Bluestem Q3 2015 Earnings Presentation

7/25/2019 Bluestem Q3 2015 Earnings Presentation

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Q3 2015 Earnings Call and Investor MeetingDec 16, 2015


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Notice to Recipients

This presentation contains statements that are forward-looking statements. Forward-looking

statements relate to expectations, beliefs, projections, future plans and strategies, anticipatedevents or trends, and similar expressions concerning matters that are not historical facts. Allstatements contained herein that are not clearly historical in nature are forward-looking. In somecases, you can identify these statements by use of forward-looking words, such as may, will,should, anticipate, estimate, expect, plan, believe, predict, potential, project,intend, could, or similar expressions. In particular, statements regarding Bluestem Group Inc. andits consolidated subsidiaries plans, strategies, prospects, and expectations regarding its business areforward-looking statements. These statements involve risks, uncertainties, and assumptions.Important factors that could cause actual results to be materially different from Bluestem Group Inc.

and its consolidated subsidiaries expectations include the risks and uncertainties set forth in RiskFactors in the Bluestem Group Inc. and its consolidated subsidiaries report as of and for the yearsended January 30, 2015 and January 31, 2014 (available at www.bluestem.com) as updated by theRisk Factors section in the quarterly report as of and for the 13- and 39- weeks ended October 30,2015 and October 31, 2014. Accordingly, you should not place undue reliance on the forward-looking statements contained in this presentation. These forward-looking statements are made onlyas of the date of this presentation. Bluestem Group Inc. and its consolidated subsidiaries undertakeno obligation to update or revise publicly any forward-looking statements, whether as a result ofnew information, future events, or otherwise.

This presentation also contains financial measures that are not prepared in accordance withgenerally accepted accounting principles (GAAP). Please refer to the Bluestem Group Inc.searnings release for the 13- and 39- weeks ended October 30, 2015 and October 31, 2014 (Q3 2015Press Release) (available at www.bluestem.com) for reconciliations of non-GAAP financial measuresto the most directly comparable GAAP measures. Non-GAAP financial measures in this presentationinclude adjusted EBITDA, contribution margin, adjusted general and administrative expenses, proforma adjusted EBITDA, unlevered pro forma free cash flow, pro forma net credit expense and proforma contribution margin.

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Q3 2015 HIGHLIGHTS


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Q3 Highlights

Bluestem Group consolidated diluted loss per share from continuing

operations of $0.02

Bluestem Brands net retail sales of $475 million for the quarter

Fingerhut sales up 10%

Gettington sales up 24%

Paycheck Direct sales up 64%Orchard sales down 5% on a Bluestem fiscal calendar basis

Bluestem Brands Adjusted EBITDA $27.0 million compared to $11.5million in Q3 last year

New revolving accounts of 169 thousand up 11%Revolving net principal credit losses of 18.8% compared to 17.5% in Q3

2014; year-over-year variance trend improved 273 bps

Orchard integration on-track

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Bluestem Group Q3 Results

Bluestem Group consolidated Q3 2015 operating income includes: $4.7 million from Bluestem Brands

$4.5 million from Legacy Capmark activity

$14.1 million gain from derivatives in our own equity

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October 30, 2015 October 31, 2014

Total net sales and revenue 482,005$ 12,710$

Total costs and expenses 472,773 7,655

Gain from derivatives in our own equity (14,120) -Operating income 23,352$ 5,055$

Income from continuing operations after income taxes 11,239$ 5,355$

Basic and Diluted Income (Loss) Per Share - Common Stockholders

Basic income per share from continuing operations $ 0.08 $ 0.06

Diluted (loss) income per share from continuing operations* $ (0.02) $ 0.06

Basic weighted average shares outstanding 136,160,378 99,844,755

Diluted weighted average shares outstanding 139,119,658 101,328,814

*The gain from derivatives in our own equity i s excluded from the diluted earnings per share cal cula tion

13 Weeks Ended

BLUESTEM GROUP INC.

Consolidated Statement of Comprehensive Income(unaudited $000s, except shares and per share amounts)


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Bluestem Brands Q3 Results

Bluestem legacy businesses

Net sales grew 13% Contribution margin 14.5%

Orchard Portfolio

Net sales $234.3 million

Contribution margin 18.5%

While gross margin was strong, we sawsome deterioration at Fingerhut due tohigher returns and discounts

Contribution margin decreased 120bps; included in 2014 is a benefit of 70bps as a result of the SCUSAtransaction; the remaining decrease of50 bps is due to credit performance

and Fingerhut gross margin

Adjusted G&A improved 150 bpsprimarily from lower incentivecompensation costs

Adjusted EBITDA was 5.7%, up 29 bpsin the quarter

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Successor Predecessor

(13 Weeks Ended) (13 Weeks Ended)

October 30, 2015 October 31, 2014

Net sales 474,957$ 213,324$

Cost of goods sold 244,049 124,407

Gross profit 230,908 88,917

Sales and marketing expenses 137,753 42,583

Net credit expense 15,143 8,777General and administrative expenses 56,864 37,865

Amortization and depreciation not i ncluded in

cost of goods sold 16,462 3,128

Interest expense, net 13,945 4,248

Loss income before income taxes (9,259) (7,684)

Income tax (benefit) expense (14,680) (3,295)

Net income (loss) 5,421$ (4,389)$

Margins and Expenses as a Percentage of Net Sales:

Gross profit rate 48.6 % 41.7 %

Sales and marketing expenses 29.0 % 20.0 %

Net credit expense 3.2 % 4.1 %

Contribution margin 78,012$ 37,557$

As a percentage of net sales 16.4 % 17.6 %

Adjusted general and administrative expenses 52,287$ 26,659$


Adjusted EBITDA 27,020$ 11,518$


BLUESTEM BRANDS, INC.

Consolidated Statements of Operations and Selected Operating Data

(unaudited in $000s)


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Orchard Portfolio Integration Update

Launched cross-sell of Orchard products through Fingerhut in Q4 of 2015

Fingerhut catalog inclusion in Spring 2016 Leverage Orchard capabilities to source unique products for Fingerhut in

Q1 2016

Provides Scale to theApparel Category

Leveraging Orchard capabilities to expand in Kids, Casual Mens &

Womens, Outerwear, and Home

Expands Private Label

Merchandising

Capabilities

Kicked-off planning process

Technical requirements/design completed

Launch as early as Q4 of 2016

Adds Attractive Customer

Base for Consumer Credit

Offerings

Executive level synergy run rate of $3 million annually

On-track to recognize 50 bps of cost savings from scale in 2016

Big areas include paper, transportation, servicing & insurance

Print contracts not available to combine until 2017

Marketing: extensive contact stream testing in 2016

Sourcing: COGS savings opportunities in both directions

Significant Earnings

Accretion and Cost

Synergies

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BUSINESS REVIEW


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Fingerhut Q3 Performance

Net Sales growth a strong 10%

TV continues to deliver good response

Expect to launch new TV campaign in late Q1 2016

New account growth of 10% compared to flat second quarter year over year growth

Contribution margin decreased by 245 bps

Gross Margin rate down 80 bps due to higher returns, higher discounts and increased shipping

expense related to launching 2-day air delivery in September

Advertising Expense was flat year over year

Net Credit Expense as a percent of Net Sales up 170 basis points year over year

Lower profit sharing revenue due to portfolio performance

2014 includes one time benefits of 66 bps from the sale of receivables to SCUSA9

Fingerhut Q3 2015 Q3 2014

Net Sales ($000) 208,652$ 189,546$Net Sales growth YOY 10.1% 22.8%

Gross Margin % 43.2% 44.0%

Advertising Expense as a % of Net Sales 20.3% 20.3%

Net Credit Expense as a % of Net Sales 6.0% 4.3%

Contribution Margin as a % of Net Sales 17.0% 19.4%

Revolving New Credit Accounts (000) 155 140

Freshstart New Credit Accounts (000) 55 51


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Gettington Q3 Performance

Gettington sales grew 24% in the quarter

Contribution margin improved by 158 bps

Improved gross margin rate due to mark-up and improved shipping revenue

Advertising expense improved 93 bps largely due to lower digital testing

Partially offset by higher credit costs reflecting the portfolio performance

2014 includes one time benefits of 30 bps from the sales of receivables to SCUSA

New revolving credit accounts grew 17% for the quarter

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Gettington.com Q3 2015 Q3 2014





Contribution Margin as a % of Net Sales 9.6% 8.0%

Revolving New Credit Accounts (000) 14 12


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PayCheck Direct Q3 Performance

PayCheck Direct excellent growth continued with sales increasing by 64% in the quarter

Gross margin is 116 bps favorable due to an increased penetration of footwear and other fashion

categories

Increased advertising expense relates to timing of catalog in-home dates falling late in the quarter

Credit expense increase from higher provision related to growth and an increase in the provision rate

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PCD Q3 2015 Q3 2014





Contribution Margin as a % of Net Sales -26.1% -10.6%

Eligible Client Employees (000) 6,216 2,449


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Net Credit Expense

Net credit expense as a percentage of average account receivable increased 148 bps over

2014, reflecting a decrease in the profit sharing received on the revolving credit receivables

and higher provision

Higher provision dollars results from growth in PayCheck Direct and FreshStart portfolios Growth in credit management costs reflect portfolio growth, as these costs as a percentage of

average receivables is flat year over year at 154 bps

Lower profit share primarily due to lower late fee yield and higher net principal losses

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Net Credit Expense ($ in 000's) Q3 2015 Q3 2014

Finance Charge and Fee Income (466)$ 516$Provision for Doubtful Accounts 3,637 656

Credit Management Costs 19,268 16,316

Portfolio Profit Sharing and Servicing Fee Income (7,296) (8,711)

Net Credit Expense 15,143$ 8,777$

Net Credit Expense as a Percent of Average Account Receivable* 4.8% 3.4%

Revolving Average Customer Accounts Receivable 1,249,882$ 1,043,445$

*Annuali zed to 52 week periods for comparabil ity


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Revolving Portfolio Performance

30+ DQ rate is essentially flat versus last year

SCUSA Risk Adjusted Margin for the quarter was 3.3%, down 270 bps Net Finance Charge and Fee Rate is impacted by higher average balances

Principal Loss rate increased by 60 bps over last year. The year over year trend is beginning to headin the right direction, as Q2 increase was 215 bps

Decrease in our yield on the sale of charged off receivables (i.e. recovery rate) is due to lowerpricing in our forward flow agreement in 2015 versus 2014

SCUSA agreement requires that receivables will be sold at a discount to SCUSA in instanceswhen forecasted annual RAM drops below 5%: For 2015, measurement period is September 1st (date of amendment) through January 31st

We expect RAM to be below 5% due to the current portfolio trends for the period September 1 st

through January 31st

Receivables are being sold at an average discount of 2.2% during the fourth quarter

This discount, called a Merchant Fee, is calculated as a percentage of new receivables sold toSCUSA13

Revolving Portfolio Q3 2015 Q3 2014

Total accounts receivable (000) 1,225,964$ 1,038,208$

Average balance 677$ 619$

30+ Delinquency rate 17.6% 17.8%

Net finance charge and fee rate 27.2% 28.6%

Principal loss rate 20.7% 20.1%

Recovery rate 1.9% 2.6%

Net principal loss rate 18.8% 17.5%

SCUSA Risk Adjusted Margin 3.3% 6.0%


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Revolving Portfolio Principal Losses

While we are beginning to observe principal loss rates trending back to 2014 levels, theyare still exceeding our expectations for the long term performance of the portfolio

We have focused on late stage roll rates impacting the roll to charge-off Improved customer contact information

Enhanced dialer technology implemented in the early second quarter

Enhanced Business Intelligence metrics helping diagnose areas for improvement

Regulatory headwinds put pressure on collection operating costs and effectiveness FCC ruling has impacted industries use of technology to implement efficient manual dialing strategies

The net impact is increased collections costs and lower penetration rates into delinquent accounts

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10%

12%

14%

16%

18%

20%

22%

24%

Q1 Q2 Q3 Q4

Net Principal Charge-off %

2014 2015

6%

8%

10%

12%

14%

16%

18%

20%

Q1 Q2 Q3 Q4

30+ Delinquency %

2014 2015


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Orchard Portfolio Q3 Performance

Net Sales

For the periods compared net sales decreased by 5% We have invested in inventory and made good progress on out of stock rates during the quarter

Contribution Margin rate improved 5 bps

Gross Margin improved by 170 bps as a result of further progress in direct sourcing, reinforcinga key investment thesis - ability to leverage enterprise wide lower COGS as a result of improvedproduct sourcing

Advertising as a percent of Net Sales deterioration of 165 bps reflects softer than expected

demand during the third quarter16

Orchard Portfolio

Orchard Portfolio

13 weeks ended

October 30 2015

Orchard Corporation

13 weeks ended

October 25 2014

Net Sales ($000) 234,252$ 247,777$

Net Sales growth YOY -5.5% 0.1%



Contribution Margin as a % of Net Sales * 18.4% 18.4%

New Gross Customers (000) 437 430

Active Customers (000) 7,996 7,863

* 2014 adjusted to conform to Bluestem's basis of presentation

Bl t B d I


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Bluestem Brands Inc.

General Administrative Expense Q3

Year over year growth driven by the Orchard acquisition Integration costs relate entirely to the Orchard acquisition and primarily reflect retention, severance and

project management costs

Key driver of improved G&A leverage is lower incentive compensation in 2015, driving 174 bps ofimprovement in the third quarter

Strategic areas of investments include: Increasing Technology and Product Management headcount to support ecommerce evolution

PCD staff to support growth

Staff supporting the implementation of Oracle systems for our general ledger and merchandising management

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($ 000) Q3 2015 Q3 2014

Compensation and Benefits 36,021$ 19,747$

Professional Fees 7,184 11,735Rent and Occupancy Costs 9,275 4,961

Other 4,384 1,422

Total General and Administrative Expenses 56,864$ 37,865$

Less:

Dividend Equivalent Expense - 2,917

Stock-based Compensation Expense 1,059 706

Integration Costs 2,972 -Acquisition Transaction Costs - 6,772

Specified Litigation Matters - 719

Other 546 92

Adjusted General and Administrative Expenses 52,287$ 26,659$

Adjusted G&A as a % of Net Sales 11.0% 12.5%


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Cash & Legacy Commercial Real Estate

Net commercial assets for the quarter ended at $74.9 million

Cash collected during the third quarter totaled $7.2 million

Activities related to the legacy commercial real estate business resulted in a $2.3 million gain in thequarter

Current expectations are for 50% of these assets to be liquidated over the next 12 months

Historically we have included the derivative liability in our own equity, a non cash item, in netcommercial real estate assets. We believe it is more meaningful to exclude this liability from thecalculation

Using the current methodology net commercial real estate assets as of July 31, 2014 would havebeen $76.5 million compared to $53.4 million reported in the second quarter

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($ 000) Q3 2015 Q2 2015

Net Commercial Real Estate Assets * 74,877$ 76,541$

Cash collected from Commercial Real Estate Assets 7,200$ 47,400$

Gains

Net gains on loans 552 1,454

Net gains on investments and real estate 401 166

Equity in joint ventures and partnerships 1,374 866

Total 2,327$ 2,486$

* calculated excluding the derivative liability


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Bluestem Group Valuation Components

We have $169 million of unencumberedcash at the Bluestem Group HoldingCompany

Bluestem Group

Cash

We have $75 million of net commercialreal estate assets, valued at the lower ofcost or market, that are being liquidatedover the next 6 - 36 months

Net Commercial

Real Estate Assets

LTM pro forma adjusted EBITDA of $155million*

LTM unlevered pro forma free cash flowof $136 million*

Total term debt outstanding of $544million

Bluestem Brands

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*Please refer to the Basis of Presentation slide in the appendix for

further explanation of LTM pro forma adjusted EBITDA and LTMunlevered pro forma free cash flow


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STRATEGY REVIEW


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Strategic Priorities

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1. Diversify funding sources

2. Develop white-label credit solution

3. Expand into new, higher-margin categories

4. Increase private-label merchandise penetration5. Expand into new revenue streams


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Gettington Strategy Shift

Gettington.com will be transitioning to an online destination for

overstocks and closeouts inventory for customers who prefer

the flexibility of paying over time

Better aligns the brand with Bluestems vision to be the retail destination

of choice for shoppers who prefer the flexibility of paying over time

Recognizes Fingerhuts successful migration into an online retailer

Provides another shopping option for the sub-prime consumer with a

differentiated value proposition from Fingerhut

Positions the brand to compete in an online space not dominated by

Amazon and big-box retailers

Expected Timing: First quarter of 2016

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Steps for Potential Uplisting

Renegotiate

SCUSA

exclusivity

Anniversary Bluestem acquisition

Identify and

close new

funding

Anniversary

Orchard

acquisition

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Diversify

Funding Sources

Stabilize Credit

Performance

Orchard

Integration

Financial

Statement Clarity

Integrate organizations, capture synergies, deliver

predictable results

Hold for

SCUSA and

holiday

results

Q3 Q4Q2Q12015

Q3 Q4Q2Q12016

Q2Q12017


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Stockholders Equity Table

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Bluestem Group, Inc.

Total Outstanding at October 30, 2015

Series A Convertible 2014 Equity Common Stock Total Stock,

Preferred Stock* Common Stock Incentive Plan Warrants Options and

Stock Stock Warrants

Total Outstanding 1,340,771 136,555,963 20,932,073 9,138,806 167,967,613

Available for Grant 2,908,611 - 2,908,611

Total Outstanding and Available for Grant ("Fully Diluted") 170,876,224

*On a as-converted to common stock basis


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Brand Contribution Margin Trends

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Fingerhut Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015

Net Sales ($000) 208,275$ 189,545$ 403,874$ 183,776$ 223,679$ 208,653$Gross Margin % 44.5% 44.0% 42.8% 43.6% 43.8% 43.2%

Advertising Expense as a % of Net Sales 19.0% 20.3% 16.6% 21.0% 19.2% 20.3%

Net Credit Expense -0.2% 4.3% 4.9% 3.1% 3.8% 6.0%

Contribution Margin as a % of Net Sales 25.6% 19.4% 21.3% 19.5% 20.7% 17.0%

Gettington.com Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015

Net Sales ($000) 18,258$ 17,529$ 41,966$ 17,042$ 21,987$ 21,787$

Gross Margin % 21.4% 21.1% 20.0% 23.2% 24.7% 24.4%


Net Credit Expense 0.8% 1.1% 1.0% -0.6% 2.9% 3.7%


PCD Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015

Net Sales ($000) 3,941$ 6,248$ 10,636$ 5,358$ 7,267$ 10,266$

Gross Margin % 27.7% 28.9% 33.4% 32.6% 33.7% 30.1%


Net Credit Expense 9.5% 7.6% 5.6% 13.2% 8.3% 18.3%

Contribution Margin as a % of Net Sales -7.9% -10.6% 8.0% -16.6% -1.8% -26.1%

Orchard Portfolio ** Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015

Net Sales ($000) 248,166$ 247,777$ 268,518$ 256,630$ 259,570$ 234,252$

Gross Margin % 56.2% 54.8% 53.3% 55.3% 55.7% 56.5%Advertising Expense as a % of Net Sales 37.4% 36.4% 37.3% 39.5% 39.3% 38.1%


**Orchard Portfolio financial information conforms with Bluestem Brands Inc. basis of presentation, a full discosure regarding the Orchard Portfolio

basis of presentation is presented in the appendix of this presentation


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Revolving Portfolio Credit Statistics

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Revolving Portfolio Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015

Total Accounts Receivable 990,007,767$ 1,035,926,698$ 1,038,208,052$ 1,287,525,737$ 1,214,617,983$ 1,237,578,571$ 1,225,964,093$

Balance Active Accounts 1,652,579 1,665,102 1,677,955 1,877,894 1,807,830 1,800,108 1,812,207

Average Balance 599$ 622$ 619$ 686$ 672$ 688$ 677$

30+ Delinquency % 16.0% 16.7% 17.8% 14.7% 15.4% 16.3% 17.6%

Net Finance Charge and Fee % 29.2% 30.4% 28.6% 28.7% 29.7% 28.8% 27.2%

Principal Loss % 17.1% 19.4% 20.1% 21.0% 19.7% 21.6% 20.7%

Recovery % 2.1% 4.1% 2.6% 1.7% 2.6% 2.2% 1.9%

Net Principal Loss % 15.0% 15.4% 17.5% 19.2% 17.0% 19.4% 18.8%

Revolving Active Accounts (000) 1,473 1,519 1,534 1,593 1,686 1,682 1,686New Revolving Credit Accounts (000) 138 153 152 288 143 150 169

New FreshStart Accounts (000) 49 47 51 123 60 50 55


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Notice to Recipients - Basis of Presentation

Bluestem Group Consolidated Financial Information

Please refer to the Bluestem Group Inc.s Q3 2015 Press Release (available at www.bluestem.com) for a description of the basis ofpresentation.

Bluestem Stand-alone Financial Information

Please refer to the Bluestem Group Inc.s Q3 2015 Press Release (available at www.bluestem.com) for a description of the basis ofpresentation.

To supplement the financial data derived from the results of Bluestem this presentation uses LTM pro forma adjusted EBITDA andLTM unlevered pro forma free cash flow as non-GAAP measures. The LTM pro forma adjusted EBITDA and LTM unlevered proforma free cash flow consists of the 13 weeks ended January 30, 2015 and 39 weeks ended October 30, 2015 of Bluestem results

and the results of Orchard Brands Corporation from October 26, 2014 through July 9, 2015.

Orchard Brands Corporation Non-GAAP Stand-alone Financial Information

The financial information in this presentation includes results of Orchard Brands Corporation and its subsidiaries for the 14 weeksended July 31, 2015 and 13 weeks ended April 25, 2015, January 24, 2015, October 25, 2014 and July 26, 2014 (collectively theAdjusted Five Quarters of Orchard Results). The Adjusted Five Quarters of Orchard Results are based on Bluestem Brands, Inc.'sbasis of presentation and fiscal second quarter ended July 31, 2015, first quarter ended April 25, 2015 and fiscal year endedJanuary 24, 2015. These measures are conformed to Bluestem Brands, Inc. basis of presentation and fiscal period ends forcomparison purposes. Bluestem Brands, Inc.s basis of presentation is in accordance with GAAP. The Adjusted Five Quarters ofOrchard Results reported herein are not similar in presentation or fiscal periods to the Six Quarters of Historical Orchard Results

reported in the Q3 2015 Press Release. To supplement the adjusted financial data derived from the results of Orchard BrandsCorporation this presentation uses contribution margin as a non-GAAP measure.

We provide these results and measures because we believe they are useful to investors in evaluating Orchard Brands operatingperformance. As non-GAAP measures, they have limitations in that they do not reflect all of the amounts associated with OrchardBrands results of operations as determined in accordance with GAAP. Non-GAAP measures should be considered along with theGAAP financial presentation and should not be considered in isolation or as a substitute for results reported in accordance withGAAP.
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Bluestem Q3 2015 Earnings Presentation