Bread Financial Holdings, Inc. (ADS) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Alliance Data First Quarter 2021 Earnings Conference Call. At this time, all parties have been placed on listen-only mode. . It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Alliance Data. Sir, the floor is yours.
Brian Vereb: Thank you. Copies of the sides we’ll be reviewing, and the earnings release, can be found on the Investor Relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; Executive Vice President of Operations and Credit Risk, Tammy Mcconnaughey, will join Ralph for the Q&A portion of the call.
Ralph Andretta: Thank you, Brian. Good morning, and thank you all for joining the call. Before I begin, I'd like to acknowledge Tim King for his contributions to Alliance Data. As we previously announced, Perry Beberman will be joining the company in July as our new CFO. Perry is an accomplished executive leader, with more than 30 years of experience in financial services. We look forward to him joining the team. I will start on Slide 3, with key takeaways from the quarter. First, we are pleased to see credit sales rebound towards pre-pandemic levels. With the expansion of the vaccine rollout, additional government stimulus, consumer confidence continues to improve, and we are seeing the return of the consumer to in-store shopping. Next, the initial rollout of the Bread platform to our brand partners, began in the first quarter, with Apt2B. We’re in active discussions with our partners for additional cross-sell opportunities, and we expect to have more to discuss in the second quarter. Just this morning, we announced the expansion of our business relationship with Fiserv, through a new strategic partnership. Fiserv will leverage Bread's payment platform to offer our digital products and capabilities to its merchant partners. The strategic partnership will power point-of-sale lending for Fiserv’s extensive merchant base, and drive platform sales and receivables growth for Alliance Data. We're very excited about the potential of this partnership. Finally, our credit performance continues to improve as a result of our prudent risk management, deliberate underwriting actions, and continued strong card member payment behavior, enhanced by stimulus payments in the first quarter. We took deliberate actions to improve our credit performance last year, and the results are evident in our credit metrics.
Operator: Your first question comes from the line of Sanjay Sakhrani with KBW.
Sanjay Sakhrani: Hey, good morning, and good job, Ralph, for wearing two hats.
Ralph Andretta: Thank you, Sanjay.
Sanjay Sakhrani: Ralph, it seems like you're gaining more confidence on sort of the loan growth expectations, and also providing some of the guidance into 2022 was positive. Maybe you could just talk about some of the specific areas that are driving that confidence. And then I also want you to touch on the competitive environment, because of what we saw with The Gap and Synchrony. I'm just curious sort of how you see that unfolding across the industry, given your years of experience
Ralph Andretta: Sure, Sanjay. I'll answer this as a CEO, then as a CFO, if you don't mind. So it's early in the year, but we're encouraged by what we're seeing in sales growth. There was an article in the Journal, I think it was Monday, that foot traffic in malls has increased 86% year-over-year for March. Although right - not yet to the ‘19 levels, that's encouraging for us, because we're seeing strong sales growth trends in April and hoping that continues going forward. It takes probably two or three months to - for those sales to become receivables. So, we're cautiously optimistic. But the offset to that is payment rates are still a bit high, and we're expecting them to moderate in the back end of the year. So, we expect receivables to be flat and probably exit the year with a little bit of growth, getting us into 2022 as we move forward. So, feel good about that.
Sanjay Sakhrani: Okay. And then I guess the Bread announcement, obviously you're making quite a bit of progress on Bread. And you talked about how you're looking to augment, or your partners are looking to augment Bread with other relationships that they have. I mean, is the goal to augment or supplant the others? And I'm curious what the Fiserv deal - is that exclusive, or do they offer other products as well?
Ralph Andretta: Yes. So, augment is pretty much our goal with our partners. And I do want to thank Apt2B for being our initial launch. And we are already seeing good activity there. And it really gave the team a chance to understand what's important to a partner, how to approach a partner, and how to execute in a defined period of time. So, really grateful to them for helping us out there. The relationship we have with Fiserv - so let me - so there's no confusion, we have two relationships with Fiserv. One is that we are outsourcing our technology stack to Fiserv, and that will be done in the middle of the 2022. That's completely exclusive to what we announced today. So we should just - they’re two different relationships. What we announced today is really differentiated from any of their other partners. We will be the only integrated provider for digital point-of-sale, physical point-of-sale, and we’ll be on their dashboard as we move forward, so - although they may have other providers that are referrals for their extensive merchant network.
Sanjay Sakhrani: And do they offer other buy now, pay later products to their merchants or no?
Ralph Andretta: Yes. They have one buy, now pay later, but I would categorize it as like a phonebook referral. It's kind of throw-over-the-fence, and we are the only - we have buy now, pay later and installment loan. So we're a full service provider to Fiserv, and integrated.
Sanjay Sakhrani: Got it. All right. Well, thank you guys. Appreciate it. You bet.
Operator: Your next question comes from the line of Robert Napoli with William Blair.
Robert Napoli: And (indiscernible) nice job on the quarter. I guess maybe on your Investor Day, you gave a little bit of a highlight. I was wondering if you could give a little more color on what you're looking to accomplish with your team and the outlook, but maybe a little more color on what you're looking to accomplish.
Ralph Andretta: Yes. I'm looking to accomplish two or three things on Investor Day. One is really to introduce what I consider a top notch team and one of the best in the industry. We’ve assembled a team of newcomers to Alliance Data and people that have been here (indiscernible). And we are - I'm excited for the investment community to meet the team. That said, I'm also excited for the investment community to see the things that this team has been doing in terms of products and digital innovation. So, we're really excited about that. Also, to be transparent about where we’re going over the next three years, what our financial metrics would be those are the things I'm hoping we accomplish in Investor Day. We’re really excited about it. We've been working hard on it (indiscernible) the investor community to do those things, demonstrate the competency of our team, (indiscernible) new products and services, and really good guidance over the next few years of where we're going.
Robert Napoli: Thank you. Got a question on online sales. I think - I mean, you said that online sales were 40%, I think. Is that up from a year ago? I mean, online sales have become a much bigger piece. Is ADS maintaining its share of online sales with its client base?
Ralph Andretta: Yes, it's very slightly up than a year ago, which I like, but again, it's slightly up of a bigger - of a flat pie. So we're happy with that. You can expect our online sales to increase going forward, particularly with the Bread integrations, everything we're doing on Bread. So you can expect that online sales number will grow as our total sales number will grow.
Tammy Mcconnaughey : Yes. And I would say Bob also, right, given (indiscernible) that certainly would be another reason that our digital sales were relatively stable year-over-year.
Robert Napoli: Thank you. And then just last question. I guess a little more color, I think on Bread, the RBC, the technology, I mean, is there a pipeline on the technology side in addition? And is the Fiserv relationship something that you think is going to drive material new business for Bread over the next couple of years?
Ralph Andretta: So, let me just the RBC first. So, the RBC relationship, to be clear, is a relationship that's really a technology and marketing fee, a recurring technology and marketing fee, as transactions are - occur, and we see good growth there. So, we don't carry that receivable. We get a fee, so there's less risk there, and we see growth there, and you'll see growth over the balance of this year. The Fiserv relationship can be very big for Bread and for us. Think of that network that Fiserv has, and integrating into that merchant network will be very, very advantageous for ADS and Bread. One of the - coming into this, one of the questions we got was, Bread did not have an extensive merchant network. Given - with Fiserv now, we really have that extensive merchant network that will be integrated into. So, we see really good opportunity there. 2021, we're going to be ramping up. Third quarter will be our first set of implementations, and then we'll see that grow as we exit the year and into 2022.
Robert Napoli: Thank you. Appreciate it.
Operator: Your next question comes from the line of Ryan Nash with Goldman Sachs.
Ryan Nash: Hey, good morning guys. Ralph, maybe I'll try one CEO question and one CFO question for you. So, maybe first on Fiserv, as a follow-up to what you just said, can you maybe just give us a sense for the size of the merchant base? And maybe as a follow-up to Sanjay’s question, how do you incentivize them to use your product relative to some of the others that are already being offered? And how do we maybe think about the ramp in revenue opportunity from this over the next few years?
Ralph Andretta: Yes. In terms of size, I can't give you a specific number, but it's extensive and one of the largest networks around, I think there's probably public domain information on size, so you can go and take a look, but it is an extensive network with an extensive sales force. So it's growing all the time. So we are really pleased with that size of the network. And in terms of revenue, in terms of using us in terms of a different partner, again, we offer both buy now, pay later and installment loan, and we will be the only integrated partner. So, it'll look like an extension of the merchant, rather than a punch out to a third party. We think that's particularly important to Fiserv, because it's an end-to-end transaction. So that's why certainly we believe we're differentiated from any of the other partners that are out there.
Ryan Nash: Got it. Maybe on loan yield, so we saw - as you highlighted, we saw sequential improvement, and I think you guys are targeting flat year-over-year. So, I was wondering just, where are we now on card related fees, just given the elevated payment rates that you're seeing? And maybe could we see some upside to the loan yield as we move back towards more normal credit trends? And as we look into next year, we could see both accelerating loan growth and improving loan yields? Thanks.
Ralph Andretta: Yes. So, I just switched seats. I think - a couple of things. I think our loan yield for 2021 will be steady, and we did have a grow over issue on fees in the first quarter to be fairly steady. Going into 2022, we'll have certainly incremental growth in receivables. We’re expecting revenue to grow. We can moderate expenses. So (indiscernible) a lot of operating leverage in 2022. Tammy, anything to add to that?
Tammy Mcconnaughey : No. I just think we'll continue - as you said, the second half of the year, we expect the payment rates to moderate, which means we expect that our yields will remain steady throughout the year.
Ryan Nash: Thanks for the color.
Operator: Your next question comes from the line of Darrin Peller with Wolfe Research.
Darrin Peller: Hey, guys. Thanks. Listen, when we look at the digital trends, it's great to hear the 40% now. First of all, I guess, if you can give us some color on how the growth rates are on the digital side as the world does reopen. I know the reopening in the physical side sounds like it’s going well, but the mix is obviously going to be an important factor in our view for the growth profile long-term. So, are we holding up from a growth rate standpoint? And then just on that sort of related topic, on the buy now, pay later, and digital strategy now with Fiserv, who's more global also. I mean, do you see this being an opportunity you can take from domestic and start moving with the Fiserv footprint across - especially given how much buy now, pay later is a popular method in places like Europe and other parts of the world?
Ralph Andretta: Yes. First on the digital growth rate, given our investment in digital, the enhanced digital suite, investment in digital acquisition, we certainly expect digital growth rate to grow. And I want to be clear to end. So it's not only acquisitions and sales. It's servicing. It’s collection. So we're looking at it from an end-to-end perspective, which will also contribute to positive operating leverage in 2022. In terms of Fiserv, I'm optimistic of what we could do with them, as that network grows and we could be - and we're integrated into that network, I see growth there, as you had mentioned. I think we’ll see that growth continue, but I'm really excited about the relationship, and as they grow, we'll grow alongside them.
Darrin Peller: Okay. When we think about the credit environment, obviously it's been notably stable, and you're showing that now with your reserves. You still have obviously high - relatively high allowance. Can you just touch again on what your thoughts are, maybe medium term to long term around credit deterioration potential on timing? What are your thoughts on the environment? When would you say that from a typical cyclical pattern, you'd expect things to change? And what should we - just remind us what we should think about in terms of targets as a percentage - yes, go ahead.
Ralph Andretta: I’m going to ask Tammy to answer that question, and I will jump in at the end, if it's appropriate.
Tammy Mcconnaughey : Yes, absolutely. So, right now our reserve rates are weighted towards the downside scenario. Certainly if positive trends continue, we believe we could see further relief. However, there are many factors to consider, and there are still many uncertainties, one being the health of the labor market, and just really given the unprecedented support in the system right now. We are confident in our loss rate guidance for the year, feel really good about coming in below 6% for the full year, and feel really good actually with the second quarter. Right now, I would tell you, as we look to close out April, we are really leaning towards the - I would say the bottom end of that guidance in the mid-five range. And certainly I think the question becomes all the uncertainties and when that actually potentially we could see an increase in delinquency levels. They will come up from here as consumers return to some normal payment behavior.
Ralph Andretta: Yes, I totally agree with Tammy. I think we're being prudent because this is unprecedented times. we're coming out of a pandemic, just trading the dollars as stimulus in the system. It's hard to tell what's going to happen. So, being prudent and keeping a sharp eye on it is I think the right thing to do.
Darrin Peller: Right. Makes sense. Thanks, guys.
Operator: Your next question comes from the line of Mihir Bhatia with Bank of America.
Mihir Bhatia: Hi. Good morning, and thank you for taking the questions. Maybe we could just start with Bread for a second. If you go back to Slide 7, maybe you can just talk about the economics of the various distribution models. Just from your perspective, the daily rank - I don't know if you want to rank order them, but at least maybe just talk about the opportunity sizes between the different models. You have three different ways you’re bidding Bread to the market. And I was just wondering in terms of just the economics to you, how they differ, particularly between the distribution and technology other than just interest that you'll get on the loans. Is there something else we should be keeping in mind?
Ralph Andretta: Yes. So I think a couple of things. We haven't dimensioned each model to the nth degree, but the direct acquisition model for us is a model that Bread is used to and we’re used to. So there - we complete the transaction, we get the receivable and we - the margins are good, and the losses are appropriate for the risk we're taking. For the technology platform model, the arrangement we have with RBC, that's clearly fees. And from that perspective, we get a recurring fee per transaction. There's less risk for us there. Obviously the margins on that would not be as great as holding the receivable. And then we certainly - and as we grow, we expect those fees to increase. And those fees - I think of those fees as no different than a network fee, than a fee that MasterCard or Visa or Discovery would get in term - or an American Express would get based on transactions. We get a fee per transaction. And then sales force out there signing merchants all the time, and we have a distribution relationship. We can continue to integrate end merchants and make that merchant network. We get transact - a gate - a transaction fee. We service the loan, and we get any other fees that would come with that, and interest on the loan. So, the margins are good there as well. And we repay Fiserv a fee, a bounty for the transaction. So each of them have good economics for us. I would say the margins on direct acquisition and distribution are probably healthier than the fees, but again, there's no risk with a fee option.
Mihir Bhatia: Right. Thank you. That's helpful. And then just wanted to ask about April trends. Have you seen credit sales now inflecting positively, and just any moderation in payment rates? I know some of your competitors have talked about that.
Ralph Andretta: Yes. So, again I'm going to refer back to the article that was in The Journal. We’re seeing incremental foot traffic in malls. And the consequence of that is, we're seeing greater sales in store. In terms of payment rates, there were fairly strong for April (indiscernible). Tammy.
Tammy Mcconnaughey : Yes. Actually, payment rates were very strong, as you can imagine at the beginning of April. We did see that start to moderate, I would say over the last week or so, but still elevated, but not to the degree that we saw at the beginning of April.
Mihir Bhatia: (Indiscernible) are marketing expense and redemptions coming back, or are redemptions more travel-weighted? So those will take a little bit longer travel recoveries? And relatedly, you mentioned $50 million in incremental marketing expense in the 2021 outlook section. That wasn't there last quarter. Is that new or was that always planned?
Ralph Andretta: As we exited - I'll address the marketing first. (Indiscernible) 2020 with the lockdown, spending money in store with merchants really wasn't economical or feasible at that time. And so, as stores open up and malls open up and there’s foot traffic, we’ve certainly targeted more marketing and not just in the store, but Omni-channel. So, we were certainly playing - we want them to come out of the pandemic strong, with marketing. So that's why you see that $50 million marketing increase. And to be clear, we can moderate that as the year goes on. So if there are - if there's changes in the economy, if there's changes in openings, we can moderate that. That's a flexible number for us. In terms of redemptions, redemption expense, that was down because LoyaltyOne’s revenue was down. So as revenue grows, that redemption expense would grow, but also would be grow - we would have positive margin.
Mihir Bhatia: Got it. Thank you.
Operator: Your next question comes from the line of Jeff Adelson with Morgan Stanley.
Jeff Adelson: Hi. Good morning, Ralph. So, I just wanted to - I know it's been asked a lot already, but I wanted to focus a little bit on the Fiserv opportunity again, but maybe asking it a different way. How are you thinking about the longer term opportunity about partnership relative to the kind of rolodex that Bread has with your existing card partners? Do you still really view the existing card partners as the primary growth engine for Bread, or is there really more of an attractive universe out there with Fiserv, just given their network?
Ralph Andretta: Yes, I think a couple of things. I think it's - the relationship with Fiserv is multi-year, and it will go - we get to follow that merchant network, irrespective if they’re partners for us or not. So really excited about that. In terms of integration to our partners, that's still primary for us because we're able to offer those partners a basket or a number of products. So, whether it's co-brand, buy now, pay later, installment loan, private label card, we're able to offer choice to our partners’ consumers. That's very powerful. Whereas as with the Fiserv relationship, we are integrated for a buy now pay later and installment loans. So there's growth opportunities there as well. At our investor conference on May 18th, we'll go into a little bit more depth on that, but we see good growth on both those vectors.
Jeff Adelson: Got it. And then just on the Bread conversions, I know you had that one with Apt2B, you've got a few more coming. But any sense of when we can expect maybe some more meaningful or sizeable partners launching? And maybe when do you think you’ll be get to get maybe like a quarter or half of your partners onto the platform? Is that a medium term, like year-end ‘22 type thing? Or is that - is there a chance that's closer?
Ralph Andretta: Well, we have 130 partners, so we've got some work to do, but I think you'll see some pickup in the second half of the year. I think you'll see us getting partners on in the second half of the year. And like I said, Apt2B was a proof of concept that we ca demonstrate we do things quickly. I guess the thing to remember is, Bread has only been part of the family for less than four months, and I think we've made some really good progress in that period of time.
Jeff Adelson: And then if I could just slip one more in. does your loan growth or receivable growth guidance incorporate any kind of widening of the credit box, or maybe how you guys high-level thinking about that as the year goes on?
Ralph Andretta: No, not really. I think we're comfortable where the credit box is. And again, going back to my - we're going to be prudent about risk management as we move forward.
Jeff Adelson: Got it. Thanks, Ralph.
Operator: . Your next question comes from the line of Dominick Gabriele with Oppenheimer.
Dominick Gabriele: Hey, thanks. Hey, good morning, and congrats. It’s such - that's really exciting news on Fiserv. I guess, when you think about the retail mix that you currently have of your partners, versus what this Fiserv opportunity could lead to, could you just talk about how your retail mix of industry partners could change over time?
Ralph Andretta: Sure. One of the things that we're very focused on, and especially coming out of the pandemic is risk concentration in soft retail and in malls, why we think there's certainly a future there. Having a diversified portfolio really helps us mitigate our risk. So having that - those Fiserv merchants across many verticals, having Bread across many verticals, thinking through those things, really mitigates our risk and gives us what I like to call a balance portfolio, of not only partners that are in different industries, but also different types of receivables. So, receivables that have high margin and a little more risk, receivables that have good margin and moderate risk, and fees that have good margin and no risk. So, we're really balancing and de-risking our revenue extremes, and Fiserv certainly contributes to that.
Dominick Gabriele: Absolutely. And then when we just think about this relationship, even more obviously historically from at least our calculations, the ISV portion of merchant acquiring is growing faster. It’s considered a faster vertical than overall merchant growth. And so, when you think about the opportunity within Fiserv space, can they flip a switch and you get added to their existing partnerships? Or are we really talking about as they grow their existing merchant base, you would be added into those, or the ones that kind of get churned upgraded to the new product? Thank you very much.
Ralph Andretta: So we are working hard to get integrated into Fiserv. So using our APIs, so in essence, it is flipping a switch. We’re hoping to be on their dashboard as well. So it is - once we get rolling, it's a pretty efficient, seamless implementation.
Tammy Mcconnaughey : Yes. And I think, Dominick, the other thing is that as you mentioned, as their business continues to grow, it opens up additional opportunities for us as well.
Dominick Gabriele: Absolutely. Maybe one more here. I guess, is there any chance that you could provide - I was just thinking about the yields. Is there any chance that you could provide the unpaid interest fee dollar amount, or give some color versus even like the fourth quarter, if it was up or down? I have a feeling it was down, and just wondering on the yield benefit quarter-over-quarter that that provided. Thanks so much.
Ralph Andretta: Yes. The thing I'll say about the yields, we were pleased that we had the yield growth, but - and lapping the late fees in the first quarter, but we expect yields to be just stable for the rest of the year.
Dominick Gabriele: Okay, perfect. Thanks for taking my questions and congrats on the quarter.
Operator: Your next question comes from the line of (Ming Jao) with Georgia Bank.
Unidentified Analyst: Hi, good morning guys. Thanks for taking my question. Most of my questions have been answered, but I wanted to ask you about the deposits. I think roughly it's now 31% of liabilities, while deposit cost has also sort of declined sequentially. How do you guys think about deposit growth going forward, and could you see continued decline in the costs there?
Ralph Andretta: Yes. I like our deposit growth. Certainly it helps us in funding. We have good yields on those deposits. We're competitive in the marketplace, and I view it as two things. One, it's a good way to gather customers to cross-sell to. And secondly, it's a good way to just - to help our funding costs. So we'll continue to be in the market for deposits.
Unidentified Analyst: Got you. Great. And then just secondly on applications, are you sort of also seeing an increase into applications just given the mall openings? Or is it still for the mix between digital and in-store?
Ralph Andretta: Yes. We're seeing an increase in applications as things open up. We certainly are. We made it easier in them - in store for applications with a QR code, go up to the sign, hit it with a QR code. So applications are much smoother in the store than they will be forced. So, it's not so much at point-of-sale waiting in line. It’s people can do that not at point-of-sale. So we're seeing that - we're seeing interest there ramp up as well.
Tammy Mcconnaughey : Yes, absolutely. When you look at the first quarter, certainly January and February were relatively low, but we really started to see the pickup in March. As the consumer confidence grew, as things started to open back up, we really started to see a nice improvement, which allowed us to get applications relatively flat year-over-year. And our new accounts were actually up as well. So, feel really good about the continued momentum, and we're continuing to see that as they move in and close out the month of April.
Ralph Andretta: Yes. Ming, on Slide 21, you can see a little more detail on that as well.
Unidentified Analyst: Perfect. Great. Thank you so much.
Operator: Your final question comes from the line of David Scharf with JMP Securities.
David Scharf: Morning, Ralph. Thanks for taking my question. Hey, we've obviously predictably focused on consumer confidence and re-engagement, and obviously everybody gauging the timing and trajectory of the light at the end of the tunnel for the consumer. I'm wondering, one of the things we haven't talked about as much in recent quarters, is the private label partner pipeline, and Petco obviously stood out as a notable addition. I'm wondering, over the course of the last year, have retailers sort of put decision making on hold, given all the uncertainty? And is that something that might open up? Just any more color on what the new partner pipeline might look like over the course of the next 12 months?
Ralph Andretta: Sure. And to answer your question, I think you've answered the question. Retailers have put their - those decisions on hold because like everybody else, they were trying to manage through the pandemic. So, some of those decisions have been put on hold. But in terms of our pipeline and renewables, I feel pretty good about it. So, we announced Torrid and Big Lots today to a multi-year renewal. I think it's critically important. We have a very robust pipeline for private label and co-brands, to be very Frank. So, that pipeline is continuous now. Retailers are looking towards the future and not worried about surviving the current. And so, we're seeing that open up quite a bit. But I think last quarter, we announced a couple of renewals. This quarter, we announced two big renewals with Torrid and Big Lots. The addition of Petco was very exciting for us. I think that card is going to be - I don't - I think people can't wait to get their paws on that card. It's going to be a great card, quite frankly. So, really excited about that new partnership and our existing partnerships. But you're right, it was on pause, but now it's jamming up a little bit.
David Scharf: Okay. No, good data. And then lastly, maybe just a quick clarification, once you get on the Bread kind of Fiserv, First Data partnership, when you refer to integrated, being the only integrated provider, does that also - is that primarily on a white label basis? Just trying to get a sense if this is going to dramatically increase the branding of Bread payments? Or is this on a white label basis, or could it be either for the merchant?
Ralph Andretta: I think it's either or. It depends. It depends on the merchant and how they want to integrate. So it's kind of an either or. But in any case, it'll certainly increase Bread’s merchant network and certainly and to a degree, increase the brand name as well.
David Scharf: Okay. Got it. Thank you.
Ralph Andretta: You bet. So listen, thank you all for joining the call today and your interest in Alliance Data. We really appreciate it. We remain focused on executing our plan and building for the future, and hoping that we see all of you on May 18th Investor Day. Everybody have a good rest of the day. Thank you.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
