|Shares Out. (in M):||171||P/E||0||0|
|Market Cap (in $M):||1,079||P/FCF||5.5x||0|
|Net Debt (in $M):||66||EBIT||198||0|
Bluestem Group Investment Thesis (BGRP)
Bluestem Group (BGRP) is an extremely cheap, underfollowed $1bn+ market cap company, with an asset light and highly FCF generative business model that has demonstrated explosive topline and EBITDA growth.
The primary reason for the opportunity is technical in nature. Bluestem is a post reorg former NOL shell story which is OTC listed but primarily trades through distressed desks. Importantly however, management has been explicit about its plans for a proper listing in the next 6-18 months which should help catapult the stock higher.
At the current price of $6.30, investors create the Company at a trailing EV/EBITDA-Maintenance Capex and levered FCF yield of 6.6x and 14.4% respectively. On Pro Forma 2015E Run Rate numbers, the metrics are even more compelling at 5.8x and 18% respectively. At the midpoint of our illustrative valuation (see below), we think the stock is worth 77% above the current stock price.
Legacy Company: Until last week, Bluestem went by the name Capmark and traded under the ticker CPMK. As many investors are aware, Capmark, a GMAC spinoff, was a classic carnage story from the financial crisis: a multi-billion dollar Commercial Real Estate lender which filed for bankruptcy in October 2009 and emerged in September 2011. The company emerged from bankruptcy having equitized debtholders, some legacy assets in runoff and a $1bn+ NOL. After winding down the vast majority of its legacy assets and paying down debt, the company was not much more than an NOL shell.
Centerbridge Involvement: In March of 2014, Centerbridge entered into an agreement with Capmark whereby it would invest $5mm in convertible preferred stock and received 5 year warrants to purchase from the company 43mm shares at a strike of $4.01. The warrants were only exercisable in conjunction with an acquisition, with the warrant proceeds expected to help fund the equity component of an M&A deal. Finally, Centerbridge committed to a ‘put’ option whereby the company could sell up to $100mm in aggregate principal amount of seven year subordinated floating rate PIK notes (L+700), whose proceeds would also be used for acquisition purposes.
Bluestem Brands: With Centerbridge’s involvement, the company began looking for M&A targets. In September of 2014 Capmark announced the acquisition of Bluestem Brands from Bain Capital Ventures and Battery Ventures for $590mm. Bluestem is a leading multi-brand online retailer selling a broad selection of branded and private label retail products to low and middle income consumers.
Orchard Brands: With a few hundred million of cash and monetizeable legacy assets, CPMK further utilized its ample dry powder on May 27, 2015 with the announcement of its acquisition of Orchard Brands for $410mm from American Capital Ltd. Orchard is a leading multi-channel direct marketer serving both women and men in the Baby Boomer and Senior demographics (age 50+). The company expects to close on the transaction in July.
Name Change: Just last week, Capmark (CPMK) announced that it had changed its corporate name to Bluestem Group, with a new ticker symbol of BGRP.
Putting it all together: An investment in BGRP provides shareholders with the opportunity to invest in 1) Bluestem brands, 2) Orchard Brands, 3) Holdco assets which include: (a) $108mm in Net Real Estate to be monetized in the near term (as per management), (b) a $1bn+ NOL and (c) a meaningful net cash position.
Business Overview: Bluestem, with its 63 year old catalog, was essentially e-retail before there was e-retail. The lion share of company sales comes from its Fingerhut brand, a $1bn revenue catalog and online retailer established in 1948, and for a period of time, owned by Federated Department Stores. The driving force of Bluestem’s consumer value proposition is its credit offering, underpinned by a proprietary credit underwriting system with prudent risk management controls. The company targets low to middle income customers who are underserved by traditional credit providers (think Credit Cards). Through Bluestem, customers have the ability to purchase on credit from the company’s more than 280,000 SKUs of merchandise while deferring payment from the time of purchase. Consistent monthly payments enable Bluestem customers to improve their FICO scores. This stands in stark contrast with purchases made using Credit Card credit where payment deferrals would hurt that same customer’s FICO score. Importantly, despite its sub-prime consumer exposure, the company demonstrated strong financial performance through the recession and subsequent recovery.
A retailer selling to low income customers on credit might remind investors of Conn’s, but the similarities end there: Conn’s is brick and mortar based whereas Bluestem is catalog and online (minimal capex and high FCF conversion). Conn’s sells 2,900 branded products and has a limited offering focused on Furniture & Mattresses, Home Appliances and Consumer Electronics. If you visit the Fingerhut website, on the other hand, you might think that you mistakenly stumbled upon target.com. The company offers its customers nearly everything ranging from shoes, fitness equipment, furniture, toys, kitchen appliances, strollers, gaming consoles, tents, Apple products… and that’s just from the home page. The most striking difference between Conn’s and Bluestem, however, lies in their credit books. Conn’s is in the process of a very public attempt to sell its credit portfolio which should help de-risk the business. Bluestem has already successfully done this through its arrangement with Santander Consumer USA (SCUSA). Piper Jaffray’s March 3, 2015 report on Conn’s entitled “Credit Stability Remains On-track; Selling Portfolio Provides Add'l Value” provides insight into how the analyst community views this type of arrangement:
“This type of transaction would appear to create additional value by minimizing credit
risk, increasing ROIC, drive a net cash infusion into the business, and potentially allow
for EBITDA (or EPS) multiple expansion.”
SCUSA Arrangement: On September 19, 2013, Bluestem announced that it entered into a seven year agreement with SCUSA for the vast majority of its credit portfolio. Under the terms of the agreement, SCUSA acquired the bulk of Bluestem’s receivables. On a go forward basis, Bluestem retains control of underwriting potential customers with SCUSA obligated to purchase all newly originated revolving receivables at par (100%) through a contractual agreement which extends through April 2022. In handing over its credit book Bluestem accomplished two things: 1) enhanced liquidity which can help fuel growth through mitigating working capital related cash needs, 2) de-risk of the business: receivables are now off of the balance sheet and the credit exposure has been passed to SCUSA. To be clear, Bluestem must continue to prudently underwrite as the arrangement is subject to covenants (i.e. Bluestem cannot “bet the house” on SCUSA’s account) and it is in Bluestem’s interest to underwrite well so that SCUSA is incentivized to continue the relationship post-expiry. The direct risk though at the end of the day lies with SCUSA. Bluestem continues to service the portfolio and, under a Risk Adjusted Margin (RAM) formula, Bluestem shares in some of the upside. Notably though, the pound of flesh extracted in exchange for the right to sell receivables to SCUSA is a meaningful shift in the credit book from being a net source of cash (income) to a net use of cash (expense). For context, 2013 EBITDA went from $144mm pre SCUSA to $66mm on a PF for SCUSA basis (Q414 Bluestem Earnings release). To further bolster access to liquidity, in June of 2015 the company announced on its Q1 earnings call that it is negotiating with SCUSA to amend the terms of its arrangement. Under the proposed amendment, Bluestem would be allowed to utilize an additional liquidity provider, thereby enhancing the company’s position by removing its dependence on a single financial institution.
Financial Snapshot: A summary of Bluestem financials, PF for the SCUSA deal (i.e. as if the arrangement had been in place for all periods) shows a rapidly growing and highly Free Cash Flow generative business.
Business Overview: Orchard Brands is a leading multi-channel direct marketer serving both women and men in the Baby Boomer and Senior demographics (age 50+) which generated $1bn in TTM revenue. The company operates a portfolio of 13 brands offering a diverse apparel assortment which it markets through various channels including: more than 500 million catalogs and mailers annually; free standing inserts, magazines, package inserts, and mini-catalogs; 13 internet sites on one common platform with a universal cart; and 30 retail and outlet stores. Orchard Brands maintains a database of 5.3 million unique customers and 8.0 million gross customers purchasing as of LTM Q115.
Transaction Merits: We think the Orchard Brands portfolio is a great fit for Bluestem. At their core, both businesses have large legacy catalog components with robust and growing e-retail platforms. The transaction will result in both cost and revenue synergies. On the cost synergy side, management has guided to a minimum of $10-20mm in savings which include G&A redundancies and marketing optimization. As per management, however the G&A synergies pale in comparison to the revenue synergy opportunity. The potential revenue synergies can be divided into two basic buckets: 1) increase in higher margin apparel offerings to the Bluestem customer base, 2) application of Bluestem credit underwriting to the Orchard customer which includes both expanding credit options to existing customers as well as utilizing Bluestem’s sophisticated underwriting process to offer credit to those customers that have been rejected for credit at Orchard. For certainty, we want to emphasize that Orchard currently has zero credit risk as the credit referenced is simply a private label credit card offering underwritten and provided by Alliance Data Services (ADS), akin to a Banana Republic or Bloomingdales card.
Financial Snapshot: A summary of Orchard financials reveals a business which, like Bluestem, is highly Free Cash Flow generative.
Consolidated Financials: On a Pro Forma basis, here is what the combined Bluestem and Orchard financials look like.
Enterprise Value Build Up: On a fully diluted basis for outstanding Centerbridge warrants, management options and giving credit for $108mm in Net Commercial Real Estate assets which should be monetized in the coming months, with cash and debt pro forma as of 3/31/15 for the Orchard Brands acquisition and finally attributing $150mm in value to the NOL for EV purposes, here is what the Enterprise Value looks like:
Implied Valuation: On an LTM and 2015E run rate basis, an investment in BGRP creates the company at an extremely attractive valuation across all metrics. For context Conn’s trades at 10.9x and 13.2x 2015E EBITDA and EBIT respectively. We think for many of the reasons outlined above that BGRP is a higher quality business model than Conn’s. In truth, we think there really is no good comp for BGRP and think it is not inconceivable to make the argument that BGRP should be bucketed not with brick and mortar businesses like Conn’s but rather fast growing, capex light e-commerce businesses which command even higher multiples.
Target Valuation: We think the proper way to value this business is NOT on EBITDA as many retail investors are wont to do. The business is extremely asset light and in short, the retail EBITDA that it generates is much more valuable than that of other retailers with materially higher maintenance capex needs and correspondingly lower Free Cash Flow conversion. In light of this, EBIT, or in this instance EBITDA less Maintenance Capex, provides a much better metric on which to value this business. Based on a range of EV/EBITDA-Maintenance Capex multiples, we think the stock could be worth between $8.85 and $13.47, implying upside potential of 40% to 114%.
Appendix A: Diluted Share Count Calculation
Closing on Orchard Brands transaction anticipated in July 2015.
Continued earnings expansion.
Gradual change in the shareholder base: over the last 6 months, there has been a gradual shift in the shareholder base from predominantly legacy distressed debt funds which owned the company either through or post-bankruptcy as a liquidation play to special situation debt and equity funds interested in owning the ongoing Bluestem and now Orchard businesses. Over time, and especially in conjunction with catalyst #4 below (Uplisting), we expect the BGRP shares to migrate into the hands of vanilla equity investors which will lead to a more proper valuation of the company.
*Uplisting* In our view, the most important catalyst is a pending uplisting of the stock. While the company maintains an OTC listing, management has been explicit in its plans to uplist the stock onto NYSE or NASDAQ and become a normal SEC filer within the next 6-18 months.
|Entry||06/24/2015 11:40 PM|
Thank you for the write-up. I have been reviewing your numbers and reading the financials and this seems too easy (i.e. What am I missing?). Even when I count stock comp (you do not), we can buy a company growing top-line north of 10% for about 8x unlevered FCF!?!? Something seems amiss . . .
- How did Bluestem grow sales almost 30% in 2014? Is this growth cyclical? Can we expect this sort of growth going forward?
- Why did Bain/Battery sell Bluestem at what seems like a song? When they announced the deal in September 2014, the 2014 numbers were already largely known and the SCUSA deal had been in place for 18 months. Why would Bain/Battery sell a low-capital biz with minimal credit risk growing at 25+% for about 6x EBITDA?
- How vulnerable is this biz to SCUSA getting cold feet and figuring a way out? Clearly, many of these subprime businesses can get crushed if regulators put pressure on the financing banks rather than directly on the biz.
- Also, when we add up PayCheck Direct, FreshStart, and the credit-dependent stub of the core biz financed by SCUSA, Bluestem still has a considerable income statement exposure to credit risk, no?
- Finally, do you know what the 'dividend equivalent expense' line is in the EBITDA reconciliation? I am still reading documents and have not come across explanation.
|Subject||Re: Several Questions|
|Entry||06/25/2015 03:20 PM|
Hi Straw1023, Thanks for the Questions. They are spot on.
We agree....this seems insanely cheap. We know distressed funds have been taking prints given they have made a lot of money already plus the technical nature of how this trades (through desks with OTC for some retail volume) prevents many of the natural owners at equity shops from owning this (and many distressed funds are just not interested in buying in now after missing the classic distressed liquidation play available in the earlier stages of the reorg and post reorg story). At a certain point though we take comfort in the numbers. As you note, it is darn cheap with technical reasons keeping it cheap near term AND a hard catalyst we can look to with a planned full SEC registration and uplisting.
1) Sales in 2014 were helped meaningfully by a TV marketing campaign that the company introduced in 2014. I doubt this explains all of the growth but I think as the company lays out in their presentation it has an enormous addressable market in the US (they will say 100mm people) so there is a large pool of people to continue to cycle into the system. On the Q4 call, the company attributed sales growth to vague categories such as: Merchandise assortment, Paycheck direct increased acceptance and "relentless focus on enhancing the customer experienc"'.
We do not think that there is any cyclicality to the growth but do think growth will temper. Per management guidance, growth at Bluestem Brands for the rest of 2015 is expected to dip down from 20% context into the mid-teens due to the anniversarying of the TV marketing campaign. We use 10% sales growth for 2015E for Bluestem which we think is conservative in light of management guidance. There is a big market of people and the large customer churn actually demonstrates to us a continuous touch with new customers as customers 'outgrow the Bluestem credit need' only to be replaced by a new cohort of customers.
2. Great question and this is the one that bothers us the most. The best replies we have gotten are that these are funds which need to exit and/or are more venture-stage focused (building up the business from point A to point B). Still we agree, why leave money on the table? and/or why was there not a higher bidder? One theory is that this was all Centerbridge driven: recall Centerbridge was part of the consortium that took SCUSA private and then public so would not be surprised if they orchestrated as a single but two-step process both the initial Bluestem arrangement with SCUSA and following their investment into Capmark, the acquisition of Bluestem.
3. Our understanding is that it is not exposed to cold feet as SCUSA is contractually obligated to acquire the receivables through the expiration of the arrangement in 2022. That being said, the company in response to investor feedback is working to gain a second liquidity provider ahead of its uplisting. This should mitigate the reliance on any one credit provider. One other point worth noting is that their all in rate is in line with what conventional Credit Card providers offer at other retailers. Check out page 17 of the November 2014 Bluestem Presentation where the company shows the APR for Fingerhut and Gettington compared to Amazon Rewards, Walmart Discover and Target.
4. PayCheck has no real credit risk (they are simply selling directly to the customer with a withdrawal to come from the customer's paycheck). As you can see the receivable balance is tiny and chargeoffs are sub 2%. The total receivables are $18mm. Due to the low credit risk the credit income is low. This is a fast growing segment which should provide stable and low risk growth (credit option where earnings driver is the merchandise sales with credit a means to 'get' the customer but not an earnings focus per se). FreshStart is where the company is more credit exposed but total receivables at 3/31/15 were $22mm albeit with high charge off rate. The company is looking to this segment as an avenue of growth and we think over time can enter into receivable sale as well for the credit book (the company has cited $100mm as the sweet spot for a portfolio to be in sale condition). Post SCUSA we are not concerned by the credit book that remains as it is a very small piece of the pie and PayCheck as discussed is just a conservative growth engine to the more credit exposed FreshStart.
5) Dividend equivalent expense as we understand it from speaking with the company is one time in nature and refers to a dividend of $190mm in cash that was made before the Bluestem business was sold to Capmark (but remains on the standalone Bluestem financials). There should be no corresponding line item on a go forward basis.
|Entry||06/29/2015 04:49 PM|
I remain entranced by this situation.
I did want to ask about NOLs. If I understand, they will gain a benefit of about 35% * $104mm = $36mm each year for a long time.
So why do you value at $150mm?
I have been simply running TEV without including NOLs (so $1.3bn). And then taking the $36mm benefit each year in calculating unlevered FCF. Whatever reasonable discount rate you use, this is worth at least double your $150mm.
|Entry||06/29/2015 06:21 PM|
We agree we may be conservative on the NOL and end of day there are a number of factors that go into getting to a number (discount rate, actual income shielded per annum etc.) so we use $150mm which we were comfortable with as a minimum (since after all this is a theoretical question of 'what is the NOL worth' to the company by its 'not' paying taxes). There could be upside to the number one would get to if you want to use different assumptions. $104mm is the max shielded per annum though in the near term it is unlikely that there is even that much income to shield, hence our use of lower number.
If use $300mm for the NOL then the upside can be even greater!
We do think a catalyst we did not list given it is speculative but certainly potentially there, is another M&A deal to further use the NOL. The company has the cash on the balance sheet to do another Orchard like deal. If there is a similar $1bn e-retail/catalog company out there, Bluestem could scoop it up and be an even greater FCF machine.
|Subject||Re: Re: NOLs|
|Entry||06/30/2015 11:56 PM|
thanks for reply on NOLs.
Help me understand your statement that in the short-term, there will not be much income to shield? Why?
I am still working through D&A going forward, but pro forma for the Orchard acquisition, isn't there north of $100mm pre-tax income to shield in 2015?
|Subject||Re: Re: NOLs|
|Entry||07/01/2015 09:43 AM|
Hi Straw, apologies if was not clear. Definitely did not mean there is not that much income to shield, but rather that the EBT was less than $104mm (with $104mm being the max to shield), meaning there is not that much with 'that much' being the full amount. We get to PF combined EBIT on trailing basis in the $120mm context (per mgmt; note this is much lower than EBITDA-Maintenance Capex due to D&A + Customer Intangible Amort outstripping Capex and enlarged due to M&A accounting). If you take out $50mm in PF interest then EBT gets closer to $70mm.
|Subject||Re: Getting the poor to pay more for less?|
|Entry||07/07/2015 11:26 PM|
It's expensive to be poor . . .
You are obviously correct that this business is all about charging subprime consumers more -- both in prices and in lending.
But an enormous part of our economy is based on this. Very few consumers go to America's Car-Mart or almost any used car market because they are rich.
Going after payday lenders (I am short WRLD) is a different animal than going after vendor-provided (or 3rd party provided thru vendor) credit. While not in the same concentration of subprime, this is what is happening with ADS (Alliance Data) 3rd party financing or pretty much any vendor financing.
Other than concentration, how would a regulator put the kabash on this business model while allowing Victoria Secret (via ADS) to continue to lend to same consumers? And I cannot imagine concentration being the criteria of any regulation.
I raised the same question of eal, but I cannot figure out how regulators would target this business in particular.
I think the bigger question is whether this recent growth has come with a lowering (either with knowledge or ignorantly) of credit standards. And if so, what happens over time with weaker customers.
|Subject||Re: Re: Getting the poor to pay more for less?|
|Entry||07/08/2015 08:45 PM|
echo blaue. i own this but i feel uncomfortable about it and my trigger finger is itchy. i think we can agree that the gaping disparity between bluestem's revenue growth (20%+) and that of ce/homewares/apparel as categories (flat/lsd) is explained by credit and credit alone (basically all of bluestem's rev is financed and maybe it's more like 60+ pf for orchard). that's not a moat, it's a parlor trick contingent upon retail subprime securitization appetite and relatedly, credit quality.... to blaue's point, whether it's on bs or not is a distinction without an ultimate difference. this feels like rolling an ever-expanding snowball uphill on toothpick-thin stilts ...success sows dramatic failure's seed ... miscegenation of responsible underwriting and rapid retail growth is awkward and artificial and doomed. underwriting learning curve -> white label credit? revenue synergy across complementary demographics? potentially pernicious regulatory risk aside, doesn't make sense because life is hard and this is too easy. the ~10% excess/obselescence reserve on inventory; ~50% 30+ day delinquency on freshstart (can that be right?); capitalization of catalog promotion expenses; private equity stakes transacted at statistically deflated multiples....all weird to me. but like i said, i own this, so i have every reason to hate it.
|Subject||Re: Re: Getting the poor to pay more for less?|
|Entry||07/08/2015 09:21 PM|
I wish I had some brilliant insight on the Regulatory side. We take a different approach with full admission that we cannot tell you what the CFPB will or will not do and if we did I am sure we would have the best short book on the planet:
Re: blaueskobalt questions:
1) Yes they sell the same stuff as the next guy. If the customer could, he would not shop at Fingerhut. But he can't. He does not have the money and or is not interested in entering the vicious world of credit card debt. Fingerhut lets him live the American dream. And to Straw's point, if you are poor, yes, the American Dream aint cheap. I would frame it a bit differently than the business model relies on getting poorer customers to pay for undifferentiated merchandise to it enables poorer people to have access to merchandise which 'richer' people can source through better channels as they have better credit
2) Re Regulatory risk, I cannot reject this out of hand as anything touching the poor / sub prime will have that risk. To each his own and I wish I had some brilliant clause in some CFPB document outlining why they give Bluestem a pass but there is none. The rates on the actual merchandise are in line with Credit cards. One can argue and say that there is actually a higher rate if you apply the higher priced item + credit fees to the similar item albeit for sale without credit on another website (fuel for the bears among you that I will give you for free!). The interest rate levels though would fall shy of the hundreds of % in the dirty areas being targeted so our sense is this would not be a high priority for regulators. There has to be some value to the merchandise availability which Bluestem affords and regulators can go and shut that down but they would also be shutting down the ability for a lot of very happy customers to access merchandise and at the same time improve their credit as opposed to destroying their credit through taking on evil credit card debt at Walmart which would put them in cycle of hell.
3) Headline risk - I refer to point #2
4) I do not think that is the peer group but that’s what makes markets. Whether you like it or not this is a high Gross Margin business. They are making a lot of money selling merchandise. They are able to do so because the customers have no access to credit elsewhere but it is not simple a funding game (unless you want to argue which I note above the merchandise pricing is masking the true interest cost to the consumer leading to bloated merchandise margins but at the end of the day the consumer gets a product and pays for it)
5) Whether you agree or not on what 'should' be, we definitely disagree as to what the market will do with this in an uplisting. You can call it stupid but we think with proper coverage from chats we have had with the natural sellside group on the name, this should rerate very meaningfully. People long CONN should be long this and then some.
1) Growth - if you look at SCUSA presentations, you can see how FICO scores have trended (average origination). They are down. Our initial thinking was fear that they were stretching to grow but we are comfortable that management will not blow this up and do buy into the argument that their underwriting history and data lets them underwrite those that others would reject. The company did great given the business model in the recession which is a good indication to us of management prudence. In 2008, revenue dropped only 5.6%, Gross margins held steady at 48%. On the credit side, charge offs while not pretty went to 22% versus 15% in the prior year (and which is where they sit today). That did not blow up the company by any means and the company came out quite strong. Further, it would be suicide to ruin SCUSA relationship by eroding underwriting standards. Were this a vanilla company I may be more concerned re: empire building / sales growth orientation for sake of sales but Centerbridge is running the show here.
1) Disagree. I do think their underwriting data provides a moat that helps them underwrite those that others reject. They did relatively well in the recession for this kind of business
2) I appreciate the cynical perspective on cross selling as it has yet to be proven but valuation does not require giving it any credit and we don't in the illustrative numbers we lay out. But we sure think there is some room there. Ditto on applying Bluestem underwriting on the Orchard side. We did not mention the White Label that you reference and which management referenced at the Orchard shareholder day since like you we thought their presentation of it and response to questions on the idea seemed poorly developed at best.
3) Freshstart numbers: small part of business and numbers look awful. We have asked management on this (i.e. just shut it down) and best answer is these are the numbers you get as you are ramping up the product. We can accept that given we are talking small numbers. Again, we like that we have a sponsor running the show and have a hard time thinking Centerbridge does not see the same numbers on Freshstart that we all do. We think its a 'heads we can make it work and have a great new segment, tails it just cannot work as chargeoffs are too high and they can gracefully bow out without too much of a hit.' Not the worst risk reward to play for when looking to areas to profitably expand.
4) PE stakes at weird multiples - I agree this is the question that bothers me the most. Could be its the Regulatory issues and there were no bidders. I don't know and I wish I had a great answer on the Regulatory. I do know that I think this is stupid cheap and unless you had great insight on why Regulators are going after this the valuation makes no sense. Even if you want to argue a meaningful discount is warranted, I do not think it would lead to a stock in the low $6 range unless sub 7x EBITDA - Maint Capex for asset light businesses and super high FCF yields were what you thought is the right discount. Those are valuations ascribed to companies in distress and with questionable futures. As far as I can tell this is not anything near what we have.
|Subject||Re: Re: Re: Getting the poor to pay more for less?|
|Entry||07/08/2015 09:58 PM|
"Miscegination" in a VIC comment . . . love it. I am putting you in the Bowd category and that is a compliement.
You state that the outsized growth (versus others) is due to credit. I'll go a step further: 100% of Fingerhut revenue is due to credit. Who in their right mind would shop at Fingerhut if not for credit reasons?
But are there a lot of VIC-ers who shop at Aaron's or go to Crazy Larry's used car lot?
You think there are a lot of wealthy people who buy the "insurance" on their $100 electronics purchase at Best Buy?
Hell, ever listen to a state lottery ad? "Hey, you never know . . . " Guess what, even a large state-run business (supported by both political parties) preys on the poor!
I am a bit struck my the conflation of moral hand wringing with being a bad business. I think these businesses are horrible for society, but i think that about probably half the S&P 500 (I am looking at you Goldman Sachs . . . the Lord's work, my ass)! Hell, I do not think I add any value to society!!
There is an entire segment of legal businesses that effectively prey on poor people and the financial situations in which they create or find themselves. It is un-seemly. It is ugly. But if you dig deep enough, you will probably find that these profit makers are your neighbors, fellow members at your golf club, and even fellow members at your house of worship or atheist society. They sure are mine.
Further, these businesses have weathered cyclical and regulatory storms for generations. So let's get down to the real questions:
- How exactly would regulators shut down this business? It seems to me that regulators are nto going to shut down vendor financing to subprime consumers. Further, given all the price competition in this area of spending, do regulators care that Fingerhut screws its customers both in terms of price paid and credit terms? I do nto think so.
I mean this as a legitimate question . . . not rhetorical. I cannot figure out how regulators would target Fingerhut without shutting down a huge part of subprime lending.
- Other than the recent growth spurt, is there any evidence that Fingerhut does not have a good understanding of the credit situation?
- I think there is a legit question on whether the recent growth was brought about by a lowering of lending standards . . . but it does seem to me that there must be some value in the fact that they convinced a 3rd party after much of the growth to take the lion's share of the credit risk. Is SCUSA that stupid? Perhaps. But it seems less likely that a 3rd party would be stupid rather than an internal mis-alignment of incentives would cause workers to knowingly harm long-term interests of company . . .
- And why don't they have a moat? They have a brand--with poor people, sure, but that is still a brand. They have reasonably efficient fulfillment ops. (Aside: In late 1990s, Fingerhut was thought the most efficient catalog fulfillment op -- this is why Federated bought them). If Amazon came out and offered same credit terms as Fingerhut . . . game over overnight. But is that a risk?
|Subject||Re: Re: Re: Getting the poor to pay more for less?|
|Entry||07/08/2015 09:59 PM|
Two other points:
1) I neglected to directly address Blaueskobalt point on SCUSA though I think I touched on it in my response to one of Straw's questions: We think the company will continue to prudently underwrite as they did through the recession (company did not blow up though you saw charge offs you would expect given the recession and this demographic). It is in their nature to continue to underwrite well. The best explanations on the 'why' sell the portfolio are liquidity and / or de-risking. Neither answer suits us as they had an ABL and I am sensitive to the point on not blowing up the underwriting which I think I addressed in the write up. One can simply posit the question: a boatload of EBITDA was given up and for what. That all being said, I view it as water under the bridge. We can debate all day long whether it is good or not good to offload the receivable book and I think there is no vanilla answer. That being said, I do not think it is core to the thesis by any means: they are incentivized to continue to prudently underwrite
2) I do not want to come across as wiping away the regulatory risks. That will always be some concern that one would be foolish to not consider but I think I lay out in my prior post why I am comfortable with that and why I think this is stupid cheap. That is the greatest unknown for this name albeit with government it can be meaningful but we think the risk reward here is too compelling to ignore.
|Subject||Re: Re: Re: Re: Getting the poor to pay more for less?|
|Entry||07/08/2015 10:05 PM|
All very good points and I will echo a few of them:
1) there is absolute brand value. They have been around for 6 decades +. That counts for something
2) Credit growth - FICO scores have come down for sure and perhaps that is the source of the growth (expanding pool of customers). All that being said SCUSA chose to partner with Bluestem because they viewed them as a well established underwriter with great credit data. SCUSA relies on Bluestem prudence and saavyness in underwriting customers profitably and as discussed it is 100% in Bluestem interest ESPECIALLY with Centerbridge running the show to not be penny wise and pound foolisj, aka grow the business for a few quarters only to blow up the entire company. The numbers do not show that anyway. 30 day delinquency (excluding impact from manual dialing in Q1) have not moved out of the 14% handle range for the last few years and that includes the quarters during which they have had the explosive growth combined with lower FICO as evidence in the SCUSA Q115 presentation page 10).
|Subject||Re: Re: Re: Re: Getting the poor to pay more for less?|
|Entry||07/10/2015 11:06 AM|
Appreciate the robust discussion here--thanks!
To straw's question--how regulators could target Fingerhut without also shutting down many others--I think that uneven regulation is a common reality for actors in unsavory grey areas. The right combination of errors, public sob stories, and politics/politicians is what's required.
|Entry||07/12/2015 11:12 PM|
I just had a long conversation with a senior retail marketing exec at well-known specialty retailer that just happens to be exploring white-label credit solutions (including Bluestem's not-yet-launched service) for turned-down borrowers.
- The retailer uses ADS solely at present, and while ADS has loosened its underwriting a bit over time to venture into the upper reaches of subprime, the retailer wants to have a second option if a customer is turned down by ADS -- almost half of credit applications at this retailer.
- The problem is that the vast majority of white-label subprime banks are "scummy" and un-professional. As well, they tend to reject too high a percenatge of the already turned-down applications to make a difference. The costs of managing a turned-down program with them are simply not worth the extra revenue.
- Bluestem has suggested in conference call that they could be used as a full-spectrum white-card solution, but exec said this would be an absolute no-go. ADS and others offer too much else. Bluestem would only be used for the turned-down piece. So this is a negative.
- The exec encouraged me to look at Bluestem (Fingerhut) not as a retailer but as a credit decisioner -- a subprime credit decisioner for small-to-medium account balances. Their core competetncy is NOT retail (of course, we have all agreed that no one in their right mind would shop at Fingerhut but for the credit). It is knowing to whom to grant credit that others have rejected. The retail piece of Fingerhut is simply a means by which to monetize the core competency.
- Further, the exec pointed out that Bluestem should really be compared to ADS. This is an imperfect comparison in that ADS is its own funder (i.e. no SCUSA) and that ADS offers valuable data-driven marketing consulting. However, both have a core competency in credit decision-ing. It just happens to be that Fingerhut owns its own retailer while ADS owns its own bank.
My sense is that this CEO grasps this already based on his discussions of Orchard acquisition and potential white-label biz for third-party retailers.
This in no way mitigates the already identified risks: if regulators go after this arm of subprime or if Fingerhut over-extended credit as it grew rapidly, this could still be a bagel. But it does clarify for me the size-able upside potential here.
If Bluestem really does have a decided advantage in small-to-medium (sub-$1,000) subprime credit decisioning, then they become a very interesting business with lots of growth potential.
|Entry||07/14/2015 11:51 AM|
In the interest of balance:
|Subject||Orchard Brands deal completed|
|Entry||07/14/2015 12:18 PM|
EDEN PRAIRIE, Minn., Jul 13, 2015 (BUSINESS WIRE) -- Bluestem Group Inc. (otcmkts:BGRP) today announced the completion of its acquisition of Orchard Brands Corporation, a leading national, multi-brand family of 13 catalog and eCommerce brands serving the boomer and senior demographics, for $410 million in cash, subject to customary purchase price adjustments. The transaction will broaden and diversify the customer base and retail capabilities of Bluestem Group’s wholly-owned subsidiary, Bluestem Brands, Inc.
The acquisition was funded with a combination of cash on-hand, a new term debt syndication, and a new asset-based lending facility. The term debt was underwritten by Credit Suisse Securities (USA) LLC and Morgan Stanley Senior Funding Inc., while Credit Suisse and U.S. Bank National Association led the asset based lending facility. Bluestem Group was advised by its financial adviser Morgan Stanley & Co. LLC and by its counsels Akin Gump Strauss Hauer & Feld LLP and Faegre Baker Daniels LLP. Orchard Brands was advised by its financial advisor Goldman Sachs and by its counsel Schulte Roth & Zabel.
About Bluestem Group Inc.
Bluestem Group Inc. is a holding company whose businesses include Bluestem Brands, Inc., a multi-brand, online retailer of a broad selection of name-brand and private label general merchandise serving low- to middle-income consumers in the U.S. Bluestem operates Fingerhut, Gettington and PayCheck Direct brands. Complementing each brand is a large selection of merchandise with a variety of payment options to provide customers with the flexibility of paying over time. Bluestem Group is headquartered in Eden Prairie, MN. For additional information visit Bluestem Brands’ website at www.bluestemgroup.com.
About Orchard Brands
Orchard Brands is a national multi-channel direct marketer offering apparel, accessories, and home products for women and men principally in the rapidly growing and underserved boomer and senior demographic. The Orchard Brands portfolio includes Blair, Haband, Norm Thompson, Solutions, Sahalie, Gold Violin, Appleseed’s, Tog Shop, LinenSource, Draper’s & Damon’s, Old Pueblo Traders, Bedford Fair and WinterSilks. Orchard distributes more than 512 million catalogs and mailers annually and operates dedicated internet sites for each brand (including a universal web cart). For more information, please visit http://www.orchardbrands.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’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’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’s control and may cause actual results and performance to differ materially from Bluestem’s expectations.
Forward-looking statements are based on Bluestem’s beliefs, assumptions and expectations of its future performance and actions, taking into account all information currently available to Bluestem. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to Bluestem or are within its control. If a change occurs, Bluestem’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’s expectations include the satisfaction of applicable conditions to the merger and the risks and uncertainties set forth in “Risk Factors” in Bluestem’s Report as of and for the fiscal years ended January 30, 2014 and January 31, 2013.
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 undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
View source version on businesswire.com: http://www.businesswire.com/news/home/20150713005280/en/
SOURCE: Bluestem Brands, Inc.
|Subject||Re: Re: Conversation|
|Entry||07/14/2015 03:36 PM|
For what its worth, we spoke last week with SCUSA IR on this. Not intending to turn this into a SCUSA debate or defense but here is the color that we got:
This was not something new but rather Parent Co noted that back in November, there was an 8K put out flagging people that there is an enforcement issue coming down the pipeline which finally came last week (http://www.sec.gov/Archives/edgar/data/811830/000089882214000415/body.htm). To be clear, the issues are at the Parent company (Holding company level) at Santandar Holdings USA which has large stake in SCUSA. Further, this is a qualitative not quantitative fail. This means the issue is not one of capital or reserves. The Fed did not object to the capitalization levels at Santandar. The Fed is not saying that reserve policy needs to be changed but rather some governance and compliance procedures need to be tightened. They echoed what the article notes regarding why the CEO left: he did not want to be a public company CEO (and it is clear he got cashed out and then some upon leaving).
|Subject||Regulatory Color & Consumer Value Proposition|
|Entry||07/14/2015 04:17 PM|
I want to make a few points that I believe are relevant to the discussion we have been having.
1) It is VERY important to note the following: Per the company, SCUSA is NOT regulated by the CFPB and therefore some of the discussion we have been having about potential CFPB inquiries may to a certain extent be moot. Since coming out of Federated Brands ~12+ years ago (and perhaps even earlier than that we just have confirmation from the company going back that far), Bluestem's sales and credit have always been regulated. Unlike other parts of the Sub Prime Wild West, Bluestem has always had a regulated financial institution issuing their credit. Currently, the actual credit issuer is WebBank which is subject to FDIC regulation. As we understand it from the company, were someone to even make a claim to the CFPB, the CFPB would simply pass along the complaint to the FDIC which already regulates and oversees the complex. The CFPB would be the Sherriff in those areas of the Sup Prime universe where you do not already have oversight which is NOT the case with Bluestem. This should help mitigate or minimize the 'CFPB waking up one day' risk as the FDIC is already involved (I carefully did not say eliminate as the FDIC itself could suddenly make noise I guess). On this point, the compliance departments at WebBank and Bluestem are in constant touch on both the retail AND credit side of the Bluestem offering. IR confirmed that they have never had any inquiries from the FDIC with regard to the pricing of their merchandise or credit offerings.
2) Bluestem is very clear and transparent with regard to how much you will be charged. It is all upfront and no hidden fees as far as we can tell. There is no law in the country stipulating that all retailers much charge the same amount for the same item and frankly there would be no way Bluestem could compete on price with Walmart given Walmart scale etc (costs Bluestem a lot more to bring a given product to market than it would a player with much larger scale). Bluestem competes via its credit proposition. Is it more than the cost at Walmart? Sure. But then again if the consumer could get financed at Walmart he would probably not go to Bluestem and Bluestem not Walmart is the entity willing to underwrite this consumer. The consumer knows full well what he is getting into (according to Bluestem) as pricing and all in cost is fully transparent (which was our experience playing around on the site as well).
3) Finally, as mentioned in the write up but which I do want to further highlight: there is a Consumer Value Proposition that Bluestem serves through enabling those with bad credit to improve their credit. Not all credit providers in the Sub Prime world can say the same. For example, my understanding (and am by no way certain so if I am wrong please let me know) is that Rent to Own, does not help your credit as the companies do not report your payments to the credit bureaus. While I recognize reviews can be found online to support any argument, a quick glance at Fingerhut and Credit Score on google shows a number of anecdotes in which people praise FH for helping them get back on their feet. I am sure there are reviews that bash FH and say it is the most nefarious and evil e-retailer since the inception of e-retail so we can take with a grain of sale.
|Subject||Re: Regulatory Color & Consumer Value Proposition|
|Entry||07/14/2015 04:35 PM|
eal, great points. just trying to provide some balance.
Do you think the white-label service (separating credit decisioning from retail) has the potential that I discussed?
|Subject||Re: Re: Regulatory Color & Consumer Value Proposition|
|Entry||07/14/2015 06:32 PM|
Re White Label, I was a little cynical in per reception when they introduced it at the Orchard M&A Shareholder meeting a few weeks ago. That being said if they really do have some secret underwriting sauce based on years of data and consumer performance, it is not inconceivable that they could offer their services to third party retailers looking to expand their customer base. I have no idea if and when they would even be looking to do this. I do think though that initially, they will try it with the Orchard customer base to target customers who apply for credit but are denied by the entity that provides third party credit to the portion of Orchard purchases made on credit (Private Label Credit). That would be a good soft launch to gauge the effectiveness of applying Bluestem underwriting outside of Bluestem proper.
|Subject||Re: FCF calculation|
|Entry||07/16/2015 01:12 PM|
Simplicity. I guess if they continue to rapidly grow there could be continuous use of WC (but then again they would be growing so any hit to $25mm of WC use should be more than compenstaed for). Over time if not growing then in theory WC should smooth out and not be a continuous use of cash so not meaningful number to the math.
|Subject||Re: 11/11/14 transcript?|
|Entry||09/10/2015 05:10 PM|
Sorry - do not have though it's a good overview call of Bluestem. I would recommend reaching out to IR to see if they can help.
|Entry||12/17/2015 10:34 AM|
Any thoughts about BGRP at current prices around $2.75?? Many thanks
|Entry||12/17/2015 12:45 PM|
It is all about the credit.
We have a TEV about $700mm (backing out inventory build for holidays). After synergies, and if credit gets back above RAM threshold, we have EBITDA (including stock comp) of $170mm. And with maint capex of $20mm, we have about $150mm of unlevered FCF (so trading below 5x unlevered).
But it looks like we are going to give up $20mm of EBITDA due to selling receivables at a discount assuming credit metrics remain where they are. And this could get worse based on credit performance. And SCUSA wants out. They cannot get out for 6.5 years, but it is not a good sign. Now, mgmt is talking securitizations and they have not gone out seeking SCUSA replacement yet. It seems pretty clear that whatever arrangement they get, it will not be as favorable as SCUSA terms.
However, so long as credit metrics stabilize and unlev FCF is $125mm and SCUSA walks after 6.5 years and replacement financing is much worse, it is still difficult to get a TEV lower than $1bn. But if credit metrics go south . . .
One thing that impresses me is that this management team is open. They release a lot of information, and answer each question directly. And they are not overly promotional. They lay out the warts.
|Entry||12/17/2015 01:05 PM|
Winbrun, I think Straw nailed a number of the main points. This stock is very cheap at current levels (admittedly dramatically lower from the post price) but I think some people I speak with are too generous on the credit book. In addition to the credit book, I think sales growth starting to moderate in line with general consumer slowdown is a change from where things stood 6 months back. The three most important things to sensitize (we think) are sales growth, fee income and chargeoffs as that drives more or less everything. Margins should be flat (conservative) to up (synergies play through) but timing of margin improvement due to synergies is unknown.
The merchant discount will hurt cash flow though the company maintains that the 2.22% number is incorrect to apply to full year 2016 given RAM is usually better in H1 and therefore the discrepancy between the hurdle and actual RAM likely to be lower.
We think the chargeoff spike and now merchant discount issue caught everyone by surprise and the onus is on management to perform and get charge offs back down to their 16% target (for many years did with a 14/15% handle). SCUSA backing away from the book certainly was not positive as well and it remains to be seen what can be accomplished through other liquidity venues.
Under some assumptions that we think are not unreasonable (18% chargeoffs, flat-ish margins, 27-28% context fee income) and $10mm merchant discount in 2016 (2.22% assumed to be too harsh), we think consolidated EBITDA (inclusive of synergies and unallocated G&A at Inc.) could actually shake out lower than $170mm and would be closer to $145-155mm context. At current price that is still extremely cheap (if zero out the NOL to avoid the debate on its value, that would be 4.7x EV/EBITDA and 5.2x EV/EBITDA-Maint Capex).
Gene Davis yesterday noted that he does not understand why the stock is where it is.We think there are two basic reasons though and number 2 may be a rebuttal to his comment: 1) distressed funds have been clobbered and this has become a risk off environment and selling begets selling, 2) credit book deterioration despite management explanations re: manual dialing make it too easy for people to not bother to spend the time on a 'sub prime' name with complicated accounting (a great technical set up but not very helpful in the short term when investors are in risk off mode and not looking to roll up their sleeves).
All in we like management a lot and find them to be candid and capable.
They laid out a game plan on timing yesterday for the first time and the plan is for an uplisting in 2017 after they get a few quarters of Orchard under their belt and the integration is more underway. On top of that it sounded like buybacks are a real possibility following the conclusion of the current quarter which we think could be a catalyst to start pushing the stock back up. This together with charge offs gradually getting back down / RAM meeting the hurdle / getting closer to the uplisting / finding alternative funding are what needs to be done and also when done should catapult the stock higher from current.
|Subject||Re: Re: BGRP|
|Entry||12/17/2015 04:27 PM|
I hear you on all that. Isn't the right way to think about it as ~$400m market cap less $169 holdco cash less $75mm run-off RE (we can debate discount rates here) leaves you with roughly $160mm of implied Bluestem Equity value compared to roughly $60-70mm levered FCF. Said differently, you are paying ~2.0 - 2.5x levered FCF to own Bluestem?? I think we all get that it is not the best business in the world, but that seems too cheap. Even at a much lower EBITDA, I still come out with $50m FCF so perhaps it is closer to 3x FCF. Perhaps this is not the right way to think about it, though keep in mind that the Term Loan at BGRP does not have an upstream guarantee so they have no claim to our holdco cash or run-off assets. Thanks.
|Subject||Re: Re: Re: BGRP|
|Entry||12/17/2015 04:51 PM|
Directionally I agree 100%.
To get more granular on the math as I see it though:
At $3.00 and 171mm fully diluted shares....and again lets just zero out the NOL (so too any EV metric will be too high in multiple terms for clarity but we can simply calculate FCF yields assuming zero tax)I get $133mm equity value for Opco and $674mm EV. We can sensitize EBITDA and thus FCF all day long but if can paint a $150mm EBITDA case under the assumptions I laid out and $50-60mm in FCF that looks pretty good: