Bluestem Group Inc. Announces Unaudited Consolidated First Quarter and Fiscal 2018 Earnings Results

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 13 weeks ended May 4, 2018 and May 5, 2017. 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.

First Quarter Fiscal 2018 Bluestem Brands Highlights

• The new revenue recognition accounting standard ("Topic 606") was adopted in Q1 2018, resulting in the accelerated recognition of $13.3 million of direct response advertising costs
• Net sales for the first quarter of fiscal 2018 were $381.1 million, a 10.9% decrease compared to the first quarter of fiscal 2017
• Adjusted net sales excluding exited businesses decreased 5.1% compared to the first quarter of fiscal 2017**
• Gross margin increased 100 basis points to 48.7%, driven by continued progress in cost reduction and price optimization efforts
• Adjusted EBITDA for the first quarter of fiscal 2018 was $(12.6) million compared to $5.8 million in the first quarter of fiscal 2017, a reduction of 470 bps as a percent of net sales*
• Compliant with lender covenants throughout and as of the end of the first quarter; net liquidity was $81.4 million compared to a covenant requirement of $40.0 million and leverage ratio was 4.16x compared to a covenant requirement of 4.50x

Lisa Gavales, Interim CEO, stated, “We made further progress on our turnaround strategy during the first quarter, and are pleased with the continued stabilization we have achieved in certain areas of the business. For the quarter and excluding the impact of the accounting change, we delivered strong gross margin and net contribution margin improvements. In addition, we continued to reduce the cost of doing business and drove improved results in our Northstar portfolio, including better performance in the credit portfolio. More specifically, we saw an inflection point with a 60 basis point decline in the portfolio delinquency rate which bodes well for a reduced merchant fee for the remainder of fiscal 2018. Furthermore, we have identified and began taking action on several initiatives that we believe will accelerate our turnaround effort of Orchard portfolio. As we look ahead, we will work to build on the progress we have made thus far in the business, as we remain focused on further improving our credit portfolio, driving additional cost reductions across the business, and developing a platform for our Orchard portfolio that we believe will drive sustainable long-term sales and profitability. Overall, we believe that we are on the right track to achieve long-term profitability for the Company.”

First Quarter Fiscal 2018 Bluestem Group Consolidated Statistics

unaudited in millions (except loss per share)		Q1 2018				Q1 2017
Bluestem Group net loss*		$	(40.1	)		$	(43.0	)
Bluestem Group basic and diluted loss per share*		$	(0.30	)		$	(0.33	)
Bluestem Group Adjusted EBITDA*		$	(14.2	)		$	6.3
Bluestem Group cash and cash equivalents		$	126.3			$	115.8

First Quarter Fiscal 2018 Bluestem Brands Stand-Alone Statistics

unaudited in millions		Q1 2018				Q1 2017
Bluestem Brands net sales		$	381.1			$	427.6
Bluestem Brands adjusted net sales**		$	381.1			$	401.4
Bluestem Brands net loss*		$	(30.7	)		$	(30.5	)
Bluestem Brands Adjusted EBITDA*		$	(12.6	)		$	5.8
Northstar Portfolio net sales		$	183.0			$	187.0
Orchard Portfolio net sales		$	208.1			$	245.8
Northstar portfolio active accounts		1.5				1.6
Orchard Portfolio gross active customers		7.4				7.8
Northstar Portfolio revolving credit portfolio:
30+ day delinquency rate		16.3		%		16.9		%
Net principal charge-off rate		20.5		%		19.6		%

*Includes a $13.3 million impact from the acceleration of certain advertising costs as a result of the adoption of Topic 606 in Q1 2018.

**Excludes net sales for exited businesses (PayCheck Direct, Draper's & Damon's retail stores and LinenSource). Year-over-year changes are estimated using net sales for the 13 weeks ended May 4, 2018 and May 5, 2017, respectively.

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 10:00 AM ET on Wednesday, June 20, 2018. The conference call can be accessed at [phone] or [phone] (International), conference ID # 6005636 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 [phone] or [phone] (International), replay pin # 6005636. The telephone replay will be available at 1:00 PM ET June 20, 2018. 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 including Appleseed’s, Bedford Fair, Blair, Draper’s & Damon’s, Gold Violin, Haband, Norm Thompson, Old Pueblo Traders, Sahalie, Tog Shop and WinterSilks. These brands 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. 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 2, 2018 and February 3, 2017.

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.
BLUESTEM BRANDS, INC.
FINANCIAL INFORMATION
13-weeks ended May 4, 2018 and May 5, 2017

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

The business results for Q1 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 on the estimated date of first delivery to recipients.

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 includes 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 Ended May 4, 2018

BLUESTEM GROUP INC. Condensed Consolidated Statements of Comprehensive Loss (unaudited - in thousands, except shares and per share amounts)
			13-Weeks Ended
			May 4, 2018					May 5, 2017
Net sales and revenue
Net sales			$	381,060				$	427,622
Commercial real estate revenue, net			395					1,704
Total net sales and revenue			381,455					429,326
Costs and expenses
Cost of goods sold			195,167					223,819
Sales and marketing expenses			127,019					123,045
Net credit expense			25,148					29,936
General and administrative expenses			49,016					66,334
Amortization and depreciation not included in cost of goods sold			12,304					15,413
Loss on impairment			—					230
Total costs and expenses			408,654					458,777
Operating loss			(27,199		)			(29,451		)
Interest expense, net			12,602					12,865
Loss before income taxes			(39,801		)			(42,316		)
Income tax expense			311					707
Net loss			$	(40,112	)			$	(43,023	)
Other Comprehensive loss
Unrealized gain (loss) on interest rate swap, net of tax			402					(235		)
Comprehensive loss			$	(39,710	)			$	(43,258	)
Basic and diluted loss per share - common stockholders
Basic and diluted loss per share			$	(0.30	)			$	(0.33	)
Basic and diluted weighted average shares outstanding			132,326,876					132,036,278

BLUESTEM GROUP INC. Condensed Consolidated Balance Sheets (unaudited - in thousands)
			May 4, 2018				February 2, 2018				May 5, 2017
ASSETS
Current assets:
Cash and cash equivalents			$	126,269			$	123,398			$	115,774
Restricted cash			15,328				15,759				16,037
Customer accounts receivable, net of allowance of $7,415, $8,233 and $18,440			5,792				9,008				40,101
Merchandise inventories			197,914				194,693				217,964
Promotional material inventories			17,723				34,660				60,966
Other current assets			35,576				28,399				29,511
Total current assets			398,602				405,917				480,353
Property and equipment, net			101,080				106,246				121,133
Intangibles, net			159,733				163,377				204,278
Goodwill			36,717				36,717				202,556
Other assets			9,851				11,222				15,339
Total Assets			$	705,983			$	723,479			$	1,023,659
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	155,519			$	160,300			$	177,169
Accrued costs and other liabilities			89,669				67,754				95,581
Short-term debt			54,060				26,434				63,342
Total current liabilities			299,248				254,488				336,092
Long-term debt			413,986				420,297				439,526
Deferred income taxes			4,360				4,245				37,635
Other long-term liabilities			36,151				39,349				38,696
Total liabilities			753,745				718,379				851,949
Stockholders' Equity:
Series A participating convertible preferred stock			5,000				5,000				5,000
Common stock			1,332				1,332				1,323
Treasury stock			(131		)		(131		)		(131		)
Additional paid-in capital			294,581				293,892				291,169
Accumulated deficit			(351,277		)		(297,324		)		(126,037		)
Accumulated other comprehensive income, net of tax			2,733				2,331				386
Total stockholders’ equity			(47,762		)		5,100				171,710
Total Liabilities and Stockholders' Equity			$	705,983			$	723,479			$	1,023,659

BLUESTEM GROUP INC. Condensed Consolidated Statements of Cash Flows (unaudited - in thousands)
			13-Weeks Ended
			May 4, 2018				May 5, 2017
Operating Activities
Net loss			$	(40,112	)		$	(43,023	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization and depreciation expense			13,466				16,801
Loss on impairment			—				230
Provision for doubtful accounts			19,953				18,152
Provision for deferred income taxes			212				161
Loss on servicing right			(2,824		)		1,250
Net gains on loans held for sale, investment securities and other			118				(1,404		)
Stock-based compensation expense			1,078				1,346
Other, net			1,043				1,310
Net change in assets and liabilities:
Customer account receivables			622				3,762
Merchandise inventories			(3,221		)		12,006
Promotional material inventories			3,096				(11,236		)
Other assets			(7,555		)		10,062
Accounts payable and other liabilities			17,116				(23,185		)
Net cash provided by (used in) operating activities			2,992				(13,768		)
Investing Activities
Purchases of customer accounts receivable			(187,767		)		(193,394		)
Proceeds from sale of customer accounts receivable			170,408				181,432
Net purchases of property and equipment			(4,958		)		(3,788		)
Distributions from equity investments			1,717				4,430
Other			—				(13		)
Net cash used in investing activities			(20,600		)		(11,333		)
Financing Activities
Repayments of debt			(7,200		)		(7,200		)
Borrowings on asset backed line of credit			110,602				130,999
Repayments on asset backed line of credit			(83,301		)		(115,598		)
Payment of dividends			—				(80,023		)
Net cash provided by (used in) by financing activities			20,101				(71,822		)
Effect of Foreign Exchange Rates on Cash			(53		)		(5		)
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash			2,440				(96,928		)
Cash, Cash Equivalents and Restricted Cash, Beginning of Period			139,157				228,739
Cash, Cash Equivalents and Restricted Cash, End of Period			$	141,597			$	131,811

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 expense, interest expense, amortization and depreciation expense, loss on impairment, loss on servicing right, stock-based compensation expense, restructuring costs, Orchard Portfolio segmentation and positioning research 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
			May 4, 2018				May 5, 2017
Adjusted EBITDA:
Net loss			$	(40,112	)		$	(43,023	)
Income tax expense			311				707
Interest expense			12,605				12,865
Amortization and depreciation expense			13,465				16,801
Loss on impairment			—				230
(Gain) loss on servicing right			(2,824		)		1,250
Stock-based compensation expense			1,078				1,346
Restructuring costs			89				14,142
Other			1,195				1,977
Adjusted EBITDA			$	(14,193	)		$	6,295

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 condensed consolidated statement of operations and condensed consolidated balance sheet:

			13-Weeks Ended May 4, 2018
			As reported				% of net sales			Topic 606 Adjustments				Balances without Adoption of Topic 606				% of net sales
Total net sales and revenue			$	381,455			100.0	%		$	—			$	381,455			100.0	%
Costs and expenses
Cost of goods sold			195,167				51.2	%		—				195,167				51.2	%
Sales and marketing expenses			127,019				33.3	%		(13,262		)		113,757				29.8	%
Net credit expense			25,148				6.6	%		—				25,148				6.6	%
General and administrative expenses			49,016				12.8	%		—				49,016				12.8	%
Amortization and depreciation not included in cost of goods sold			12,304				3.2	%		—				12,304				3.2	%
Total costs and expenses			408,654				107.1	%		(13,262		)		395,392				103.7	%
Operating loss			(27,199		)		(7.1	)%		13,262				(13,937		)		(3.7	)%
Interest expense, net			12,602				3.3	%		—				12,602				3.3	%
Loss before income taxes			(39,801		)		(10.4	)%		13,262				(26,539		)		(7.0	)%
Income tax expense			311				0.1	%		—				311				0.1	%
Net loss			$	(40,112	)		(10.5	)%		$	13,262			$	(26,850	)		(7.0	)%

							As of May 4, 2018
							As Reported				Topic 606 Adjustment				Balances Without Adoption of Topic 606
Promotional material inventories							$	17,723			$	27,104			$	44,827
Other current assets							35,576				(7,519		)		28,057
Accrued costs and other liabilities							89,690				(7,519		)		82,171
Accumulated deficit							(351,277		)		27,104				(324,173		)

Bluestem Brands, Inc.
Results for the 13-Weeks Ended May 4, 2018

BLUESTEM BRANDS, INC. Condensed Consolidated Statements of Loss and Selected Operating Data (unaudited - in thousands)
	13-Weeks Ended
	May 4, 2018				May 5, 2017				Change(a)
Net sales	$	381,060			$	427,622			(10.9	)%
Cost of goods sold	195,644				223,819				(12.6	)%
Gross profit	185,416				203,803				(9.0	)%
Sales and marketing expenses(b)	127,019				123,045				3.2	%
Net credit expense	24,660				33,702				(26.8	)%
General and administrative expenses	46,430				65,035				(28.6	)%
Amortization and depreciation not included in cost of goods sold (c)	12,304				15,413				(20.2	)%
Loss on impairment	—				230				(100.0	)%
Interest expense, net (d)	12,602				12,865				(2.0	)%
Loss before income taxes(b)	(37,599		)		(46,487		)		(19.1	)%
Income tax benefit	(6,855		)		(16,034		)		(57.2	)%
Net loss(b)	$	(30,744	)		$	(30,453	)		1.0	%
Margins and Expenses as a Percentage of Net Sales:
Gross profit	48.7		%		47.7		%		100		bps
Sales and marketing expenses(b)	33.3		%		28.8		%		450		bps
Net credit expense	6.5		%		7.9		%		(140	)	bps
Contribution margin (b,e)	$	33,737			$	47,056			(28.3	)%
As a percentage of net sales(b)	8.9		%		11.0		%		(210	)	bps
Adjusted general and administrative expenses (e)	$	44,457			$	49,664			(10.5	)%
As a percentage of net sales	11.7		%		11.6		%		10		bps
Adjusted EBITDA (b,e)	$	(12,608	)		$	5,779			(318.2	)%
As a percentage of net sales(b)	(3.3		)%		1.4		%		(470	)	bps
Selected Financial Data:
Lender net liquidity (e)	$	81,369			$	86,247			(5.7	)%
Availability on inventory line of credit	$	76,530			$	81,605			(6.2	)%
Adjusted free cash flow (e)	$	(14,396	)		$	1,007			(1,529.6	)%
Lender leverage ratio (e)	4.16				3.54
Lender leverage ratio requirement	< 4.50				< 4.50
Program agreement leverage ratio (e)	4.24				3.89
Program agreement leverage ratio requirement	< 5.00				< 5.00
Selected Operating Data:
Northstar Portfolio revolving new customer credit accounts (f)	111				90				23.3	%
Fingerhut FreshStart new customer credit accounts (f)	43				54				(20.4	)%
Orchard Portfolio new gross customers (g)	563				652				(13.7	)%
Northstar Portfolio active accounts (h)	1,464				1,577				(7.2	)%
Orchard Portfolio gross active customers (i)	7,435				7,813				(4.8	)%

(a)		Changes in rates are presented as the basis point ("bps") increase (decrease) from the prior period.
(b)		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 $13.3 million for the 13 weeks ended May 4, 2018.
(c)		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.
(d)		Interest expense is net of interest income.
(e)		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.
(f)		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.
(g)		Individual customers who have made a first-time purchase from a particular brand within the Orchard Portfolio during the period presented. Unique new customers, representing unique individuals who have made a first-time purchase from the Orchard Portfolio during the 13-weeks ended May 4, 2018 and 13-weeks ended May 5, 2017, were 198 and 219, respectively.
(h)		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.
(i)		Individual customers that have made at least one purchase from a particular brand within the Orchard Portfolio during the previous twelve fiscal months. Unique active customers, representing unique individuals who have made at least one purchase from the Orchard Portfolio during the twelve fiscal months ended May 4, 2018 and May 5, 2017, were 4.4 million and 4.7 million, respectively.

BLUESTEM BRANDS, INC. Condensed Consolidated Balance Sheets (unaudited - in thousands)
		May 4, 2018				February 2, 2018				May 5, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	12,299			$	9,173			$	14,173
Restricted cash		15,328				15,759				15,953
Customer accounts receivable, net of allowance of $6,976, $7,082 and $8,887		5,708				7,275				7,699
Merchandise inventories		197,914				194,693				217,964
Promotional material inventories		17,723				34,660				60,966
Prepaid expenses and other assets		32,450				25,346				24,545
Total current assets		281,422				286,906				341,300
Property and equipment, net		83,785				89,385				121,133
Intangible assets, net		159,733				163,377				204,278
Goodwill		36,717				36,717				202,556
Other assets		4,282				4,040				3,075
Total Assets		$	565,939			$	580,425			$	872,342
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable		$	155,519			$	160,300			$	177,169
Current income taxes payable		36,697				36,370				26,818
Accrued costs and other liabilities		104,098				81,098				109,711
Short-term debt		54,060				26,434				63,342
Total current liabilities		350,374				304,202				377,040
Long-term debt		413,769				420,080				439,309
Deferred income taxes		5,889				16,325				48,356
Other long-term liabilities		36,170				39,145				31,013
Total liabilities		806,202				779,752				895,718
Stockholder's equity:
Common stock		—				—				—
Additional paid-in capital		369,602				369,602				369,602
Accumulated deficit		(611,938		)		(570,697		)		(393,364		)
Accumulated other comprehensive income, net of tax		2,073				1,768				386
Total stockholder's equity		(240,263		)		(199,327		)		(23,376		)
Total Liabilities and Stockholder's Equity		$	565,939			$	580,425			$	872,342

BLUESTEM BRANDS, INC. Condensed Consolidated Statements of Cash Flows (unaudited - in thousands)
			13-Weeks Ended
			May 4, 2018				May 5, 2017
Operating Activities
Net loss			$	(30,744	)		$	(30,453	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Amortization and depreciation expense			13,238				16,801
Loss on impairment			—				230
Provision for doubtful accounts			19,937				21,919
Provision for deferred income taxes			(10,436		)		(8,402		)
(Gain) loss on servicing right			(2,824		)		1,250
Stock-based compensation expense			689				1,234
Other, net			1,257				1,175
Net change in assets and liabilities:
Customer accounts receivable			(1,011		)		2,905
Merchandise inventories			(3,221		)		12,006
Promotional material inventories			6,440				(11,236		)
Prepaid expenses and other assets			(7,482		)		3,654
Current income taxes payable			327				(7,241		)
Accounts payable and other liabilities			18,079				(19,288		)
Net cash provided by (used in) operating activities			4,249				(15,446		)
Investing Activities
Purchase of customer accounts receivable			(187,767		)		(193,394		)
Proceeds from sale of customer accounts receivable			170,408				210,924
Net purchase of property and equipment			(4,296		)		(3,788		)
Net cash (used in) provided by investing activities			(21,655		)		13,742
Financing Activities
Repayments of debt			(7,200		)		(7,200		)
Borrowings on asset backed line of credit			110,602				130,999
Repayments on asset backed line of credit			(83,301		)		(115,598		)
Net cash provided by financing activities			20,101				8,201
Net Increase in Cash, Cash Equivalents and Restricted Cash			2,695				6,497
Cash, Cash Equivalents and Restricted Cash, Beginning of Period			24,932				23,629
Cash, Cash Equivalents and Restricted Cash, End of Period			$	27,627			$	30,126

BLUESTEM BRANDS, INC. Supplemental Financial Information - Segment Net Sales (unaudited - in thousands, except average order size)
			13-Weeks Ended
			May 4, 2018							May 5, 2017							Change
			$				% of Sales			$				% of Sales			%
Total sales by merchandise category:
Home			$	94,932			22.6	%		$	106,529			23.1	%		(10.9	)%
Entertainment			67,864				16.2	%		73,110				15.8	%		(7.2	)%
Fashion			256,600				61.2	%		281,897				61.1	%		(9.0	)%
Total merchandise sales(a)			419,396				100.0	%		461,536				100.0	%		(9.1	)%
Corporate and other(b)			(10,012		)					(5,226		)
Returns and allowances			(44,073		)					(47,689		)					(7.6	)%
Commissions and other revenues			15,749							19,001							(17.1	)%
Net sales			$	381,060						$	427,622						(10.9	)%
Gross profit rate			48.7		%					47.7		%					100		bps
Sales and marketing expense rate(c)			33.3		%					28.8		%					450		bps
Contribution margin rate(c, d)			8.9		%					11.0		%					(210	)	bps
Average order size(e)			$	100						$	106
Northstar Portfolio sales by merchandise category:
Home			$	85,203			45.0	%		$	88,983			45.9	%		(4.2	)%
Entertainment			67,864				35.9	%		73,110				37.7	%		(7.2	)%
Fashion			36,147				19.1	%		31,833				16.4	%		13.6	%
Total merchandise sales(a)			189,214				100.0	%		193,926				100.0	%		(2.4	)%
Returns and allowances			(10,209		)					(11,166		)					(8.6	)%
Commissions and other revenues			4,001							4,286							(6.6	)%
Net sales			$	183,006						$	187,046						(2.2	)%
Gross profit rate			43.9		%					42.3		%					160		bps
Sales and marketing expense rate(c)			15.1		%					15.3		%					(20	)	bps
Contribution margin rate(c, d)			15.2		%					13.1		%					210		bps
Average order size(e)			$	221						$	224
Orchard Portfolio sales by merchandise category:
Home			$	9,729			4.2	%		$	17,546			6.6	%		(44.6	)%
Fashion			220,453				95.8	%		250,064				93.4	%		(11.8	)%
Total merchandise sales(a)			230,182				100.0	%		267,610				100.0	%		(14.0	)%
Returns and allowances			(33,864		)					(36,523		)					(7.3	)%
Commissions and other revenues			11,748							14,715							(20.2	)%
Net sales			$	208,066						$	245,802						(15.4	)%
Gross profit rate			52.6		%					52.6		%					—		bps
Sales and marketing expense rate(c)			47.8		%					39.4		%					840		bps
Contribution margin rate(c,d)			4.7		%					13.2		%					(850	)	bps
Average order size(e)			$	69						$	75

(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 in-transit product sales from shipping point to estimated time of delivery to the customer, net sales of PayCheck Direct and the elimination of inter-segment activities.
(c)		Fiscal 2018 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 $13.3 million for the 13 weeks ended May 4, 2018, of which $2.1 million related to Northstar Portfolio and $11.1 million 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.

BLUESTEM BRANDS, INC. Supplemental Financial Information - Credit Portfolio (unaudited - in thousands, except average balance outstanding)
							13-Weeks Ended
							May 4, 2018				May 5, 2017				Change %
Net credit expense:
Provision for doubtful accounts:
Loss on sale of customer accounts receivable							$	17,552			$	12,212			43.7		%
Company-owned customer accounts receivable							2,385				5,940				(59.8		)%
Loss on sale of PayCheck Direct customer accounts receivable to BGI Holding Company							—				3,766				(100.0		)%
Total provision for doubtful accounts							19,937				21,918				(9.0		)%
Credit management costs							15,944				18,822				(15.3		)%
Finance charge and fee income, net							(950		)		(1,180		)		(19.5		)%
Servicing fee income and portfolio profit sharing							(7,447		)		(7,108		)		4.8		%
(Gain) loss on servicing right							(2,824		)		1,250				n/m
Net credit expense							$	24,660			$	33,702			(26.8		)%
			13-Weeks Ended
			May 4, 2018								May 5, 2017
Serviced Portfolio Selected Credit Data:			Revolving(a)				FreshStart(b)				Revolving(a)				FreshStart(b)
Balance active accounts			1,698				121				1,800				142
Average balance outstanding			$	805			$	102			$	776			$	104
Customer accounts receivable			$	1,367,340			$	12,346			$	1,395,741			$	14,863
Balances 30+ days delinquent(c)			$	222,890			$	4,580			$	235,428			$	6,141
Balances 30+ days delinquent as a percentage of total customer accounts receivable(d)			16.3		%		37.1		%		16.9		%		41.3		%
Average customer accounts receivable			$	1,417,769			$	12,899			$	1,443,936			$	15,761
Finance charge and fee income			$	94,572			$	944			$	94,145			$	1,167
Finance charge and fee income rate(e)			26.7		%		10.2		%		26.1		%		11.4		%
Net principal charge-offs			$	72,778			$	2,577			$	70,869			$	2,751
Net principal charge-off rate(f)			20.5		%		27.8		%		19.6		%		26.7		%

(a)		Revolving serviced portfolio includes Northstar Portfolio revolving credit accounts.
(b)		FreshStart serviced portfolio is Fingerhut's installment accounts.
(c)		Delinquent balances as of the customers' statement cycle dates prior to or on fiscal period end.
(d)		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.
(e)		Revolving finance charge and fee income rate represents finance charge and fee income as a percentage of average customer accounts receivable for the 13-weeks ended May 4, 2018 and May 5, 2017, 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 May 4, 2018 and May 5, 2017, respectively.
(f)		Revolving net principal charge-off rate represents net principal charge-offs as a percentage of average customer accounts receivable for the 13-weeks ended May 4, 2018 and May 5, 2017, 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 May 4, 2018 and May 5, 2017, respectively.

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands except % of net sales and ratios)

To supplement the consolidated financial information of Bluestem Brands, Inc. and its subsidiaries for the 13-weeks ended May 4, 2018 and May 5, 2017 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 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, Orchard Portfolio segmentation & positioning research 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 transaction-related expected cost savings, certain non-cash charges, certain one-time charges and expected cost savings reflecting the projected impact of cost synergies such as savings in headcount reduction, print and paper, transportation, credit operations and marketing, accelerated advertising costs associated with the adoption of Topic 606 and other. 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.

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands except % of net sales and ratios)

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

			13-Weeks Ended
			May 4, 2018				May 5, 2017
Contribution margin:
Net loss			$	(30,744	)		$	(30,453	)
Income tax benefit			(6,855		)		(16,034		)
Interest expense, net			12,602				12,865
Loss on impairment			—				230
Amortization and depreciation not included in cost of sales			12,304				15,413
General and administrative expenses			46,430				65,035
Contribution margin			$	33,737			$	47,056
Contribution margin % of net sales			8.9		%		11.0		%

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

		13-Weeks Ended
		May 4, 2018				May 5, 2017
Adjusted general and administrative expenses:
General and administrative expenses		$	46,430			$	65,035
Less:
Stock-based compensation expense		(689		)		(1,234		)
Restructuring costs		(89		)		(12,160		)
Orchard Portfolio segmentation and positioning research		—				—
Other		(1,195		)		(1,977		)
Adjusted general and administrative expenses		$	44,457			$	49,664
Adjusted general and administrative expenses % of net sales		11.7		%		11.6		%

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

																					13-Weeks Ended
																					May 4, 2018				May 5, 2017
Adjusted EBITDA:
Net loss																					$	(30,744	)		$	(30,453	)
Income tax benefit																					(6,855		)		(16,034		)
Interest expense																					12,605				12,865
Amortization and depreciation expense																					13,237				16,801
Loss on impairment																					—				230
(Gain) loss on servicing right																					(2,824		)		1,250
Stock-based compensation expense																					689				1,234
Restructuring costs																					89				17,909
Other																					1,195				1,977
Adjusted EBITDA																					$	(12,608	)		$	5,779
Adjusted EBITDA % of net sales																					(3.3		)%		1.4		%

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands except % of net sales and ratios)

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

														Fiscal Quarters Ended
														May 4, 2018				May 5, 2017
Adjusted free cash flow:
Net cash provided by (used in) operating activities														$	4,249			$	(15,446	)
Plus: Proceeds from sale of customer accounts receivable														170,408				210,924
Less: Purchase of customer accounts receivable														(187,767		)		(193,394		)
Less: Maintenance capital expenditures														(1,286		)		(1,077		)
Adjusted free cash flow														$	(14,396	)		$	1,007
Adjusted free cash flow % of net sales														(3.8		)%		0.2		%

The following table presents trailing twelve months lender adjusted EBITDA and leverage ratios:

			Trailing Twelve Fiscal Months
			May 4, 2018				May 5, 2017
Adjusted EBITDA			$	73,903			$	92,977
Expected cost savings (a)			15,984				19,070
Non-cash charges			(103		)		629
One-time charges			—				858
Acceleration of advertising expense due to adoption of Topic 606 (b)			13,262				—
Other (c)			7,463				16,895
Program agreement adjusted EBITDA			110,509				130,429
Unrestricted subsidiary (d)			1,857				10,604
Incremental expected cost savings (a, e)			371				2,121
Lender adjusted EBITDA			$	112,737			$	143,154
Leverage ratio net debt:
Short-term debt
Current portion of term loan, net of discount			$	24,434			$	23,943
Asset backed line of credit			28,248				37,244
Capital lease obligation and other			1,379				2,155
Total short-term debt			54,061				63,342
Term loan, net of discount			413,559				437,502
Capital lease obligation			210				1,807
Total long-term debt			413,769				439,309
Total debt			467,830				502,651
Plus: Deferred charges			6,272				8,759
Less: Cash and cash equivalents (f)			(5,043		)		(4,672		)
Leverage ratio net debt			$	469,059			$	506,738
Program agreement leverage ratio			4.24				3.89
Program agreement leverage ratio requirement			< 5.00				< 5.00
Lender leverage ratio			4.16				3.54
Lender leverage ratio requirement			< 4.50				< 4.50

(a)		Expected cost savings reflects the projected impact of cost synergies such as, but not limited to or necessarily inclusive of, the implemented headcount reductions, catalog circulation reductions and anticipated vendor savings.
(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 per the term loan agreement.
(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.

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands except % of net sales and ratios)

The following table presents adjusted working capital and net liquidity:

			May 4, 2018				May 5, 2017
Adjusted working capital:
Total current assets			$	281,422			$	341,300
Total current liabilities			350,374				377,040
Working capital			$	(68,952	)		$	(35,740	)
Plus: Inter-company portion of current income taxes payable			30,583				30,255
Plus: Inter-company payable due to stock compensation			14,739				14,240
Adjusted working capital			$	(23,630	)		$	8,755
Program agreement and lender net liquidity:
Cash and cash equivalents			$	12,299			$	14,173
Less: Third party credit card receivables			(7,256		)		(9,501		)
Lender cash and cash equivalents			5,043				4,672
Plus: Asset backed line availability			76,530				81,605
Program agreement net liquidity			$	81,573			$	86,277
Less: Unrestricted subsidiary cash			(204		)		(30		)
Lender net liquidity			$	81,369			$	86,247
Program agreement and lender net liquidity requirement			> $40,000				> $40,000

BLUESTEM BRANDS, INC.
Non-GAAP Financial Measures
(unaudited - in thousands except % of net sales and ratios)

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 condensed consolidated statement of operations and condensed consolidated balance sheet:

			13-Weeks Ended May 4, 2018
			As reported				% of net   sales			Topic 606     Adjustments				Balances   without   Adoption of  Topic 606				% of net   sales
Total net sales and revenue			$	381,060			100.0	%		$	—			$	381,060			100.0	%
Costs and expenses
Cost of goods sold			195,644				51.3	%		—				195,644				51.3	%
Sales and marketing expenses			127,019				33.3	%		(13,262		)		113,757				29.9	%
Net credit expense			24,660				6.5	%		—				24,660				6.5	%
General and administrative expenses			46,430				12.2	%		—				46,430				12.2	%
Amortization and depreciation not included in cost of goods sold			12,304				3.2	%		—				12,304				3.2	%
Total costs and expenses			406,057				106.6	%		(13,262		)		392,795				103.1	%
Operating loss			(24,997		)		(6.6	)%		13,262				(11,735		)		(3.1	)%
Interest expense, net			12,602				3.3	%		—				12,602				3.3	%
Loss before income taxes			(37,599		)		(9.9	)%		13,262				(24,337		)		(6.4	)%
Income tax benefit			(6,855		)		(1.8	)%		2,416				(4,439		)		(1.2	)%
Net loss			$	(30,744	)		(8.1	)%		$	10,846			$	(19,898	)		(5.2	)%

									As of May 4, 2018
									As Reported				Topic 606 Adjustment				Balances Without Adoption of Topic 606
Promotional material inventories									$	17,723			$	27,104			$	44,827
Other current assets									32,450				(7,519		)		24,931
Current income taxes payable									36,697				1,100				37,797
Accrued costs and other liabilities									104,098				(7,519		)		96,579
Deferred income taxes									5,889				4,660				10,549
Accumulated deficit									(611,938		)		21,344				(590,594		)

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