Bluestem Group, Inc.
First Quarter 2016 Earnings Conference Call
June 10, 2016
Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
CORPORATE PARTICIPANTS
Andy Spicher, Vice President of Corporate Development and Investor Relations
Gene Davis, Executive Chairman of the Board
Steve Nave, President and Chief Executive Officer
Mark Wagener, Executive Vice President and Chief Financial Officer
CONFERENCE CALL PARTICIPANTS
Matthias Ederer, Wingspan Investment Management
Andrew Diaz, Empyrean
Michael Cohen, Opportunistic Research
Andrew Shannahan, Knighthead Capital
PRESENTATION
Operator:
Greetings and welcome to the Bluestem Group Incorporated First Quarter 2016 Earnings Call. At this
time, all participants are in a listen-only mode. As a reminder, this conference call is being recorded.
It is now my pleasure to introduce your host, Mr. Andy Spicher, Vice President of Corporate Development
and Investor Relations at Bluestem.
Andy Spicher:
Good morning, everyone, and thank you for joining us on our first quarter earnings call. Before we get
started, I'd like to point out that we posted today's presentation to our website. It's on our Investor
Relations page at bluestem.com. So, if you haven't already, you can find it there while I run through the
forward-looking disclosure.
Before we begin, I need to remind you that during the course of today's call, various remarks we make
about expectations for our Company and other statements that make use of forward-looking words such
as may, expect, believe, or similar expressions, constitute forward-looking statements. Actual results may
vary materially from those contained in forward-looking statements based on a number of factors.
Also in today's presentation, we supplement historical financial data derived from Bluestem's financial
statements which are prepared in accordance with GAAP by use of non-GAAP performance measures,
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
including contribution margin, adjusted G&A expenses, and Adjusted EBITDA. We refer you to the press
release document available on our website at www.bluestem.com for further information.
Finally, I ask you to turn to Page 3 of today's presentation for an important update on how we'll be
disclosing our financial results going forward. We have revised our segment reporting to reflect our
organizational structure post the integration of Orchard. We now have five reporting segments, Northstar
portfolio, which includes the Fingerhut and Gettington brands; Orchard portfolio which includes the 13
brands acquired in the Orchard brand acquisition; PayCheck Direct; Capmark portfolio and Corporate.
Our business review today and in the future will focus on these reporting segments.
With that, I will now turn the call over to Gene Davis, our Executive Chairman.
Gene Davis:
Thanks, Andy, and thanks to everyone for joining us on the call this morning to discuss our Company's
first quarter results. As usual, joining me on today's call are Steve Nave, our President and CEO; and
Mark Wagener, our CFO. Steve and Mark will take you through a detailed recap of our financial results,
the headwinds we're facing and a discussion of some of our strategic priorities for the year.
With that, I'll turn the call over to Steve. Steve?
Steve Nave:
Thanks, Gene. If you're following along with the presentation materials Andy mentioned, I'll start with the
headlines for the quarter on Page 5. Bluestem Brands' net sales for the quarter were just under $430
million. The Northstar portfolio which Andy mentioned includes the credit led Fingerhut and Gettington
businesses, was down 11% year-over-year. The Orchard portfolio was down 2.1% year-over-year and
PayCheck Direct delivered year-over-year growth of 84%. Bluestem Brands' Adjusted EBITDA for the
quarter was $3.7 million, down $3.2 million from last year's first quarter of $6.9 million. Throughout the
quarter, we saw a stabilization in the performance of the revolving credit portfolio. Principal credit losses
excluding the timing effect of recoveries on bulk sales of charged-off receivables improved 30 basis
points year-over-year.
Finally, we completed the buyback of 4.5 million shares of our common stock shortly after we announced
our intention to do so in our Q4 earnings call. The series of transactions took place at an average price of
$2.75 a share, which Management and the Board feel is significantly below the current intrinsic value of
the enterprise. As a reminder, significant tax consequences prohibit us from executing additional share
repurchases anytime in the near future.
We obviously had a challenging quarter. Some of our headwinds were the result of deliberate decisions,
like the tightening of our underwriting standards, while others are macroeconomic factors, like the
dramatic expansion and the supply of subprime revolving bank cards. If you turn to Page 6, you'll see
some of the stats supporting this observation.
New account subprime originations by general purpose and PLCC issuers are continuing their doubledigit increase trend, up 25% last year with no indication that growth is slowing yet this year. This
obviously has a direct impact on the Northstar portfolio business. We're seeing lower response rates to
our direct marketing campaigns from prospects as well as existing customers. While we're seeing stable
performance in our credit portfolio, we believe it would not be prudent to react to this industry trend like
others by loosening our underwriting standards. As a result of the sales softness, we'll have challenges
with continuing our trend of improving operating expense leverage and the optics of our future credit
portfolio performance may be negatively impacted by the denominator effect caused by the decrease in
new customer accounts.
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
Also, as I'm sure many of you are aware, the retail industry as a whole has been challenging so far this
year. This is likely impacting our Orchard portfolio business, although our contact stream optimization
testing, which kicked into high gear in the first quarter, is making prior year comparisons for this business
less meaningful.
Turning to Page 7, you'll see the things we're focusing on in response to these challenges. First, we'll
continue to monitor and react to changes in response rates, the impact of the rates on the profitability of
our marketing campaigns, and as a result, will adjust the marginal cutoff points for our direct marketing
activities. Fortunately our processes and systems are already set up this way so this won't be a change
to how we've always executed each marketing campaign.
Second, as you know, we've been highly focused on improving the trends in our credit portfolio. This
doesn't change but we are mindful that our customers could potentially eventually overextend themselves
with other credit issuers so further underwriting tightening is something we'll continue to keep top of mind.
To be clear, we are not seeing anything indicating this in our portfolio today; we just know from
experience to be mindful of the scenario.
We're also testing some new pricing strategies in the Fingerhut brand to find opportunities to drive greater
demand and therefore greater profit by investing in price reductions.
Finally, we're keeping a watchful eye on our fixed as well as variable expenses to make sure we're
operating with the most efficient cost structure possible.
With that high-level recap, I'll hand it over to our CFO to go into the details of the first quarter
performance. Mark?
Mark Wagener:
Thanks, Steve. Please turn to Page 8 where I'll start our review with the Bluestem Group first quarter
results.
Bluestem Group for the quarter reported a loss before income taxes $32 compared to a $23.2 million loss
last year. Please remember that the 2015 numbers do not include the Orchard portfolio. The $8.8 million
year-over-year decrease in earnings primarily reflects a $14.7 million increased loss at Bluestem Brands
and a $2.8 million in lower earnings from the Capmark portfolio, partially offset by an $8.7 million lower
loss from derivatives on our own equity. I'll talk about the Bluestem Brands' performance in a moment.
The lower Capmark performance reflects timing on the liquidation of our remaining commercial real estate
assets and the fact that there are fewer remaining assets in which to liquidate. Our valuation of the
Centerbridge warrants resulted in a $0.5 million gain for the quarter. This accounting treatment ended in
May when the warrant exercise price became fixed. During the second quarter, we will reclassify the
derivative liability into equity.
Turning to Page 9, we have the first quarter results for Bluestem Brands. Due to the significant increase
in sales resulting from the Orchard portfolio acquisition, I'd focus your attention on percent of sale
outcomes in the bottom of the table. Net sales are up 107.8% over last year. Our contribution margin
decreased from 17.9% to 14.8%, primarily due to lower profit sharing on our service credit portfolio.
G&A expenses as a percent of net sales decreased 40 basis points, primarily reflecting improved
leverage from the Orchard acquisition.
Finally, Adjusted EBITDA for the quarter was 0.9% of net sales versus 3.3% last year.
Please remember that the first quarter of our fiscal year has historically been the low point for EBITDA
margins.
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
Let's turn to Page 11, Northstar portfolio performance. I want to reiterate from previous calls that we
evaluate each business at the contribution margin level, and the components of contribution margin are
gross margin, advertising and net credit expense. Since these line items vary by brand due to the
merchandise product mix, the dominant marketing channel for that brand and the credit products provided
to the customer is more meaningful to evaluate each brand at the contribution margin.
As Steve mentioned earlier, the Northstar portfolio had a challenging first quarter as we saw increased
credit supply impact marketing response rates, website visits and new account application volume. This
obviously puts pressure on retail demand and our marketing efficiency. Furthermore, the repositioning
our Gettington brand to an off-price business strategy and the related advertising pullback further
deteriorated Northstar portfolio sales. The net sales for the quarter of $183.2 million, down 11%, with the
decrease being equally driven by Fingerhut performance and the Gettington repositioning.
New revolving credit accounts were $120,000 for the quarter, down 16% over last year. As part of our
normal operating cadence and performance feedback loop, we continuously monitor the delinquency and
loss performance of our new account vintages. This discipline served us well during the last recession.
At this point, we have not seen any credit deterioration in our 2015 and 2016 new account vintages.
Contribution margin decreased 470 basis points in the quarter, as higher credit cost and less efficient
marketing were only partially offset by stronger gross margins.
Net credit expense while up 600 basis points as a percent of net sales was in line with our expectations
for the quarter. Driving the higher credit costs were lower profit sharing revenue as risk-adjusted margin
for the quarter was 5.1%, down from 7.5% we reported last year. Impacting the overall risk-adjusted
margin was a 200 basis point reduction in revolving credit portfolio net finance charge and fee yield from
last year. This first quarter decrease is consistent with the year-over-year decrease of 230 basis point we
saw in the fourth quarter of 2015. Driving this decrease is lower late fee yield due to increases in the
average balance of our customers as well as higher charge-off of finance charges and late fees. Adding
to the reduction on risk-adjusted margin was a 50 basis point increase in net principal charge-offs driven
entirely by lower recoveries on charge-off receivables. These lower recoveries is primarily due to the
timing of bulk sales.
We incurred a $2.3 million merchant discount during the first quarter which is included in our provision for
loan losses. This merchant discount, a 1.17% discount on receivables sold to SCUSA was required to
enhance the portfolio's risk-adjusted margin performance to a level approximating 5% for fiscal 2016. We
expect to continue incurring a similar merchant discount on the sale of receivables to SCUSA throughout
2016. It is worth noting that, while risk-adjusted margin for the first quarter was 5.1%, the required
merchant discount is based on our full year risk-adjusted margin expectations.
Another item I would like to point out is that the amended agreement we entered into with SCUSA last fall
which adjusted their exclusivity rights to allow us to seed a new funding source increased the targeted
risk-adjusted margin threshold from 4.5% to 5%. This increase in the targeted threshold increased our
required discount we paid during the quarter by 61 basis points or $1.2 million.
We experienced 100 basis point deterioration in marketing leverage during the first quarter. Although we
adjusted our marketing spend in response to soft sales demand, we were unable to fully offset the lower
response rates on our marketing campaigns.
Finally, we improved our gross margin primarily due to the repositioning of the Gettington brand.
Let's turn to Page 12, net credit expense. We evaluate our net credit expense as a percent of average
receivables, so as we think about year-over-year performance, net credit cost as a percent of average
receivables is up 270 basis points over last year. The key drivers of this is the provision for loan losses,
which includes the $2.3 million merchant discount I previously mentioned, and lower profit sharing and
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
servicing fee income. We did see a 60 basis point improvement in credit operating cost during the
quarter primarily driven by collection efficiencies.
Turning to Page 13, revolving portfolio performance was stable during the quarter. We saw an increase
in delinquency rates of 50 basis points to 15.9%, all of which was driven by the year-over-year decrease
in sales. We also saw our principal loss rate excluding recoveries on charged-off receivables decrease
by 30 basis points during the quarter. As Steve mentioned, we continue to be disciplined in our
underwriting cutoffs and credit line assignments and will be continually reevaluating these as the year
unfolds. To be clear, any changes in underwriting in the near term would be designed to tighten credit to
ensure stable portfolio performance during this business cycle.
Turning to Page 14, Orchard portfolio. Net sales was down 2.1% for the first quarter. This decline in part
reflects lower marketing spend as we initiated our contact stream optimization test at the beginning of
2016. If you'll recall our conversations from last year, our goal with these tests is to optimize the
advertising spend while maintaining current demand levels and utilizing the savings to accelerate growth
as well as improve overall profitability. The remaining portion of the sales decrease reflects the soft retail
environment, partially offset by improved fill rates. During the quarter, we improved our overall initial fill
rates in the Orchard portfolio by 600 basis points.
The contribution margin improved 90 basis points during the quarter. We had a 160 basis point
improvement in advertising leverage, reflecting improved advertising efficiencies from adjustments in our
mail plans to optimize our circulation and the contact stream optimization test. This was partially offset by
lower gross margins of 80 basis points due to higher discounts for free shipping and merchandising
promotions in a very competitive retail environment. These increased discounts were partially offset by
continued progress on our sourcing initiatives which drove down product cost.
Finally, our new and active customers were down slightly in the quarter, reflecting the previously
mentioned circulation cuts.
Now I'll ask you to turn to Page 15. PayCheck Direct had another strong quarter with net sales up 84.4%
and a year-over-year improvement of 810 basis points in contribution margin. The improved contribution
margin reflects product sales shift to higher margin products and advertising efficiencies. We ended the
quarter with 6.3 million eligible client employees, an increase of 3.7 million over last year.
Turning to Page 16, I mentioned earlier our G&A expense improved 40 basis points as a percent of net
sales, primarily due to the acquisition of Orchard. Obviously with the soft retail demand, and as Steve
mentioned earlier, we are mindful of potential deleveraging in this line item and are being very strategic in
our investments.
Turning to Page 17, the Bluestem Brands' balance sheet was relatively consistent with year-end. The
growth in merchandise inventories is primarily seasonal in nature with minor impacts from our first quarter
sales softness. Our inventory turn in the first quarter was 3.2 versus 3.7 in the prior year, which primarily
reflects our decision to maintain higher Orchard portfolio inventory levels to improve overall fill rates in
that business. The growth in promotional material inventories is also seasonal in nature.
During the quarter, we had a $9.3 million in growth—we made $9.3 million in growth capital expenditures,
a $4.7 million increase over the prior year due to the build out of our new corporate headquarters. We
ended the quarter with $66 million in available liquidity, $529 million outstanding on our term debt, and
$92.3 million in borrowings on our inventory line of credit.
Finally, we entered into an interest rate swap during the first quarter with a notional value of $100 million.
This fixes our interest cost on $100 million of our LIBOR plus 70 basis point debt which has a LIBOR floor
of 100 basis points and an interest rate cost of 8.94%.
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
If you turn to Page 18, the key take-away is that we entered the first quarter with $179 million of
unencumbered cash at the group level after utilizing $12.5 million of cash for the share buyback. The
Capmark legacy business has $61 million in remaining net commercial real estate assets, which we
expect will be largely liquidated over the next 18 months.
I'll now let Steve wrap us up. Steve?
Steve Nave:
Thanks, Mark. I'll quickly discuss how we're doing against our high priority strategic initiatives on Page
20.
First, we've made great progress against our effort to reposition the Gettington brand as an off-price
goods retailer. We relaunched the Gettington website on April 25, with a 4,000-item assortment of offprice goods. We have additional site functionality and navigation refinements to make before we begin
our marketing campaigns, but we have no reason to believe we won't be ready for the full marketing
launch in the third quarter.
Next, the integration of the Orchard brands acquisition is going really well. There's not much more to say
about this, but as I mentioned last quarter, we're very bullish on the likelihood of delivering the synergies
anticipated at the time of the acquisition.
Next, as you know, one of our highest priorities this year is to diversify our funding sources. This process
is going very well. I'll leave that one there as I'm sure it will come up further in a minute during Q&A.
Finally, and I don't believe we've discussed this one before, but we've completed the development of our
new e-commerce platform, BCP. Our Product Development and Technology Teams did an outstanding
job delivering this more efficient and highly scalable e-commerce platform which also provides a better
online customer experience. We'll spend the next several months migrating each of our retail brands to
this platform. We hope to have this migration complete in time for the holiday shopping season.
I'll close by recognizing our team of nearly 4,000 employees. The integration of Bluestem and Orchard
has thrown the team many curve balls, whether it be having to operate with a new or different system,
changing reporting relationships or not being able to rely as much on in-person conversations to execute
responsibilities. The team has done a great job adapting to our new integrated enterprise and I cannot
thank them enough for that.
With that, I'll turn the call over to the Operator to take your questions. Operator?
Operator:
Certainly. If you'd like to ask a question over the phone lines today, that'll be star, one on your telephone
keypad. If you are using a speakerphone, please make sure that your mute function has been turned off
to allow your signal to reach our equipment. Once again, to queue up for questions, that's star, one on
your telephone keypad.
We'll take our first question from Matthias Ederer with Wingspan.
Matthias Ederer:
Hi. Thanks for taking my questions. Can you provide us with an update on your financing partner and
potential challenges through capital/funding alternatives you have. In relation to that, what your plan is
with respect to use of HoldCo cash in order to expand your funding alternatives. That's my first question.
Mark Wagener:
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
Hey. Thanks Matthias. We are in the middle of our process right now on the funding diversification. We
have received a number of preliminary bids from potential investors and we're going through that process
of meeting potential investors, having conversations, and doing a deeper dive to explain the business to
them. So, that's where we're at right now. I feel like we're making really good progress. As towards the
holding company cash and how we will use that to support either the funding diversification or other
initiatives, I think we need to get deeper into the funding project before we have an idea as to what if any
of that cash will need to support that project.
Matthias Ederer:
Got it. Thanks for that, Mark, appreciate it. Then my second question is in relation to—dovetailing to the
question asked from the previous call in Q4., now that we are sort of 40% through the year, are you
willing to provide—now that you're seeing some of these headwinds play out and addressing them, are
you able and willing to give us some sort of guidance be that at revenue or EBITDA with respect to any or
all of your businesses? Even something directional in terms of growth or decline on revenue and EBITDA
would be very helpful. Thank you.
Mark Wagener:
Yes, thanks again. I think at this point we're not willing to give guidance. I mean obviously, and as Steve
mentioned in his talking points, we've got a number of headwinds that we're dealing with in the macro
environment, and so I think at this time we're just not in the position and nor are we willing to provide
guidance. I think we have to get through where we expect the merge to be for the rest of the year. I think
we provided you at least some outlook as to how we see the portfolio performing but other than that we
will not provide any guidance.
Steve Nave:
Yes, Matthias, this is Steve—one thing that I guess I would augment that with is, one of the things that's
pretty noisy in our results, and I've referred to it as noisy for the last couple of quarters, is what's going on
with the Orchard portfolio, and the contact stream optimization, while it started just four or five months
ago, it really, really kicked in in earnest in the first quarter. We're probably going to see that level of noise
continue into and through the second quarter and then we believe coming out of that we'll start to see
something that looks a lot better in terms of year-over-year comparisons. We see the results of the
contact stream optimizations, evaluating each test cell, et cetera and we're pretty confident that the CSO
activities cost us about 200 basis points in growth with Orchard. So, it's a fancy way of saying, Orchard
probably would have been flat for the quarter, which actually would be pretty significant improvement over
where it's been last year before we bought it and then even after we bought it. So, the one little bit of
guidance I'll give you because it's such a noisy thing is that Orchard will more than likely turn around after
the second quarter once we have all the results from the CSO testing and have been able to react to
them.
Matthias Ederer:
I appreciate that, Steve. Thanks a lot for that comment.
Steve Nave:
Sure.
Operator:
We'll move forward to our next question from Andrew Diaz of Empyrean.
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
Andrew Diaz:
Hey guys. How are you doing? Thanks for taking the question. Had a couple of questions. I guess just
on the buyback in terms of executing that, I guess you obviously had some insight, line of sight into that. I
mean, can you maybe talk about the quarter, did it progressively get worse, or any kind of color there in
terms of how the quarter performed in terms of a cadence?
Mark Wagener:
Sure. So, I think I know where you're headed, trying to connect it to the buyback, but if I'm off the mark let
me know. I would definitely say we saw a worse back half of the quarter than we did in the front half of
the quarter. So, I think the front half looked a little bit more like what we saw in Q4 and then things got a
little bit tighter in the back half, so—and I think that answers your question.
Andrew Diaz:
Got it. No, that's helpful, absolutely that's very helpful. Then just on G&A, I guess if you look at adjusted
G&A in the fourth quarter, I think it was $59 million and then were sequential increased to I guess $61
million-ish or $62 million-ish, and given the kind of sales and the macro headwinds that you're talking
about, I mean, I guess how should we think about G&A? I mean, is it—this is-are you really making an
investment there and at the same time revenues are softer, or how should we think about that?
Steve Nave:
Yes, no, that's a great question. So, if you look at G&A fourth quarter into first quarter, the lion's share of
the increase would be a change in bonus accrual. So, in the fourth quarter of last year, the business was
not doing as well as we would have liked it to do, things started to slow down, so we had a reduction in
our bonus accrual in the fourth quarter. We came into this year with a plan and a bonus accrual set to the
target of that plan and that's what we had accrued to. So, there would be a step-up in just that one
component. I can tell you on a year-over-year basis you're going to see increases in G&A from natural
things like the folks that we hired last year being on the books in February, March and April of this year
but not last year. So, the annualization of new hires, et cetera. Absent that, we're not making a lot of
incremental investments in our overhead. As a matter of fact, we've been reducing overhead kind of
throughout the first quarter. So, you're not going to see major investments. One variation from that would
be, and I think Mark mentioned it, we had to move into a new office building. That move was done in May
but I think we started paying rent in April-ish and it's a bigger building because we were completely out of
space and overcrowded in our old building. So, our rent expense is going to up. Not a lot, not materially,
but it's going to go up if you looked at that one single line item. But other than that, we're not making
investments in overhead right now for the most part.
Andrew Diaz:
Got it. I guess I was thinking that some of the synergies would start to flow through, so I was a little
surprised by the G&A level. But, can you maybe talk about when you expect those $15 million of
synergies to flow through. I guess it would be on the G&A side or would those expenses be in different
line items than just the G&A?
Steve Nave:
Sure. So, you're certainly going to see some synergies in the G&A line probably in the back half of this
year once we get through. I mean, keep in mind when we put the organization together we had some
people that we needed to stay on for about a year so they're on retention plans, et cetera. So, those
expenses are still hitting us. Once those things anniversary in July, you'll start to see some improvement
on the G&A side. But when you talk about what I call the heavy hitter synergies, those are not going to
be in G&A. Those are going to be in things like shipping expense, print, paper and postage on the
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
marketing side, things like that. Maybe some benefits in professional services related stuff in G&A, but
the big stuff is going to be our shipping contracts and our print and marketing contracts, and those should
be starting to flow through here pretty soon.
Andrew Diaz:
Got it. So, just so I understand it, that's an Orchard contribution margin flow-through.
Mark Wagener:
It'd be both Orchard and Northstar because the print, paper, postage savings, as an example, would be
across the entire network.
Steve Nave:
Yes.
Mark Wagener:
So, you'd see that at Fingerhut—or the Northstar portfolio, Fingerhut, Gettington, and you'd see a little bit
of that at PayCheck Direct as well.
Andrew Diaz:
Got it. No, that's helpful. Then just one last one. Just on the provision for returns, can you maybe talk
about what's going on there and any changes there? Any kind of changes in terms of are you seeing
more returns or any kind of color there would be helpful, I think.
Steve Nave:
Yes, I think we saw a slight uptick in returns in the first quarter but I don't think there was anything that
stuck out as being a big change in the business. So, we're not alarmed by that.
Andrew Diaz:
Got it. Okay. So, that's really just bringing the Orchard portfolio on line and that's why it—actually I think
it jumped from 6 to 29 or—on the cash flow statement.
Mark Wagener:
That's got to be—well, that's got to be Orchard. I mean, Orchard has a higher returns rate than the
legacy Bluestem businesses because it's 85% apparel and apparel has a higher return rate than any
other retail category. So, that's got to be that.
Steve Nave:
Yes, and if you're looking at the cash flow statement obviously the cash flow statement last year did not
include Orchard. So, from a rate perspective and just the business operation looking at the year-overyear, we saw a slight uptick but nothing alarming from us, from our business analysis.
Andrew Diaz:
Got it. All right. Thank you very much, appreciate it.
Operator:
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
We'll move forward to our next question from Michael Cohen with Opportunistic Research.
Michael Cohen:
Hi guys, can you hear me?
Steve Nave:
Yes. Hey Michael.
Mark Wagener:
Hi Michael.
Michael Cohen:
Hi guys. Thanks for taking my question. I have a couple that are sort of in the mundane housekeeping
related category. You mentioned a delay in the sale of charge-off receivables - could you just kind of
provide a little more commentary as to what's going on there? Do you think it is purely timing or sort of
the pricing for charge-off receivables changing? Any commentary there would be helpful.
Steve Nave:
Yes, it's purely timing. We are not seeing any real shifts in the pricing of charged-off receivables.
Actually I would say that the market has been fairly consistent the past 12 to 15 months. So, it's purely
timing and it's timing compared to last year.
Michael Cohen:
If I just understood it, so there's about 50 bps of recovery that you would have gotten had the sale taken
place in it's sort of normal time cycle in which case we should kind of view the steady state loss rate as
closer to 18.9, is that correct?
Mark Wagener:
Well, the 18.9 which you just quoted is gross.
Michael Cohen:
Oh, I'm sorry.
Mark Wagener:
Yes. We had 17.5 as the net principal loss rate for the quarter, so we would have expected that with
normal timing to be closer to the upper 16 handle is what we would have expected, just on a normal type
kind of run rate.
Michael Cohen:
Thank you, that's helpful. Then sort of last on the mundane. I saw there was sort of a disclosure of
something called Corporate as an offset within the sales category. Could you just sort of explain to those
of us who don't know what that is?
Mark Wagener:
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
Sure. So, how we evaluate the brands based on shipped sales and for generally accepted accounting
principles, your GAAP or generally accepted accounting principles is done on in-home, and so that intransit, from the point of shipment to the point of in-home, which is about anywhere from three to four
days worth of sales, we do that accounting in Corporate. So, that's the sales activity that you see going
on in Corporate and that's just purely timing from the point of shipment to the point of in-home.
Michael Cohen:
Got you. That's helpful. Then touching on sort of a little bit more the strategic side, can you just kind of
talk about sort of what you've seen in your sort of initial, five or six weeks in Gettington, and just give us a
sort of broader perspective. You mentioned that there was a relaunch with 4,000 SKUs. How different
are those SKUs, how different is the customer base you expect? Just kind of an overall strategic review
of where you think the Gettington relaunch is and how you think it's going to progress over time given
what you've learned so far.
Steve Nave:
Yes, so it's early on. I mean, I think we're about four to five weeks into it. We've seen sales a little bit,
frankly stronger than we were initially expecting but it's still very small. So, with the 4,000 SKUs we're
seeing some good movement. From a customer standpoint, our expectations are that the customer base
will be very similar to the Fingerhut customer base and I think it's a little too early to tell right now but
that's where our expectations are. I think as the year progresses and we get expanded assortment at
Gettington, we'll get a better read probably as we get towards the third and probably fourth quarter and
we get through the first holiday season, but right now it seems to be at least initially the first four or five
weeks seems to be tracking at expectations.
Michael Cohen:
Okay. Then last question, just on PayCheck Direct. I noticed that sort of the number of employees fourth
quarter to first quarter was flat. Was that sort of also a deliberate sort of semi-credit tightening view of
things, or how are you guys thinking about sort of the corporate outreach to try to sort of expand that
number?
Steve Nave:
Well, good question. So, we did put on some new clients in the first quarter. This is part of that business
model as we bring clients on and we look at them over a one to two to three-year period of time, if we see
some clients where we don't like the performance, and it mostly would be on the credit side of things, we
would pull back and not renew some contracts. So, you'll see some of that back and forth going on within
the PayCheck business.
Michael Cohen:
Okay, great. Thanks.
Operator:
We'll move forward to our next question from Andrew Shannahan with Knighthead Capital.
Andrew Shannahan:
Good morning. I just had two quick questions. Following up on Matthias' question as it related to the
conversations with potential investors on alternative funding sources. It seems that now that we have
some sort of economic proposals in front of us, is there kind of an internal timeframe or a timeframe by
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Bluestem Group, Inc. – First Quarter 2016 Earnings Conference Call, June 10, 2016
which shareholders should expect to kind of hear an update on the process in terms of which ones are
viable or what path we're going forward. Is that a kind of a Q3 event or a Q4 event? Just kind of curious
on timing there. The second question is as you talked about the cadence in Q1 where it had started
stronger and kind of tailed off towards the end, has that tailing continued into Q2 or have kind of the
relaunches in Gettington and some of the other things helped taper and turn that tide?
Mark Wagener:
So, I'll take the first question with respect to the funding diversification project. Our hope is, and goal is,
that as we get towards the back end of the third quarter, potentially fourth quarter, that we would be
closing on a transaction and we would be updating shareholders once we close a transaction and that
would be our normal process. So, we'll continue to update as to how the progress is going but we will not
have specifics around any funding transaction until it's actually closed.
As for the second question, we have continued to see similar softness as we've entered into the second
quarter, that retail softness, as we saw in the back half of the first quarter.
Andrew Shannahan:
Okay. Thank you.
Operator:
As a reminder, that's star, one to enter the queue.
It seems that we have no further questions at this time. I'll go ahead and turn the call back over to our
speakers to close out the call.
Gene Davis:
Thank you. Thanks to all of our investors for joining us today. Thank you once again for your past and
future support of the Company. We'll be talking again in three months and hopefully bring you some
better news. Thanks everybody. Have a great weekend. Bye-bye. Operator, you can disconnect now.
12
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