Bread Financial Holdings, Inc. (BFH) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Alliance Data Systems Corporation Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Ms. Tiffany Louder with Investor Relations. Ma'am, the floor is yours.

Thank you, Josh. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; Tim King, Alliance Data's Chief Financial Officer; and Jeff Chesnut, Alliance Data's Treasurer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's recent release on the current impact of COVID-19 and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers may reference certain non-GAAP financial measures, which we believe will provide useful information for investors. If referenced, reconciliation of those measures to GAAP will be posted on the Investor Relations website at alliancedata.com. With that, I would like to turn the call over to Ralph Andretta. Ralph?

Thank you, Tiffany. Good afternoon. This is certainly a difficult time for our country, our businesses, our partners and our associates. I wanted to take this opportunity to provide an update on Alliance Data's business, focusing on 4 key topics on investors' minds: our liquidity and capital structure, loss rates, our view on the current retail environment and our business' longer-term viability. We will address these topics and then take some questions. First, I want to recognize and commend the tremendous efforts of our global leadership team and associates over the last several weeks. No one could have anticipated the magnitude of coronavirus and its still unfolding impacts. Our associates' health and safety remain our #1 priority, and I am proud of the significant measures implemented that have resulted in minimal disruption to our business and likewise, our partners and customers. Approximately 95% of our total workforce is now set up to work from home, and our technology infrastructure continues to perform well. From the recent price movement of our shares, it is apparent we need to clarify where we stand today and address the perception that circumstances are worse than they actually are. Alliance Data is financially sound and our business is fully operational. The one thing I would ask you to take away from this call is that we are in a stable position and we are focused on the future. I am confident that Alliance Data will weather this storm. Let's first look at Alliance Data's current liquidity profile. Today, we have $1 billion of immediate liquidity at the parent level between cash on hand and our revolver. We have a laddered maturity schedule for our approximately $3 billion of debt with our nearest maturity 3 years away and the next maturity 5 years out. So we have adequate time for the world to normalize before we have to focus on refinancing. Our toughest covenant requires staying below the 3.5x leverage. Our leverage ratio was 1.6x at year-end 2019, giving us substantial cushion. Now let's take a look at our existing cost structure. We have made considerable headway in managing expenses over this past year. Our annual interest expense is now expected to be approximately $100 million, which is down considerably given the recent rate cuts. Our corporate expense run rate for 2020 is $70 million annually, down from $165 million a year ago. In addition, there is $100 million of required amortization on our term loan so that current nondiscretionary cost to run our business is $270 million per year. As you know, we have a number of businesses that generate cash flow, including our banks, our customer servicing organizations and LoyaltyOne, which includes our AIR MILES coalition business in Canada, and our BrandLoyalty business in Europe. To provide an example of our stability on an adjusted EBITDA basis, our nonbank cash flows of approximately $400 million could decrease by 30% from last year's level and we would still meet our 2020 corporate overhead obligations without taking any additional actions. Even in a pressured environment, we would still have significant cash flow for the business to service our debt and satisfy our corporate expense. This scenario does not take into account the additional expense reduction measures underway and the ability to delay certain expenses to preserve capital. Now let's discuss our FDIC insured and regulated banks, where we maintain productive and ongoing dialogues with our regulators. The banks have $3.5 billion of equity capital and total risk-based capital was nearly 16% at year-end 2019. This places us well above the regulatory standard for a well-capitalized institution of 10% and provides significant breathing room. The banks also have the ability to fund their ongoing businesses through a variety of sources, including our traditional avenues as well as our recently launched retail deposit platform. Shifting to loss rates. Let me tell you how we approach and manage that risk. We continually stress test our business and in the current environment, we have taken this to another level. Looking back at 2009 during the financial crisis, our net loss rates were just over 9% on an annualized basis. The highest net charge-off rate we saw was 10% for exactly 2 months. We stress-tested our business with a sustained 10% loss rate for 12 months to see what the impact would be. In addition, we looked at a scenario in which our partners' credit sales dropped 25% for stress testing purposes. In all of these scenarios, we remained EBIT and cash flow positive and our liquidity remains sufficient. Like other issuers, we are helping our cardholders during this difficult time with forbearance programs. While this is the right thing to do, these programs will also help limit the number of card members who might otherwise charge off their balances. Our credit card portfolio is better positioned today from a risk standpoint than it was during the Great Recession. In 2009, we were 95% private label. We have diversified our portfolio. Private label is now 75% of our portfolio. 1/3 of our private label business is big-ticket, jewelry and furniture, where credit tends to be better, with the remaining 25% co-brand. The diversity helps us mitigate our exposure. Not only is our portfolio more diversified today, it is also healthier from a customer risk standpoint. Our underwriting standards have evolved over the past few years. As evidence, our average risk score has increased approximately 10 points. We have deployed dozens of new scoring models to further stratify our portfolio since the Great Recession. We have diversified our product types and now 25% of our portfolio is co-brand, which performs better in this environment. And the percentage of our portfolio that is prime has increased by approximately 4% since 2009. Given the product diversity and higher quality customers we have today, we view the peak levels of 2009 recession as a good stress test. However, we would not expect to reach those levels in the current environment. Now let's discuss a bit about the retail environment and its impact on our retail partners and the long-term viability of Alliance Data. Some investors believe a percentage of our retailers could go out of business and there is fear that sales will not return to the bricks and mortar. So let's discuss this a bit further. On retail trends, looking at outcomes and historical recovery rates related to past pandemics and similar global crises, full recoveries occurred once those events came to an end. During the period the outbreak spreads, retail spending steps down and stays down. In previous pandemics, after a period of 3 to 4 months, spending began to recover. We have seen history of both a steady recovery from the 2003 SARS outbreak in China and even a faster recovery following in South Korea after the 2015 MERS outbreak. In both cases, the market stabilized as the epidemic came to an end. This occurred in a matter of months, not years. Post-SARS, the strongest consumer spend recovery category was apparel, which benefited from relief spending for the 2 quarters following the outbreak. We believe there are parallels to the COVID-19 situation and likewise would expect similar recovery as the virus begins to temper. This is already beginning to happen in China now as the rate of the spread has drastically slowed down. We continue to monitor global analysts and consulting firms and other experts, some of whom are suggesting recovery could be well underway in the second half of this year. We've weathered similar market conditions before that put significant pressure on retailers. And what we've learned then applies now. In the event a retailer declares bankruptcy and closes their stores, our economics are not immediately impacted. First, we do not lend to the retailer. We lend to the customer or cardholder. So we do not lose money when a retailer files for bankruptcy. The customer remains the responsible party and continues to pay the bill. Second, the wind-down period generally remains profitable for us. We do not have to compensate our retail partner during this period. Consequently, during the wind-down period, our cash flow improves given no new payments to the partner nor any marketing or acquisition efforts required. Lastly, during the wind-down period, there are no new purchases, which helps near-term profitability. The balances that remain are typically those that are paid over time rather than those that pay off immediately. Of course, in any given year, a retailer can fail, that's why we continue to develop and expand our prospect pipeline to replace volumes and activity. We have worked hard to move our business towards more durable partners and categories like beauty and home furnishings, and we plan to target additional categories and more co-brand opportunities. In fact, we recently re-signed several partners to multiyear deals. And now turning to Alliance Data's business viability. While performance in January and February this year showed positive momentum over 2009, the company observed some softness in volume in mid-March and that continues to accelerate. That said, our co-brand volume grew double digits, but we expect that to abate as well. Although our private label business has significantly softened, we have seen a shift to online. For the first week of March, online sales were 32% of total brand partner sales, and this increased to 46% for this past week. We continue to see positive results from our digital marketing efforts. Based on historical trends, we expect pent-up demand to be significant when things normalize. We believe this consumer purchase activity is delayed but not lost. So what are we doing now? We are focusing on what's within our control, and that includes looking for additional efficiencies and investing wisely in our business. We have taken actions to reduce our expense base by $200 million across our businesses over the last 12 months, and we're seeing the benefit of $150 million of that flow through our P&L in 2020. We believe there is more. I joined just 45 days ago with a fresh set of eyes and set some additional goals and targets for cost reduction and savings. The Alliance Data leadership team has proven to be terrific in executing on earlier goals and recent events have certainly accelerated our time line on newer goals. Although early days, we see the potential to reduce expenses by another $100 million or more over the next 12 to 18 months, increasing our profitability while maintaining our service levels and investing for the future. There are several areas of focus: purchasing power leverage, reduction of cost to serve partners and customers, technology development efficiencies and our real estate footprint. A quick review indicated that consolidation and renegotiating of specific vendor contracts would yield expense benefits. We are in the process of pursuing several opportunities in this area. Actions are underway to reduce our cost to serve our customers. Areas of focus include a move towards digital self-servicing, standardizing service level agreements, improved workforce scheduling and the correct balance of onshore and offshore servicing. We are focused on reducing our technology development through partnering with third parties and a move towards agile development. We are focused on reducing -- I'm sorry, excuse me, lastly, as a result of our previous expense containment efforts and reductions in force, we have the opportunity to reduce our space requirements and investments in real estate. For example, we have announced the closure of one of our Columbus call centers and are relocating those associates to our headquarters. We closed our Cincinnati site and shifted those associates to work from home. We are actively working on subletting half of our Denver facility. Through these actions and further retail rationalization, we plan to move our overall occupancy to 90% over the next 18 months. I have had the honor of managing large organizations through economic crises like 9/11 and the Great Recession. While it's important to find efficiencies during the crisis, it is also important to invest wisely to emerge stronger when business returns to normal. The plan is not different at Alliance Data. We will continue to strategically invest in data and analytics, improve recession readiness capabilities and additional customer-facing products and capabilities. We are in the process of reviewing whether to buy, build or partner, and we'll continue to evaluate the most effective go-forward strategy. Make no mistake, this is a moment in time, not a new norm. Our management team is laser-focused on getting through this volatility in the near term while keeping strategically aligned on our go-forward plan, which we expect to announce later this year. In summary, we have adequate liquidity to withstand the current environment. We have stressed our business using 2009 data and a 25% drop in sales, and we remain profitable, benefiting from cost savings across actions from last year and have additional levers to pull to increase profitability. We are focused on navigating through this crisis, and we are thoughtfully investing in the future. When we collectively work through the next few months, we believe consumers will begin to shop and spend again. We will be ready to help our partners adapt because that's what we've done throughout our history. As a final thought, Alliance Data has been around for a long time, and the company has emerged from each of prior crises a leaner, stronger competitor. This one will be no different. We look forward to giving you a further update at the time of our first quarter earnings call on April 23. With that, I want to say thank you, and I'll have the operator open the line for Q&As for Tim, Jeff and myself.

[Operator Instructions] Your first question comes from Sanjay Sakhrani with KBW.

I guess one of the questions I have and I get from investors is holdco tangible capital. Can you help us think about the discussions you're having with bank regulators around holdco capital levels and whether or not you guys would expect any moratorium on dividending up capital to the holding company?

Sanjay, it's Tim, good question. Clearly, early in that process with the regulation about what the ILC that we own and what type of different stipulations the regulators would put for the holdco. I'll tell you what won't change, of course, is our commitment to making sure our banks are well capitalized, are run in a safe and sound manner. And certainly, no dividend would come up if we don't pass that, but we feel very, very comfortable about the capital and liquidity position that the banks have. So obviously pretty early, but at this point, we don't think that's going to affect our cash flows in any form or fashion.

Okay. And then just a follow-up on the commentary around loss rates and the previous financial crisis levels. Could you just put that with some of the expectations that the unemployment rate could be materially higher than the last recession? I guess how do we get to a point where your profitability remains comparable to last time and the losses don't exceed those levels?

Yes, Sanjay, the way I think about it is, it depends on the spike in the unemployment rate. Like this spike is going to be very high quickly but given the 2 to 3 months we think it will take to abate, you'll see that spike reduce quickly. Where in the last recession, in the Great Recession, we saw that as a gradual increase in unemployment rather than a stark increase and it came down. It rose gradually and came down gradually, which extended the losses. Here, we think it's going to be a spike and then it's going to come down. And that's why I don't believe the loss rates will be any higher than the last recession.

And can you just, sorry, one last follow-up. You're able to participate in all of these programs that the Fed is putting out in terms of workouts as well as loss assurances and such. Can you just talk about that?

Sure. So there's a couple of number of the different hardship programs we're looking at, some of them that are obviously very prescriptive as to what we're being asked to do as well as some of the different programs, some of them about not reporting, reporting. So for instance, we'll put in a hardship program that's a 3-month and a 6-month program. We'll do a 1-month delay programs. Those are programs that most likely we will not have to put them into our hardship programs. Of course, we're going to continue to offer the hardship programs, the TDRs that you see us disclose. So there's a number of programs we're looking at and obviously, trying to make sure that we do the best thing for the customer we possibly can.

Your next question comes from the line of Bob Napoli with William Blair.

I guess, Ralph, when I think back to the 2008, 2009, and I think at 10% charge-off, the company was still nicely profitable. But I mean, I guess what happens if, I mean, I don't think any of us have seen, I mean I know you can look at SARS and other pandemics in other countries, but we just have never seen -- we don't know what this is going to be. If it is more prolonged, how do you manage the business? And I guess you would lean more on government programs, the whole industry would. We're not talking about just ADS here. But what if this is more prolonged? I mean we all hope it's as you suggested.

Yes, I hope it's not prolonged as well, but I think a couple of things. We're taking this week-by-week and day-by-day, but we are seeing a shift towards more online sales. And I think that as this gets prolonged, we'll see that pent-up demand go to online. Now that said, we've seen over the last couple of weeks, we have seen a decrease in sales, but strengthening in online. From that perspective, I think that would be where I would look for increased sales. I don't think sales will get to 0. It didn't happen in 2009. I don't think that will happen given the diversity of our portfolio. So I don't anticipate that from that perspective. Given the programs we have in place and what I'm seeing in payment rates, I think our customers are continuing to be responsive to their obligations. I think that will continue. So from that perspective, I think our cash flow will continue to be strong. We may suffer at the back end of the year, but I don't anticipate that our sales will diminish to a point where we can't operate.

Yes. Bob, I'd just add to that. Bob, I'd add, we clearly stressed our P&L out for a full year at a 10% loss rate.

And at 25% sales loss for the full year.

So a fairly egregious drop. We clearly don't think that's what's going to happen, but obviously, we have the responsibility to make sure that we look at a scenario that's that draconian. If it extends further, of course, we'll look at that, but the big driver is going to be that huge loss rate. If it starts dropping below the 9%, we go back to very profitable quickly.

And do you expect the loan portfolio to decline from here? I would imagine in this kind of environment that you might see some steady drop across the industry, not just at ADS.

Yes. I think we'll see some ANR decline. Just in the softness of sales you're going to see an ANR decline. If people continue to pay off regularly, you would, by definition, see ANR decline across the industry.

And Bob, I'll add to that which is, it's going to be, as you model that out, depending on how much that drops, that actually might increase our profitability because we'll get the provision release as opposed to provision build.

Great. And then just last question. Are you seeing any changes out of the Canadian business, out of the loyalty business? I mean that business does generate a decent amount of cash flow historically anyway.

Yes. I think a couple of things. So certainly, we're seeing people put the brakes on travel, as you would imagine. And if you think about that from a cash flow perspective, that's a good thing because travel is a high cost redemption. So you'll see people put the brakes on travel. But what we haven't seen from a spending perspective is a big pullback again because that business is gas and groceries and everyday spend. That's where people are spending their money on now. So less redemptions, less high cost redemptions and stable sales, our cash flow would be equal or better.

Your next question comes from Andrew Jeffrey with SunTrust.

Maybe following up on Bob's question, I guess, philosophically, is this an environment in which you want to try to grow? And I'm thinking about just quality of incremental credit, the underwriting changed. We know these external factors you can't control, but as you look at perhaps new applications coming in over the transom and there are obviously some consumers who are going to continue to spend and want credit. I mean do you tighten down the screws at this point or how do you think about that from a capital and growth standpoint? How do you balance those things?

Yes. So we haven't yet changed our underwriting criteria. Our underwriting criteria really is the same. Now that said, we're seeing less applications through the door just by design because places are -- obviously, the brick-and-mortars are closed and we're seeing some online applications. We haven't yet changed our underwriting criteria. We haven't loosened it and we haven't tightened it. So we're still in early days and seeing what's come through the door in March. That said, certainly, we've seen an increase in our co-brand portfolio sales, and that's where the lines are a bit bigger because the credits are a bit better. So from that perspective, we've seen people utilize their lines a little bit more. And we've not seen any stress in that portfolio from a payments perspective, yet, again, early days. But we haven't done anything to really -- at this point, again, early days, 2, 3 weeks, that kind of change our underwriting criteria dramatically.

Okay. And Tim, maybe for you, if I think about forbearance and going back to Harvey, which I feel like a little bit of a microcosm of perhaps what we're going to see. How do you envision that? I mean it might be one of those things where losses don't spike because you've offered this forbearance, but delinquencies become more protracted and we should be thinking about a multi-quarter period of reaging and losses just get spread and it impairs growth. I mean is that a dynamic that just -- how are you going to manage that as you think about it? I know it's early days but just...

Yes. And I'm glad you asked the question because I don't think I gave the justice and the color when Sanjay asked it. There's a couple different forbearance programs we are putting in place or have put into place. So we'll take one of the forbearance programs where we just keep people current for a month. So they're current now and we just don't ask for a payment. A lot of people, as they're calling in right now, that's been a very popular choice because they think they'll be back in a position a month from now. We wouldn't have gotten a late fee from them before. We're not going to get a late fee from here. We get the finance charges. We just hold them. In that case, actually, it's going to increase our finance charges, have no bearance -- no bearing on our late fees. If we go to something where we give them a 3- or a 6-month term, you're going to have obviously less of my finance charges. You will have -- you hold them in a bucket on the delinquency. And so obviously, we're concerned about what happens in the back end of that. I can't -- I haven't modeled that yet. We don't know what the take rates are going to be. But if they take the short-term forbearance programs of 3 or 6 months, there will be some fee give up. If they take the very, very short, 1 month, we actually should benefit. And if they roll into some of our larger programs at 12 months, it will be pretty much as we expect. We do know what that looks like.

Right. And I would say just anecdotally, again, early days, but some of the feedback we've gotten from customers on our phones is that they don't want a 12-month program. They want to skew towards a shorter program because they think that's more reasonable to indicative of what's going on now.

Okay. Hopefully that remains the case.

Your next question comes from Darrin Peller with Wolfe Research.

Just the real question is just, when we think about a bottoms-up analysis on each of your meaningful-sized clients, your merchants, how much thought should we be considering, like what percentage of your book of loans should we be considering in terms of possibly having previously been considered at risk that this could potentially put them over the edge. We're just trying to figure out what percentage of the portfolio really is at risk. I think you've already done a good job outlining your liquidity and your cash flow even in very draconian scenarios, but any further thought would be helpful.

Yes. We haven't -- Darrin, thanks for the question. We haven't gone back to look at what's happened over the last 1.5 weeks. I will tell you, prior to March 1, we saw no increase in pressure in the percent of our book that was at risk. But we haven't seen the manifestation really since about the 13th of March is when the wheels really came off. And so we have not gone back to looking through what that's done and what type of ability to withstand that. So it's an ongoing. As we get better color to that, certainly, we'll share, but we don't know what it's going to look like because it really is just 1.5 weeks.

Yes. Our partner teams are always in literally constant contact with our brands. And I don't think anybody has raised a flag yet in terms of going over the edge. Again, early days, so we haven't seen that. We're in pretty much contact daily.

Okay. And just a quick follow-up. When you guys think about pricing in an environment that's stressed, I mean oftentimes, pricing is used to offset greater risk. I mean is that still even in a shocking environment like we're now is like sort of a lever that can be pulled? And maybe just remind us on the asset sensitivity versus liability sensitivity your book as well?

Yes. So the first question is, can we price for risk? And the answer, of course, we can price for risk. But again, we're 1.5 weeks of it. By the time you start going back to an acquisition, our acquisitions obviously are down very, very dramatically. You don't have any stores. You don't have any acquisition. So there's not a lot of opportunity for us to right price new acquisition. Of course, we'll start looking at the overall book of business. We're doing that now as far as there's any type of repricing that we need to do. If you go look at the asset sensitivity, I'll just do it in kind of a layman's term, which is -- about 70%, 80% of our book is variable rate. On the asset side, about 50% of our book is variable rate. And as you get out to 6 months, you start rolling. So by the time you get to about 9 months, you got about 75% of your liabilities will reset.

Yes. I think just a word on that. In terms of pricing for risk, I think we do adequately price for risk now. I think a knee-jerk reaction to repricing in a crisis would not be really customer-centric and we'll hope it would be looked on efficiently at this point.

Your next question comes from Ryan Cary with Bank of America.

I want to start and ask how you're thinking about the full year guide that you have in the market. And I apologize if I missed it, but I don't believe you formally addressed it or pulled in. So should we still be thinking of growth in these ranges as the right ZIP code or it's just too difficult to tell right now with all the uncertainty in the market?

I'm going to let Tim answer that.

Yes. So obviously, we're looking at all of our guidance, our growth guidance as far as the revenue and to the expectation we set on AR, but we'll do that on the earnings call, Ryan, it's just too early to tell.

Makes sense. And that's fair. I just want to kind of ask you upfront just if you have a sense of that. And so for my follow-up, I was hoping you could talk a little bit more about how on average, how the revenue and profit sharing agreements are impacted. And I know you mentioned in the event a retailer goes out of business, you're no longer responsible for these payments. Is there anything you can provide on the impact of these arrangements given a likely materially slower spending environment going forward?

Yes. So we have a number of different arrangements with our retailers. In some cases, there is no revenue share at all. There are some cases where there are revenue share. We don't disclose what portion of our book has a revenue share as opposed to different type of compensation to our partner. Those cases where we do have a revenue share, of course, they are risk-adjusted, meaning that the charge-off runs through that. If charge-offs were to spike, then we'd expect...

We'd expect it to decrease.

Yes. But we haven't disclosed that.

Your next question comes from Ryan Nash with Goldman Sachs.

I had 2 questions. Ralph, first, maybe can we start with your thoughts on just capital allocation. I know, obviously, this is all quick and early and we're in probably in capital preservation mode right now. But if you look in the market, clearly, there's been concern about the leverage of the company and your bonds have been trading at steep discounts relative to their par value. So I know we're still early in this. But if your forecast proves to be correct and this is a 2 to 3-month time, can you maybe just talk about how you think about capital allocation and uses of capital? And is it your goal to further deleverage the company? I have a follow-up.

Yes. I think a couple of things. I think about it this way. First, I want to invest in the business and come out of this strong. Second, I do want to pay down the debt, right? I think that's an important thing to do, to pay down our debt. I do want to preserve the dividend. And lastly, it would be repurchase stock. So that's how I would rank. If I had to look at use of capital, that's how I would rank use of capital and being very thoughtful across those categories.

Got it. And maybe coming back to some of the hardship programs that have been put in place. If you think about some of these programs historically, whether it was through past things like the hurricanes and the like, what historically have these things meant for the ultimate loss content? And what are really the major factors that influence it?

Yes. There's a couple of things that obviously going to affect it. And I'm going to talk more in this environment as opposed to hurricane environment. Clearly, if I have somebody we put in a 1-month program that comes out of it after a month, we start recovering. In 2 months from now, these people will pay us off. It will have no impact. When we start getting them out into a 6-month program and this recession lasts longer, then I would expect a lot of the people, and I'll come back and quantify that later because we have not run it yet. If you put in a longer program, that will materially impact our charge-off rate. And what it will do is just delay that charge-off rate by 6 months. I put them in a hardship program for 6 months. They come out. They start rolling through that. Basically, if they were going to charge off before, they'll roll off after. So in essence what you do is you take your charge-off. Instead of having a big peak in 6 months from now, you end up having -- instead of a big peak, a less severe charge-off, but for a longer period of time because of the hardship programs.

Your next question comes from David Scharf with JMP Securities.

And hopefully, Ralph, you and your family are staying safe. A couple of questions. One staying on the forbearance. I'm curious in very near term what some of your thoughts are on just customer outreach, delinquency management. We've seen a couple of states suspend collections efforts and state-owned debt and some political pressure in some of those states to have private collectors halt activities. Moving beyond the numbers, do you have any thoughts about whether we may see a little more extended potential moratorium on collection activities? And in addition, whether from a recovery standpoint, because I'm not sure what ultimately your gross charge-off assumptions are and your sensitivity, do you think you'll resort more to charge-off sales versus recovery activity?

Like I said, it's too early to tell. I think a couple of things. We have a pretty structured sales program that we would continue to leverage. I mean to me, my first and foremost protocol is collections. I do want to collect and recover rather than just kind of write-off the debt and get pennies on the dollar. To me, it's more of a matter of collecting those receivables. And that's where I would probably put my energy as we move forward. I think the outreach from customers has been good. It's been -- they're calling us to ask us how they could get into a program that suits them. And I like that rather than them being silent. That works for us rather than us having to call them. We're getting a good response from our customers. In terms of suspension, we go by -- when a disaster area is declared by FEMA, we abide by those rules. We haven't seen anything out there that is draconian at this point. But again, early days and every day, there's a new twist or a turn. But to me, I put my emphasis on collections because if you do flood the market with asset sales, the price is going to go down anyway. So you're going to get less pennies on the dollar.

Right, right. Got it. And then one last question just on sort of your modeling. I'm wondering on the draconian assumption of a 25% reduction in retail sales for a year. More than just a mathematical input, I would imagine that kind of assumption has certain implications about how many retailers actually survive. I mean does your modeling in that scenario factor in retail bankruptcies as well going forward?

It does. It does by rote. And by that, I mean, we obviously had to run very quickly. Again, the sales started dropping out dramatically back in the 13th and the 14th of the month. And we quickly, right before that, were running the business where we have not had a chance to go back and say, retailer A goes bankrupt, retailer B does not. But you don't get down 25% on a 12-month period without losing a significant number of your retailers.

Your last question comes from Tim Willi with Wells Fargo.

I apologize if this question was asked. I was a bit distracted earlier in the call. But given the move with the Fed and all the cuts they've made, if I remember correctly, in prior years, there was sort of the asset-sensitive side of the balance sheet. And again, I know it was a bit of a lag. Is that anything you can address on this call just sort of in terms of your thoughts around the balance sheet and the rate environment?

Sure. So Tim, are you talking specifically how much the 25 basis points would cost us on the P&L?

Yes, I'm talking about the credit card receivables, which I think are tied to Fed funds/prime rate in terms of their yield, which would imply, I guess, over the next 12-plus months, there'd be some drop in yield because of the Fed actions?

Yes. I would just use to be conservative, call it, 70%, 80% of our assets are 100% variable rate. And so obviously, a 25 basis point, as you factor that through, by the time you take it all the way through, if I get that drop on Day 1 of the year, it costs us about so $0.40 to $0.50 in our EPS. The later that happens in the year, the less that has an impact on us.

And is that net of any benefit you would get on the funding side when you sort of talk about that EPS number?

Yes. 100% net for my funding costs, my timing of my funding, looking at that. So again, the later in the year, for instance, if we get a Fed rate drop in October, almost no effect on us at all. So I'm quoting a number that happens on January 1.

That is all the time we have for questions. I'll turn the call back to management for any closing remarks.

No, thank you. I certainly appreciate you all dialing in from wherever you are. I can assure you, Tim and I, we're 6 feet apart even though we're in the same room. And I appreciate the continued interest in Alliance Data. Everybody stay safe and have a good day.

This concludes today's conference call. Thank you for joining. You may now disconnect.