,480 1,465 1.0 %
Orchard Portfolio gross active customers (j) 6,809 7,374 (7.7 )%
 
(a)   Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.
(b) Includes $6,450 of inventory write-downs related to exited retail brands.
(c) Fiscal 2018 amounts and percentages include the impact of the adoption of Topic 606, which pertains to revenue recognition. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. The impact of adopting Topic 606 was an increase in sales and marketing expense of $4,666 for the fiscal year ended February 1, 2019.
(d) Consists of amortization expense of customer relationship finite-lived intangible assets and depreciation expense related to software and office equipment. Owned fulfillment facilities and equipment depreciation is included in cost of goods sold.
(e) Interest expense is net of interest income.
(f) 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.
(g) Customers that have made their initial order on account during the fiscal period presented. Revolving new customer credit accounts excludes FreshStart graduates initially included in FreshStart new customer credit accounts when their initial order was made.
(h) Individual customers, counted once for each brand, who have made a first-time purchase from a during the period presented. Unique new customers,counted only once without regard for purchases from multiple brands, who have made a first-time purchase from the Orchard Portfolio, during the fiscal years ended February 1, 2019 and February 2, 2018, were 712 and 706, respectively.
(i) 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.
(j) Individual customers, counted once for each brand, that have made at least one purchase from a particular brand within the Orchard Portfolio during the previous twelve fiscal months. Unique active customers, counted only once without regard for purchases from multiple brands, who have made at least one purchase from the Orchard Portfolio during the twelve fiscal months ended February 1, 2019 and February 2, 2018, were 4.2 million and 4.5 million, respectively.
 
       
BLUESTEM BRANDS, INC.
Condensed Consolidated Balance Sheets
(unaudited - in thousands)
 
February 1, 2019 February 2, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 7,102 $ 9,173
Restricted cash 13,508 15,759
Customer accounts receivable, net of allowance of $7,800 and $7,082 8,154 7,275
Merchandise inventories 210,658 194,693
Promotional material inventories 13,810 34,660
Prepaid expenses and other assets 27,887   25,346  
Total current assets 281,119 286,906
Property and equipment, net 71,810 89,385
Intangible assets, net 120,921 163,377
Goodwill 36,717 36,717
Other assets 1,674   4,040  
Total Assets $ 512,241   $ 580,425  
 
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 140,992 $ 160,300
Current income taxes payable 36,678 36,370
Accrued costs and other liabilities 89,628 81,098
Short-term debt 49,903   26,434  
Total current liabilities 317,201 304,202
Long-term debt 395,602 420,080
Deferred income taxes 3,828 16,325
Other long-term liabilities 35,291   39,145  
Total liabilities 751,922 779,752
 
Stockholder's equity:
Common stock
Additional paid-in capital 369,602 369,602
Accumulated deficit (610,228 ) (570,697 )
Accumulated other comprehensive income, net of tax 945   1,768  
Total stockholder's equity (239,681 ) (199,327 )
Total Liabilities and Stockholder's Equity $ 512,241   $ 580,425  
 
     
BLUESTEM BRANDS, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited - in thousands)
 
Fiscal Year Ended
February 1, 2019   February 2, 2018
Operating Activities
Net loss $ (29,035 ) $ (207,786 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization and depreciation expense 53,056 62,600
Loss on impairment 25,601 192,149
Provision for doubtful accounts 97,554 110,803
Provision for deferred income taxes (7,835 ) (38,670 )
(Gain) loss on servicing right (3,182 ) 3,665
Stock-based compensation expense 2,471 3,525
Other, net 5,027 3,729
Net change in assets and liabilities:
Customer accounts receivable (12,127 ) (4,624 )
Merchandise inventories (15,965 ) 35,277
Promotional material inventories 7,009 15,070
Prepaid expenses and other assets (1,542 ) 3,360
Current income taxes payable (1,009 ) (185 )
Accounts payable and other liabilities (13,576 ) (66,902 )
Net cash provided by operating activities 106,447 112,011
 
Investing Activities
Purchase of customer accounts receivable (1,080,963 ) (1,072,357 )
Proceeds from sale of customer accounts receivable 994,657 1,008,956
Proceeds from sale of assets 24,295
Net purchase of property and equipment (18,595 ) (20,022 )
Net cash used in investing activities (104,901 ) (59,128 )
 
Financing Activities
Borrowings of debt 1,802
Repayments of debt (32,006 ) (28,802 )
Borrowings on asset backed line of credit 364,314 373,887
Repayments on asset backed line of credit (339,978 ) (396,665 )
Net cash used in financing activities (5,868 ) (51,580 )
 
Net (Decrease) Increase in Cash, Cash Equivalents and Restricted Cash (4,322 ) 1,303
Cash, Cash Equivalents and Restricted Cash, Beginning of Period 24,932   23,629  
Cash, Cash Equivalents and Restricted Cash, End of Period $ 20,610   $ 24,932  
 
       
BLUESTEM BRANDS, INC.
Supplemental Financial Information - Segment Net Sales
(unaudited - in thousands, except average order size)
 
13-Weeks Ended
February 1, 2019   February 2, 2018 Change
$   % of Sales $   % of Sales %
Total sales by merchandise category:
Home $ 119,891 20.3 % $ 139,452 22.0 % (14.0 )%
Entertainment 188,773 31.9 % 196,589 31.0 % (4.0 )%
Fashion 283,244   47.8 % 299,058   47.0 % (5.3 )%
Total merchandise sales(a) 591,908 100.0 % 635,099 100.0 % (6.8 )%
Corporate and other(b) 19,102 14,593 30.9 %
Returns and allowances (42,662 ) (48,822 ) (12.6 )%
Commissions and other revenues 16,469   20,471   (19.5 )%
Net sales $ 584,817   $ 621,341   (5.9 )%
Gross profit rate(f) 42.6 % 45.3 % (270 ) bps
Sales and marketing expense rate(c) 16.0 % 20.5 % (450 ) bps
Contribution margin rate(c, d, f) 19.7 % 15.6 % 410 bps
Average order size(e) $ 129 $ 125
 
Northstar Portfolio sales by merchandise category:
Home $ 111,874 28.0 % $ 128,346 31.0 % (12.8 )%
Entertainment 188,773 47.3 % 196,589 47.5 % (4.0 )%
Fashion 98,495   24.7 % 88,516   21.5 % 11.3 %
Total merchandise sales(a) 399,142 100.0 % 413,451 100.0 % (3.5 )%
Returns and allowances (19,364 ) (21,279 ) (9.0 )%
Commissions and other revenues 6,293   6,837   (8.0 )%
Net sales $ 386,071   $ 399,009   (3.2 )%
 
Gross profit rate(f) 43.0 % 42.9 % 10 bps
Sales and marketing expense rate(c) 10.7 % 11.5 % (80 ) bps
Contribution margin rate(c, f) 21.9 % 17.1 % 480 bps
Average order size(e) $ 235 $ 239
 
Orchard Portfolio sales by merchandise category:
Home $ 8,017 4.2 % $ 11,106 5.0 % (27.8 )%
Fashion 184,749   95.8 % 210,542   95.0 % (12.3 )%
Total merchandise sales(a) 192,766 100.0 % 221,648 100.0 % (13.0 )%
Returns and allowances (23,298 ) (27,543 ) (15.4 )%
Commissions and other revenues 10,176   13,634   (25.4 )%
Net sales $ 179,644   $ 207,739   (13.5 )%
 
Gross profit rate(f) 40.6 % 48.0 % (740 ) bps
Sales and marketing expense rate(c) 28.8 % 37.2 % (840 ) bps
Contribution margin rate(c,f) 11.8 % 10.7 % 110 bps
Average order size(e) $ 65 $ 66
 
(a)   Total merchandise sales include shipping and handling revenue and is net of sales discounts.
(b) Corporate and other consist of adjustments to Bluestem's net sales related to net sales of PayCheck Direct and the elimination of inter-segment activities.
(c) Fiscal 2018 expenses and expense percentages include the impact of the adoption of Topic 606, which pertains to revenue recognition. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. The impact of adopting Topic 606 was a decrease in sales and marketing expense of $(13,914) for the 13-weeks ended November 2, 2018, of which $(5,327) related to Northstar Portfolio and $(4,911) related to Orchard Portfolio.
(d) 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.
(e) Represents merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.
(f) Includes impact of inventory write-downs of $1,571 at Northstar Portfolio and inventory write-downs and establishment of liability for committed inventory purchases of $4,879 at Orchard Portfolio, or $6,450 total for Bluestem.
 
       
BLUESTEM BRANDS, INC.
Supplemental Financial Information - Segment Net Sales
(unaudited - in thousands, except average order size)
 
Fiscal Year Ended
February 1, 2019   February 2, 2018 Change
$   % of Sales $   % of Sales %
Total sales by merchandise category:
Home $ 431,329 22.8 % $ 472,989 23.8 % (8.8 )%
Entertainment 432,651 22.9 % 447,849 22.6 % (3.4 )%
Fashion 1,027,052   54.3 % 1,062,565   53.6 % (3.3 )%
Total merchandise sales(a) 1,891,032 100.0 % 1,983,403 100.0 % (4.7 )%
Corporate and other(b) 8,199 10,282 (20.3 )%
Returns and allowances (167,569 ) (184,011 ) (8.9 )%
Commissions and other revenues 64,190   77,981   (17.7 )%
Net sales $ 1,795,852   $ 1,887,655   (4.9 )%
Gross profit rate(f) 46.1 % 46.9 % (80 ) bps
Sales and marketing expense rate(c) 23.9 % 25.0 % (110 ) bps
Contribution margin rate(c, d, f) 15.4 % 14.1 % 130 bps
Average order size(e) $ 112 $ 113
 
Northstar Portfolio sales by merchandise category:
Home $ 397,916 37.7 % $ 413,177 39.2 % (3.7 )%
Entertainment 432,651 41.0 % 447,849 42.4 % (3.4 )%
Fashion 225,811   21.3 % 193,572   18.4 % 16.7 %
Total merchandise sales(a) 1,056,378 100.0 % 1,054,598 100.0 % 0.2 %
Returns and allowances (54,733 ) (57,837 ) (5.4 )%
Commissions and other revenues 19,477   20,465   (4.8 )%
Net sales $ 1,021,122   $ 1,017,226   0.4 %
 
Gross profit rate(f) 43.6 % 42.8 % 80 bps
Sales and marketing expense rate 13.3 % 13.6 % (30 ) bps
Contribution margin rate(c,f) 18.4 % 15.2 % 320 bps
Average order size(d) $ 229 $ 235
 
Orchard Portfolio sales by merchandise category:
Home $ 33,413 4.0 % $ 59,812 6.4 % (44.1 )%
Fashion 801,241   96.0 % 868,993   93.6 % (7.8 )%
Total merchandise sales(a) 834,654 100.0 % 928,805 100.0 % (10.1 )%
Returns and allowances (112,836 ) (126,174 ) (10.6 )%
Commissions and other revenues 44,713   57,516   (22.3 )%
Net sales $ 766,531   $ 860,147   (10.9 )%
 
Gross profit rate(f) 49.0 % 51.4 % (240 ) bps
Sales and marketing expense rate 38.3 % 38.4 % (10 ) bps
Contribution margin rate(c, f) 10.7 % 13.0 % (230 ) bps
Average order size(d) $ 68 $ 71
 
(a)   Total merchandise sales include shipping and handling revenue and is net of sales discounts.
(b) Corporate and other consist of adjustments to Bluestem's net sales related to net sales of PayCheck Direct and the elimination of inter-segment activities.
(c) Fiscal 2018 expenses and expense percentages include the impact of the adoption of Topic 606, which pertains to revenue recognition. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. Expenses and expense percentages for the full fiscal year ended February 1, 2019 are comparable to those of the full fiscal year ended February 2, 2018, as the expense recorded in fiscal 2017 is not materially different from the expense that would have been recognized had Topic 606 been adopted at the beginning of fiscal 2017.
(d) 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.
(e) Represents merchandise sales including shipping and handling revenue divided by the number of merchandise orders fulfilled during the fiscal period presented.
(f) Includes impact of inventory write-downs of $1,571 at Northstar Portfolio and inventory write-downs and establishment of liability for committed inventory purchases of $4,879 at Orchard Portfolio, or $6,450 total for Bluestem.
 
         
BLUESTEM BRANDS, INC.
Supplemental Financial Information - Credit Portfolio
(unaudited - in thousands, except average balance outstanding)
 
13-Weeks Ended
February 1, 2019   February 2, 2018 Change %
Net credit expense:
Provision for doubtful accounts:
Loss on sale of customer accounts receivable $ 31,291 $ 41,183 (24.0 )%
Company-owned customer accounts receivable 4,820   4,414   9.2 %
Total provision for doubtful accounts 36,111 45,597 (20.8 )%
Credit management costs 16,077 16,038 0.2 %
Finance charge and fee income, net (1,275 ) (1,036 ) 23.1 %
Servicing fee income and portfolio profit sharing (12,136 ) (8,192 ) 48.1 %
Loss on servicing right 1,155   4,633   (75.1 )%
Net credit expense $ 39,932   $ 57,040   (30.0 )%
 
13-Weeks Ended
February 1, 2019 February 2, 2018
Serviced Portfolio Selected Credit Data:

Revolving(a)

FreshStart(b) Revolving(a) FreshStart(b)
Finance charge and fee income $ 104,585 $ 1,348 $ 88,810 $ 1,000
Finance charge and fee income rate(c) 28.4 % 15.5 % 24.2 % 13.6 %
Net principal charge-offs $ 86,248 $ 2,448 $ 75,967 $ 2,230
Net principal charge-off rate(d) 23.4 % 28.1 % 20.7 % 29.2 %
Average customer accounts receivable $ 1,473,277 $ 14,284 $ 1,466,095 $ 12,734
 
(a)   Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's installment accounts.
(c) 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 February 1, 2019 and February 2, 2018, respectively, 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 February 1, 2019 and February 2, 2018, respectively.
(d) Revolving net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13-weeks ended February 1, 2019 and February 2, 2018, respectively, 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 February 1, 2019 and February 2, 2018, respectively.
 
       
BLUESTEM BRANDS, INC.
Supplemental Financial Information - Credit Portfolio
(unaudited - in thousands, except average balance outstanding)
 
Fiscal Year Ended
February 1, 2019   February 2, 2018

Change %

Net credit expense:
Provision for doubtful accounts:
Loss on sale of customer accounts receivable $ 86,156 $ 93,328 (7.7 )%
Company-owned customer accounts receivable 11,398 13,689 (16.7 )%
Loss on sale of PayCheck Direct customer accounts receivable to BGI Holding Company   3,786   (100.0 )%
Total provision for doubtful accounts 97,554 110,803 (12.0 )%
Credit management costs 62,363 67,759 (8.0 )%
Finance charge and fee income (3,424 ) (2,799 ) 22.3 %
Servicing fee income and portfolio profit sharing (32,937 ) (30,651 ) 7.5 %
(Gain) loss on servicing right (3,182 ) 3,665   (186.8 )%
Net credit expense $ 120,374   $ 148,777   (19.1 )%
 
     
Fiscal Year Ended
February 1, 2019   February 2, 2018
Serviced Portfolio Selected Credit Data: Revolving(a)   FreshStart(b) Revolving(a)   FreshStart(b)
 
Finance charge and fee income $ 391,955 $ 3,499 $ 356,407 $ 2,692
Finance charge and fee income rate(c) 27.9 % 9.1 % 25.2 % 6.4 %
Net principal charge-offs $ 310,103 $ 10,894 $ 294,554 $ 12,580
Net principal charge-off rate(d) 22.1 % 28.3 % 20.7 % 29.5 %
Average customer accounts receivable $ 1,405,166 $ 12,372 $ 1,415,594 $ 12,756
           
February 1, 2019 February 2, 2018
Accounts Receivable Data: Revolving(a) FreshStart(b) Revolving(a) FreshStart(b)
 
Balance active accounts 1,823 142 1,792 128
Average balance outstanding $ 822 $ 111 $ 833 $ 110
Customer accounts receivable $ 1,498,283 $ 15,869 $ 1,492,172 $ 14,073
Balances 30+ days delinquent(e) $ 248,509 $ 3,685 $ 243,467 $ 3,318
Balances 30+ days delinquent as a percentage of total customer accounts receivable(f) 16.6 % 23.2 % 16.3 % 23.6 %
 
(a)   Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(b) FreshStart serviced portfolio is Fingerhut's installment accounts.
(c) Revolving finance charge and fee income rate represents finance charge and fee income as a percentage of average customer accounts receivable for the fiscal years ended February 1, 2019 and February 2, 2018, respectively, 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 fiscal years ended February 1, 2019 and February 2, 2018, respectively.
(d) Revolving net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the fiscal years ended February 1, 2019 and February 2, 2018, respectively, 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 fiscal years ended February 1, 2019 and February 2, 2018, respectively.
(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.
 

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands)

To supplement the consolidated financial information of Bluestem Brands, Inc. and its subsidiaries for the 13- and 26-weeks ended February 1, 2019 and February 2, 2018 which are presented in accordance with 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"):

Contribution margin, as presented, is defined as net sales less cost of goods sold, sales and marketing expenses and net credit expense. Contribution Margin represents the combined performance of merchandising, marketing and credit management activities.

Adjusted general and administrative expenses, as presented, is defined as general and administrative expenses adjusted for stock-based compensation expense, restructuring costs, Orchard Portfolio segmentation and positioning research, a one-time class action legal settlement and other.

Adjusted EBITDA, as presented, represents net loss before income tax benefit, interest expense, amortization and depreciation expense, loss on impairment, gain or loss on servicing right, stock-based compensation expense, restructuring costs, inventory write-downs related to restructuring activity, Orchard Portfolio segmentation & positioning research, a one-time class action legal settlement and other.

Adjusted free cash flow, as presented, represents net cash provided by operating activities, plus proceeds from the sale of customer accounts receivable, less purchase of customer accounts receivable and less maintenance capital expenditures.

Program agreement adjusted EBITDA, as presented, represents Adjusted EBITDA, as defined above, plus adjustments allowed for under Bluestem's program agreement including certain non-cash charges, certain one-time charges, accelerated advertising costs associated with the adoption of Topic 606, and expected cost savings reflecting the projected impact of savings in credit account repricing, print and paper, headcount reduction and other operational improvements . Other includes charges such as, but not limited to or necessarily inclusive of, strategic investments, system implementations and executive recruiting.

Lender adjusted EBITDA, as presented, represents program agreement adjusted EBITDA, as defined above, less designated unrestricted subsidiaries, which consists of the subsidiary making sales for our PayCheck Direct business, and incremental expected cost savings as allowed for under Bluestem's lender agreements.

Leverage ratio net debt, as presented, is defined as short-term debt plus long-term debt plus deferred charges and less cash and cash equivalents.

Program agreement leverage ratio, as presented, represents Leverage ratio net debt, as defined above, divided by program agreement adjusted EBITDA, as defined above.

Lender leverage ratio, as presented, represents Leverage ratio net debt, as defined above, divided by Lender adjusted EBITDA, as defined above.

Working capital, as presented, is defined as total current assets less total current liabilities.

Adjusted working capital, as presented, represents working capital, as defined above, plus the inter-company portion of current income taxes payable and inter-company payable due to stock compensation.

Program agreement net liquidity, as presented, is defined as cash and cash equivalents less third-party credit card receivables ("Lender cash and cash equivalents") as defined by the lender plus availability under the asset backed line of credit.

Lender net liquidity, as presented, is defined as program agreement net liquidity, as defined above, less unrestricted subsidiary cash as defined by the lender.

We provide these measures because we believe they are useful to investors in evaluating our operating performance and financial condition compared to other companies in our industry and to evaluate our financial condition and operating performance compared to term loan and program agreement financial covenants. 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 contribution margin, adjusted general and administrative expense, adjusted EBITDA, adjusted free cash flow, program agreement adjusted EBITDA, lender adjusted EBITDA, leverage ratio net debt, program agreement leverage ratio, lender leverage ratio, working capital, adjusted working capital, and program agreement and lender net liquidity may not be comparable to the calculations of such measures by other companies.

The following table reconciles contribution margin from the nearest GAAP performance measure, which is net loss:

       
13-Weeks Ended Fiscal Year Ended

February 1,
2019

 

February 2,
2018

February 1,
2019

 

February 2,
2018

Contribution margin:
Net income (loss) $ 13,112 $ (159,762 ) $ (29,035 ) $ (207,786 )
Income tax expense (benefit) (1,132 ) (12,685 ) (8,468 ) (39,859 )
Interest expense, net 12,283 12,291 50,136 50,692
Loss on impairment 25,601 191,919 25,601 192,149
Amortization and depreciation not included in cost of sales 13,202 15,284 49,510 58,081
General and administrative expenses 52,410   49,836   189,559   213,017  
Contribution margin $ 115,476   $ 96,883   $ 277,303   $ 266,294  
 
Contribution margin % of net sales 19.7 % 15.6 % 15.4 % 14.1 %
 

The following table reconciles adjusted general and administrative expenses from the nearest GAAP performance measure, which is general and administrative expenses:

       
13-Weeks Ended Fiscal Year Ended

February 1,
2019

 

February 2,
2018

February 1,
2019

 

February 2,
2018

Adjusted general and administrative expenses:
General and administrative expenses $ 52,410 $ 49,836 $ 189,559 $ 213,017
Less:
Stock-based compensation expense (458 ) (854 ) (2,471 ) (3,525 )
Restructuring costs (2,472 ) (175 ) (2,566 ) (13,827 )
Class action legal settlement (1,200 )
Other (88 ) (716 ) (1,764 ) (7,598 )
Adjusted general and administrative expenses $ 49,392   $ 48,091   $ 181,558   $ 188,067  
 
Adjusted general and administrative expenses % of net sales 8.4 % 7.7 % 10.1 % 10.0 %
 

The following table reconciles adjusted EBITDA from the nearest GAAP performance measure, which is net loss:

       
13-Weeks Ended Fiscal Year Ended

February 1,
2019

 

February 2,
2018

February 1,
2019

 

February 2,
2018

Adjusted EBITDA:
Net income (loss) $ 13,112 $ (159,762 ) $ (29,035 ) $ (207,786 )
Income tax expense (benefit) (1,132 ) (12,685 ) (8,468 ) (39,859 )
Interest expense 12,359 12,351 50,224 50,755
Amortization and depreciation expense 14,083 16,263 53,056 62,600
Loss on impairment 25,601 191,919 25,601 192,149
Gain on servicing right 1,155 4,633 (3,182 ) 3,665
Stock-based compensation expense 458 854 2,471 3,525
Inventory write-down, exited brands 6,450 6,450
Restructuring costs 2,472 175 2,566 19,647
Class action legal settlement 1,200
Other 88   716   1,764   7,598  
Adjusted EBITDA $ 74,646   $ 54,464   $ 102,647   $ 92,294  
 
Adjusted EBITDA % of net sales 12.8 % 8.8 % 5.7 % 4.9 %

The following table reconciles adjusted free cash flow from net cash provided by operating activities:

       
13-Weeks Ended Fiscal Year Ended

February 1,
2019

 

February 2,
2018

February 1,
2019

 

February 2,
2018

Adjusted free cash flow:
Net cash provided by operating activities $ 72,465 $ 86,949 $ 106,447 $ 112,011
Plus: Proceeds from sale of customer accounts receivable 387,714 378,285 994,657 1,008,956
Less: Purchase of customer accounts receivable (419,237 ) (420,031 ) (1,080,963 ) (1,072,357 )
Less: Maintenance capital expenditures (3,314 ) (2,316 ) (9,537 ) (7,774 )
Adjusted free cash flow $ 37,628   $ 42,887   $ 10,604   $ 40,836  
 
Adjusted free cash flow % of net sales 6.4 % 6.9 % 0.6 % 2.2 %
 
     
BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands)
 

The following tables present trailing twelve months lender adjusted EBITDA and leverage ratios:

 
Trailing Twelve Fiscal Months
February 1, 2019   February 2, 2018
Adjusted EBITDA $ 102,646 $ 92,294
Expected cost savings (a) 21,372 17,038
Non-cash charges (103 ) (103 )
Acceleration of advertising expense due to adoption of Topic 606 (b) (4,135 )
Other (c) 29,183   7,465  
Program agreement adjusted EBITDA 148,963   116,694  
Unrestricted subsidiary (d) 68 4,602
Incremental expected cost savings (a, e)   920  
Lender adjusted EBITDA $ 149,031   $ 122,216  
 
Balances As Of
February 1, 2019 February 2, 2018
Leverage ratio net debt:
Short-term debt
Current portion of term loan, net of discount $ 25,032 $ 24,921
Asset backed line of credit 24,336
Capital lease obligation and other 535   1,513  
Total short-term debt 49,903 26,434
Term loan, net of discount 395,602 419,545
Capital lease obligation   535  
Total long-term debt 395,602   420,080  
Total debt 445,505 446,514
Plus: Deferred charges 4,407 6,894
Less: Cash and cash equivalents (f) (3,895 ) (4,713 )
Leverage ratio net debt $ 446,017   $ 448,695  
 
Program agreement leverage ratio 2.99 3.85
Program agreement leverage ratio requirement < 5.00 < 5.00
 
Lender leverage ratio 2.99 3.67
Lender leverage ratio requirement < 4.50 < 4.50
 
(a)   Expected cost savings reflects the projected savings in credit account repricing, print and paper, headcount reduction and other operational improvements.
(b) The Company adopted Topic 606, which pertains to revenue recognition, on February 3, 2018. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients.
(c) Other includes charges such as, but not limited to or necessarily inclusive of, strategic investment charges, system implementation charges and executive recruiting.
(d) Bluestem Enterprises, Inc. ("BEI"), a subsidiary of Bluestem, was designated as an unrestricted subsidiary under Bluestem's term loan agreement at the end of fiscal 2016, which requires BEI's results of operations to be excluded from Bluestem's consolidated adjusted EBITDA calculation.
(e) Due to the unrestricted subsidiary designation, incremental expected cost savings above program agreement threshold limitations are able to be included in lender adjusted EBITDA.
(f) Excludes third party credit card receivables.
 

The following table presents adjusted working capital and net liquidity:

       
February 1, 2019 February 2, 2018
Adjusted working capital:
Total current assets $ 281,119 $ 286,906
Total current liabilities 317,201   304,202  
Working capital $ (36,082 ) $ (17,296 )
Plus: Inter-company portion of current income taxes payable 30,610 30,255
Plus: Inter-company payable due to stock compensation 16,550 14,240
Plus: Effect of Topic 606 on Promotional inventories 9,175    
Adjusted working capital $ 20,253   $ 27,199  
 
Program agreement and lender net liquidity:
Cash and cash equivalents $ 7,102 $ 9,173
Less: Third party credit card receivables (3,207 ) (4,460 )
Lender cash and cash equivalents 3,895 4,713
Plus: Asset backed line availability 81,529   92,407  
Program agreement net liquidity $ 85,424   $ 97,120  
Less: Unrestricted subsidiary cash (52 ) (28 )
Lender net liquidity $ 85,372   $ 97,092  
 
Program agreement and lender net liquidity requirement > $40,000 > $40,000
 

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands)

Impact of Adoption of Topic 606

The Company adopted Topic 606 which pertains to revenue recognition, on February 3, 2018.

The adoption of Topic 606 had a material impact on the timing of advertising expense recognition related to direct response advertising. Under Topic 606, the Company now recognizes the expense associated with its catalogs on the estimated date of first delivery to recipients. Prior to adoption of Topic 606, these costs were capitalized and amortized over their expected period of future benefit. In addition, the estimated realizable value of future product returns was reclassified from current liabilities to current assets.

The following tables present the impact the adoption of Topic 606 had on the Company's Consolidated Statements of Comprehensive Loss and Condensed Consolidated Balance Sheet:

     
13-Weeks Ended February 1, 2019
As reported  

% of net
sales

 

Topic 606
Adjustments

 

Balances
without
Adoption of
Topic 606

 

% of net
sales

Total net sales and revenue $ 584,817 100.0 % $ $ 584,817 100.0 %
Costs and expenses
Cost of goods sold 335,611 57.4 % 335,611 57.4 %
Sales and marketing expenses 93,798 16.0 % 13,914 107,712 18.4 %
Net credit expense 39,932 6.8 % 39,932 6.8 %
General and administrative expenses 52,410 9.0 % 52,410 9.0 %
Amortization and depreciation not included in cost of goods sold 13,202 2.3 % 13,202 2.3 %
Loss on impairment 25,601   4.4 %   25,601   4.4 %
Total costs and expenses 560,554   95.9 % 13,914   574,468   98.2 %
Operating income (loss) 24,263 4.1 % (13,914 ) 10,349 1.8 %
Interest expense, net 12,283   2.1 %   12,283   2.1 %
Income (loss) before income taxes 11,980 2.0 % (13,914 ) (1,934 ) (0.3 )%
Income tax expense (1,132 ) (0.2 )% (2,434 ) (3,566 ) (0.6 )%
Net income (loss) $ 13,112   2.2 % $ (11,480 ) $ 1,632   0.3 %
 
 
Fiscal Year Ended February 1, 2019

As reported

% of net
sales

Topic 606
Adjustments

Balances
without
Adoption of
Topic 606

% of net
sales

Total net sales and revenue $ 1,795,852 100.0 % $ $ 1,795,852 100.0 %
Costs and expenses
Cost of goods sold 968,534 53.9 % 968,534 53.9 %
Sales and marketing expenses 429,641 23.9 % 4,666 434,307 24.2 %
Net credit expense 120,374 6.7 % 120,374 6.7 %
General and administrative expenses 189,559 10.6 % 189,559 10.6 %
Amortization and depreciation not included in cost of goods sold 49,510 2.8 % 49,510 2.8 %
Loss on impairment 25,601   1.4 %   25,601   1.4 %
Total costs and expenses 1,783,219   99.3 % 4,666   1,787,885   99.6 %
Operating income (loss) 12,633 0.7 % (4,666 ) 7,967 0.4 %
Interest expense, net 50,136   2.8 %   50,136   2.8 %
Income (loss) before income taxes (37,503 ) (2.1 )% (4,666 ) (42,169 ) (2.3 )%
Income tax (benefit) expense (8,468 ) (0.5 )% (1,051 ) (9,519 ) (0.5 )%
Net loss $ (29,035 ) (1.6 )% $ (3,615 ) $ (32,650 ) (1.8 )%
 
     
As of February 1, 2019
As Reported   Topic 606 Adjustment  

Balances Without
Adoption of Topic 606

Promotional material inventories $ 13,810 $ 9,175 $ 22,985
Other current assets 27,887 (3,770 ) 24,117
Accrued costs and other liabilities 89,628 (3,770 ) 85,858
Deferred income taxes 3,828 2,293 6,121
Accumulated deficit (610,228 ) 6,882 (603,346 )

Contacts

Investor Relations:
Jean Fontana
ICR
IR@bluestembrands.com

Contacts

Investor Relations:
Jean Fontana
ICR
IR@bluestembrands.com