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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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http://www.capmark.com/http://www.bluestem.com/http://www.bluestem.com/http://www.capmark.com/7/25/2019 Bluestem Q3 2015 Earnings Presentation
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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$
As a percentage of net sales 11.0 % 12.5 %
Adjusted EBITDA 27,020$ 11,518$
As a percentage of net sales 5.7 % 5.4 %
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
Net Sales ($000) 21,787$ 17,529$Net Sales growth YOY 24.3% 38.2%
Gross Margin % 24.4% 21.1%
Advertising Expense as a % of Net Sales 11.1% 12.0%
Net Credit Expense as a % of Net Sales 3.7% 1.1%
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
Net Sales ($000) 10,266$ 6,248$Net Sales growth YOY 64.3% 829.7%
Gross Margin % 30.1% 28.9%
Advertising Expense as a % of Net Sales 37.8% 31.9%
Net Credit Expense as a % of Net Sales 18.4% 7.6%
Contribution Margin as a % of Net Sales -26.1% -10.6%
Eligible Client Employees (000) 6,216 2,449
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Net Credit Expense
Net credit expense as a percentage of average account receivable increased 148 bps over
2014, reflecting a decrease in the profit sharing received on the revolving credit receivables
and higher provision
Higher provision dollars results from growth in PayCheck Direct and FreshStart portfolios Growth in credit management costs reflect portfolio growth, as these costs as a percentage of
average receivables is flat year over year at 154 bps
Lower profit share primarily due to lower late fee yield and higher net principal losses
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Net Credit Expense ($ 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%
Gross Margin % 56.5% 54.8%
Advertising Expense as a % of Net Sales 38.1% 36.4%
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%
Advertising Expense as a % of Net Sales 12.7% 12.0% 11.5% 12.4% 11.7% 11.1%
Net Credit Expense 0.8% 1.1% 1.0% -0.6% 2.9% 3.7%
Contribution Margin as a % of Net Sales 7.8% 8.0% 7.5% 11.3% 10.1% 9.6%
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%
Advertising Expense as a % of Net Sales 26.1% 31.9% 19.8% 36.0% 27.2% 37.8%
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%
Contribution Margin as a % of Net Sales 18.8% 18.4% 16.0% 15.8% 16.3% 18.4%
**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.
http://www.bluestem.com/http://www.bluestem.com/http://www.bluestem.com/http://www.bluestem.com/