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

Great. Up next, we are pleased to have Alliance Data joining us once again. Since taking over as CEO earlier this year, Ralph has worked to reposition the company by enhancing growth verticals, managing costs, restructuring its debt and, more recently, completing what could be an important acquisition for the company in Bread as it looks to enhance its private label and co-branded offerings with installment lending and buy now, pay later capabilities. As I mentioned, joining us from ADS is CEO, Ralph Andretta. Also joining him is Chief Commercial Officer, Val Greer. We are going to have a short presentation, followed by Q&A, in which CFO, Tim King, will be joining us for. So with that, I'm going to pass it over to Ralph and Val for their opening -- to get through some slides.

Hey, Ryan, thank you, and thank you all for joining today. We're excited to be here with you, albeit virtually. Some of the agenda, on Page 3. I'll be giving a brief overview of the company, highlight our strategic actions and provide an update on the fourth quarter 2020. Then I'll turn it over to our Chief Commercial Officer, Val Greer, who will discuss our go-to-market strategy in the Card Services business. After our prepared remarks, Tim King, our CFO, will join Val, me -- and me for a fireside chat with Ryan. Slide 4 provides an overview of the company. Alliance Data consists of 2 segments, Card Services and LoyaltyOne. Card Services provides payment solutions, supported by data and analytics and our digital capabilities. Our current portfolio is approximately 40% private label, 30% big ticket private label and 30% co-brand. We'll be adding to this product mix, as a result of the completion of the Bread acquisition last Thursday, further expanding our digital capabilities with buy now, pay later and installment lending. We also announced an agreement with Fiserv to leverage their highly flexible, scalable credit processing platform to benefit our brand partners and card members. The Card Services business represents over 80% of the company's total revenue. LoyaltyOne includes 2 businesses: the AIR MILES rewards program, a coalition loyalty program, representing one of the largest and most recognized loyalty programs in Canada; and BrandLoyalty, which focuses on loyalty programs with grocery stores throughout the world. Each of the businesses continues to adapt to the current environment and are performing well given the challenges over the past year. We remain confident in our strategic direction and are focused on driving long-term sustainable shareholder value. On Slide 5, as I introduced on our third quarter earnings call, we developed our recover, rebuild and regrow action plan as an output of our 3-year strategy. The recover components are mostly behind us, and our efforts to rebuild and regrow are on track. Our rebuilding action items include expanding our digital offerings and upgrading platform speed, flexibility and technologies. Our growth will be supported by our regrow strategic initiative, which include focused investments, especially in digital enhancements and operational and product efficiencies. Our actions will position us for sustained, profitable long-term growth. On Slide 6, we provide an update on the improving trend in credit sales in our Card Services business. While down year-over-year, we are seeing continued, gradual recovery in credit sales. We currently expect this trend to continue at a modest pace until we lap the initial pandemic impact in the second quarter of 2021. Card members continue to use an omnichannel spend approach, with year-over-year online credit sales per day continuing to grow, up 12% in November versus the prior year. We saw holiday credit sales being pulled forward in November, with less of an emphasis on the Black Friday weekend. In spite of the reduced foot traffic over Black Friday weekend, those who shopped spent more. Beauty has had a good holiday season, with strong online adoption and Cyber Monday performance. In the days since Cyber Monday, we have seen improved holiday sales across our channels, which is encouraging. The bottom chart shows our year-over-year new account volume. Account openings are recovering from the pandemic lows, but it is choppy. The combined impact of moderate sales growth and sluggish new account acquisitions in 2020 will result in headwinds for Card Services and receivables growth in 2021. Let's turn to Slide 7, and I'll provide a quick update on the fourth quarter based on what we've seen to date, and then I will review our strategic initiatives going forward. As shown on the previous slide, we expect fourth quarter 2020 year-over-year credit sales to remain down and to continue to gradually improve each quarter on a year-over-year basis. We expect the Card Services accounts receivable average balance to be up sequentially in the fourth quarter due to normal holiday seasonality and then down sequentially in the second and third -- in the first and second quarter of 2021, as is typical as the holiday balances roll off. We remain cautiously optimistic on the future but are prepared for potential uneven gradual economic recovery. As Tim mentioned on our third quarter earnings call, card gross yields are expected to remain consistent throughout the fourth quarter. Let me turn to operating expenses. Total operating expenses, excluding loan loss provision expense, are expected to increase sequentially, driven by the normal seasonal increase in marketing investments of approximately $50 million as well as approximately $50 million onetime noncash charges related to the ongoing optimization of our real estate footprint. Given our previously referenced cautious optimism regarding our outlook and the positive vaccine news, we remain comfortable with our investment ramp in 2021, which is focused on digital technology enhancements and marketing to drive future growth of the company. We would also expect expenses in 2021 related to the integration of Bread and the work to prepare for our transition to Fiserv. Our card credit metrics remain in line with our expectations for the fourth quarter. Note that the monthly figures will show some volatility due to the timing impact of our pandemic-related customer relief programs provided earlier this year. Given the proactive, prudent risk management actions we took in 2020, including the relief programs and our focused collection efforts, all loss metrics going forward may be better than we had previously anticipated. The bottom of this slide highlights our 4 key strategic initiatives. We are opportunistically investing in these strategic areas. We are leveraging our technology as a strategic advantage, with continued innovation and a focus on reducing our cost to serve. As evidenced by our recent announcements of Fiserv and Bread, we are continuing to diversify and develop our product offerings to provide our [ card members ] a full suite of payment solutions. Digital advancement remains at the forefront of our development framework. Finally, our data science and analytics capabilities and insights remain a key strategic advantage and will continue to drive efficiencies and effectiveness for our business operations as well as for our partners. I will now turn it over to Val Greer, our Chief Commercial Officer. Val is an accomplished professional, with more than 25 years of experience in the financial services industry. We are pleased to have her on our team and excited by the focus and experience she brings to our Card Services businesses. Val?

Great. Thank you, Ralph, and hello, everyone. Moving to Page 9. Core to our business is how we manage, engage and grow our brand partnership. We're taking a more thoughtful and strategic approach to how we manage our Card Services portfolio to optimize growth, profitability, resources and investments. The graphic at the top of the slide illustrates our change from what has historically been an AR tier-based strategy to a more strategic framework based on performance and opportunity. Portfolios in the growth quadrant represent strong partners and growth verticals with attractive returns. We will invest and shift resources to support these partners and build these thriving relationships. In the invest quadrant, we'll diversify and grow revenue streams by introducing new products and capabilities, driving incremental sales and capturing a larger share of the point-of-sale transaction. For maintain portfolios, we'll enact measures to protect and optimize profitability. And for our improve and deprioritize, we'll look to scale down resource support and marketing spend. We are focused on partnering with companies that have a shared interest in driving sustainable, profitable growth for mutual success. And we are investing in our partnerships with talent and resources, evolving from a relationship model to a general manager model. As a general manager, there is clear accountability for growth, profitability and health of a relationship to ensure long-term retention. We're providing more detailed and granular metrics and analytics to better deliver actionable insights to our brand and set internal targets to ensure we meet our long-term performance objectives. Turning to Slide 10. I want to highlight the product and technology enhancements we have made to improve our client experience and drive growth. Bread, which I'll discuss in more detail shortly, has been an ideal partner to strengthen the expansion of our verticals and the addressable market of small- and medium-sized merchants while, at the same time, providing our existing partners with a broader product suite and white label product solutions. Through our recently announced strategic agreement with Fiserv, we will improve our brand partner conversions and speed to market, including quickly and seamlessly adding new products and capabilities that benefit our partners and our card members. The platform enables efficient integration, use of mobile wallet while supporting our data and analytic capabilities and improving our operational efficiencies. Also during the third quarter, we announced the launch of our Enhanced Digital Suite. This digital application helps our brand partners capitalize on the accelerated growth of e-commerce. The Enhanced Digital Suite promotes credit payment options earlier in the shopping experience, prescreens customers in real time, allows for immediate credit approval and checkout. This creates a seamless process for customers to adopt, apply for and use our payment options. Several of our brands are now leveraging our patented frictionless capabilities across all channels to drive easy applications, including QR code text and apply functionality as well as dynamic real-time offer messaging that brings payment offers to the forefront of the customer shopping journey. We further support our offerings with enhanced digital marketing and payment tools. And combined, we expect these offerings to bring through more qualified applicants, a higher average purchase value and a higher credit sales conversion rate, making our suite of services more valuable to our brand partners. As Ralph mentioned earlier, we continue to see improving growth from our digital channels, and we would expect this trend to continue as our partners take advantage of our digital solutions. Our Comenity proprietary offerings include our newly launched proprietary credit card, the Comenity Card. This new general purpose cash-back card has exceeded our early expectations. We're currently offering the card to select customers and seeing strong activation rates, early engagement and cross-category shopping, especially among millennials. In the situation where a partner leaves or is having financial troubles, we can strategically offer the Comenity Card to retain card member relationships and drive increased credit sales. For our Comenity online deposit products, we are increasing our targeted marketing activity to unlock a new customer base and grow this diversified funding source, which has expanded since its launch. If you move to Page 11. The acquisition of Bread was an efficient way to expand our offerings and gain access to a broader audience and younger customer demographics. Bread's fintech platform advances our digital capabilities and offerings. And we are also excited to add Bread's talented group of employees, many of whom are specialized technology and product engineers. These new Alliance Data associates bolster our agility, fintech knowledge and skill sets to support the innovation and development of new and expanded payment solutions. We're creating a new innovation hub in New York to drive digital advancements throughout the organization. The deal jump-starts our ability to offer buy now, pay later and installment products to our brand partners. We're bringing additional opportunities to leverage and offer our core products to those partners. We are actively talking to our brand partners to incorporate these new options into their suite of product offerings to drive incremental sales and capture a larger share of point-of-sale transactions. Alliance Data will be uniquely positioned to provide a branded, full-spectrum payment suite for our partners. We can offer new prospects a differentiated white label product offering across buy now, pay later, private label, installment lending and co-brand. Bread's product strategy will be seamlessly enabled through our Enhanced Digital Suite, allowing product presentation flexibility and quick onboarding and integration. I'm excited for the future, the opportunity for Card Services business to grow profitably. Ryan, I think we're now ready for the fireside chat portion of the call.

Great. Can everyone hear me?

Yes.

Awesome. Ralph, Val, thank you for the remarks. And maybe we can dig in. Ralph, maybe just to start off, big picture, as you survey the landscape right now, just given everything that's gone on with the company over the past 2 years, maybe just talk about where you and the Board are focused for 2021.

Sure, Ryan. I think as bad the pandemic has been, there's a bit of a silver lining for us in terms of 3 things. One, it kind of highlighted where our weaknesses were, and we have to really get on top of that. I think we've done a good job of that in 2020. Second, it really battle tested my leadership team and identified areas where I needed to strengthen that and to clearly -- Val brings an enormous amount of experience to my leadership team and is somebody that drive profitability for the future. And third, it really shows where opportunities were and our gaps. And then Bread being one of them and our partnership with Fiserv. So it accelerated our thinking on how we're going to position ourselves going forward. So I'm pleased with where we are as we enter 2021. We put a lot of the -- some baggage behind us, and we'll continue to do that. I'm very pleased with the Board. I mean the Board has been very, very supportive. The Board has changed amidst this pandemic. And we've swapped out our Board. So we had a Board that I would categorize earlier as demanding. And now we have a Board I would characterize as challenging and engaging. The Board has some new members, one of which is John Gerspach, the former CFO of Citi. He'd been very helpful to me as we moved through this changing organization. And Roger Ballou, who's our new -- our Chairman, who has an enormous amount of operational experience from American Express and other consumer brands. So they're very helpful and engaged, and it is a collaborative effort to move this company forward. So we're pleased about that as well. I feel good that we got the recover -- at the end of our recovery stage, and we're solidly in the rebuilding growth stage, the actions we have taken. So I look optimistically at 2021.

Got it. And as I said, you've been in the seat for almost 1 year. You've made a handful of big announcements, including Bread and the transition to Fiserv and obviously, a lot of cost optimization along the way. One of the more recent ones was recover, rebuild, regrow action plan that you put in. If you were to take a step back, just how much of your strategy would you say is in place already? And how much is still in the works? And maybe can you give us a preview of what some of the bigger things you're working on strategically for the next few years?

Sure. So as I said, I think we're at the -- hopefully, at the end of the recovery stage. I think we've done the right things for our employees. We managed our expenses. We have prudent risk management. And we thoughtfully invested in that rebuild phase of the organization. So if you look at Fiserv and if you look at Bread, those are clearly under my rebuild -- our rebuild strategy, our rebuild category. And we've done some nice work there. We've invested in digital, and we put out Digitally Enhanced Suite, we announced last quarter. That's also operational. And unless, I would say -- we're very focused on our balance sheet. Strengthening the balance sheet is critically important to the Board and important to me and the organization, ensuring that as we move forward, we do think there's going to be strength in the balance sheet and not [indiscernible] moving forward. So I feel we are in -- right in the middle of that rebuild stage. And going forward, it's going to be all about execution. We've done some really -- we've made some really bold moves. We need to execute on Bread. We need to execute on Fiserv, on the transition. We need to continually digitally enhance our business. But investments yet to be made. Data and analytics are critical for us, not just the data and analytics that enhance our partnerships and drive our spending acquisition, but also to reduce our cost to serve with artificial intelligence, robotics. We've put a number of bots in 2020 that are really going to pay dividends in 2021. That's an area for me that's critical to invest in. I'm very bullish about marketing in 2021, to regrow our receivables base. I think that's critically important. We'll do that as well. So to me, we'll make those strategic investments in technology, in decision management and, quite frankly, in people. Val mentioned this innovation hub. I think bringing people onboard to move this business forward is critical, and we'll always make investments in people. I feel very, very comfortable with the investments we've made in Val and her team, and she has brought with her a number of good followership and more people with her. And we're very comfortable about moving forward. So I'd say we are smack in the middle of the rebuild and heading towards the regrow stage of our actions.

One of the things that you mentioned that you did -- that you put in the bold category was the Bread acquisition. And I think you gave some guidance on it on the most recent earnings call, where you expect it to be accretive by year 3. What are some of the major milestones investors should be looking for along the way in terms of integrating the transaction and rolling out the existing -- rolling out the platform to your existing merchants in order to hit those targets?

Yes. Let me just -- Ryan, if you don't mind, let me just step back a second and tell you why Bread was so important to us in terms of acquisition. When -- initially, when I got here, there was certainly a product gap, buy now, pay later and installment loans. And some of our competitors were working with our current partners. You don't like to see that. So there's 3 ways to close that gap. You need a partner, you build or you buy. And really, partnership wasn't a good option for me because I want to own the end-to-end transaction. It's got regulatory -- it's got regulatory concerns, and you want to own the customer service transaction. So partnering with a third party and relying on somebody else really wasn't a good option, I felt, that we, as a regulated organization, could take. Well, then we could build. And having built this functionality at a competitor and with Val, it's a 24-month process to build it, to get it right, to get it burned in, and -- it's quite a long process. Or you could buy. And so I leaned in on the buy side on this in terms of Bread. It gets us the technology we're looking for in a shortened time period. And it also brings enormous talent to ADS. So those are the overriding reasons why the Bread acquisition was [ from burner ] in 2020. What it does for us is a number of things. It's a white label solution. And that means we can integrate it seamlessly to our partners. So where you're working with -- if you're working with a competitive buy now, pay later functionality, you got to punch out to yet another third party. For our partners, this is a seamless integration. And from a customer perspective, it's one flow. That's a really good thing. The second thing for me is it's -- the integration is kind of a 60-day integration. So time to market is really quick. And third is what I've mentioned a couple of times, the talent. And we're not going to just use this talent for buy now, pay later and installment loans. We're going to use this talent and grow this talent to really drive digital renaissance across ADS. That's what's important. I think what the investors can look for is a couple of things. One is when we do have those -- when we do integrate them with clients, our current partnerships, that's something for the investors to look at as a mile marker. The second thing is early days, but Bread itself has a really robust pipeline. And to me, that pipeline is going to be a nice source of revenue generation for us. I sit here and, not to make my CFO nervous, I believe that this will be even -- the results will even be better than we had anticipated because of that pipeline. We didn't have a good insight to what we do now. And we're very focused on executing and exploiting all of the -- all the benefits that Bread brought to us. So more to come. Early days, we're only 5 days into the -- to the close. But for me, it's been really a -- little early in 5 days to see what the opportunities are.

Maybe to switch gears and focus a little bit on your fourth quarter update. I wanted to dig in a little bit more in terms of the year-over-year credit sales as well as the new account openings. Maybe first on the credit sales. Maybe can you give us a sense of what you're seeing across different methods of delivery? I think you mentioned digital was up 12%. Can you maybe talk about what you're seeing in-store? And then maybe as you think about the new account openings, can you maybe just talk about how that's varying e-commerce versus in-store? And are closures impacting the pace at which you're seeing new account openings across the platform?

Okay. So let me do this. Let me just give you just a brief overview, and I'm going to ask Val to fill in the details. So we have seen sales, obviously, year-over-year be somewhat muted as opposed to -- when you compare them to 2019. What we have seen that's been pretty interesting and why we have obviously this big digital push and why it's so important is that online became even bigger -- our e-commerce became even bigger for us than previous. And the bricks-and-mortar were there. And when bricks-and-mortar closed, we saw more sales online. When bricks-and-mortar started to open, we saw a little bit of pent-up demand. So we saw people going to the stores and shop. And we saw kind of online kind of get back to where our original estimates were. But now, and I mentioned this, that online or omnisales are up 12% -- online sales are up 12% year-over-year in November, which is quite a good sign for us. And we have made investments in digital in terms of acquisition. And that digital acquisition is not only online acquisition, but making it easier when somebody isn't on our stores to acquire a card. I'll ask Val to kind of talk about sales and acquisitions.

Yes. Thanks, Ralph. So yes, we have seen a nice uptick in November on the sales. Card members really continue to spend across channels. So they've been taking a real omnichannel user shopping as retailers have really implemented buy online, pick up in store and other cross-channel marketing programs. And so we've seen that drive both the online sales as well as some modest pickup in the in-store sales. In particular, some of the categories where we have strong market share like beauty have been performing very well over the holiday period, and we see online sales there really outperforming the industry. We were up 54%, the sales in beauty, on Black Friday and 59% on Cyber Monday versus the industry of 46% and 47%. So the industry is where we reflected market share. We continue to see good growth there. And I think in terms of the new account side, there has been a little bit of softness there as not all stores are open. And so we continue to see good pickup on the sales, and we'll see some gradual pickup on the account side as the economy starts returning to a more robust status.

Maybe switching gears a little bit. I don't want Tim to feel left out at all. I think Ralph had a comment that credit seems to be progressing better than expected. And you've -- you talked in the past about losses, won't reach prior cycle highs, although they are expected to pick up next year, particularly in the back half. Can you maybe just talk about how you're seeing credit play out? When do you expect losses to increase and potentially to what level? And then just given how conservative your reserve setting was, what do we need to see for reserves to actually start to come down?

Yes. Ryan, listen, I don't want Tim to be left out either. So I will start, and then I'll turn it over to Tim. I'm very pleased with where we are in our credit performance. If you take a step back, I think the actions we took in 2020 were the right actions to take. And I think all [ issuers ] have taken action. We were pretty proactive in our improving risk management early on with the pandemic. We offered our card members the right forbearance program, short-term forbearance programs and gave them options through forbearance that they were engaged with willing to make work for them. We focused our energies on the collection process, ensuring that we had the righteous collections process in place during the pandemic, and it was very helpful to us. So those 3 things were very helpful. And then the stimulus, of course, is helpful in terms of managing the credit through the cycle. Tim and I have said this on a number of occasions. This is not a credit recession. It's a sales recession. So people continue to pay their bills, they paid a little bit more than the minimum. The 0 payers were less. Having said all that, we're still cautiously optimistic about the future. And I think we're adequately reserved. We are very conservative in -- about how we're reserving. So I will ask Tim to comment as well. I have been pleased how our risk management team had kind of navigated through the pandemic.

Yes. So Ryan, your question was clearly specific around the reserve levels and what would we have to see in order to start getting comfortable with a lower reserve level. As Ralph mentioned, we're very comfortable with where we are right now. We feel like we're appropriate given the uncertainty. So if you put that together, as we start seeing some more of these positive trends repeat themselves, the unemployment rate continues to improve, we see a stimulus package or we see the sales come back up, you see a COVID vaccine come in and start seeing our sales and come back. Those are all things we expect to happen. But until I see the data -- until we see the data, we're going to obviously set the reserves associated with the uncertainty. But again, we'll start taking that down as patterns start repeating themselves and we start getting some better economic news, more continued good economic phase.

Got it. One of the major concern for the stock the past few years has been the health of the underlying retailer base. And as we entered COVID, this accelerated due to the shutdown of brick-and-mortar. Can you talk a little bit about the health of your retail partners, given what we've seen during the pandemic, how you see them coming through? And how do you think about the growth the platform can generate over time that now, if you think back, we had a handful of headwinds that you were facing from retailers. But now you've got new verticals that you've moved into. You've got the growth that could be generated from Bread, but on the flip side, you still do have the potential risk from some legacy retailers. So how do you think about all those things together?

Yes. I'll start and I'll let Val [ insert ] a number of detail. So I think the pandemic has kind of made certain retailers show their hands, right? So retailers that were close to bankruptcy anywhere just have been pushed them over the edge sooner rather than later. So like the Pier 1 who filed Chapter 7 ahead of others, they were going to go. It was just a matter of when they were going to file. So I think that was -- I think the pandemic has kind of accelerated some of the bankruptcy for those that have gotten through it unlike a Chapter 11. It's because they've been organizing and were working with them. But nonetheless, I think there's been some Chapter 7 bankruptcies, which kind of -- from a -- hurts a lot of a number of retailers that we have. That said, in that type of bankruptcy, our economics tend to get a bit better. We end up not paying the retailer for acquisitions or for sales. And our customer -- at the end of the day, our customer is the card member, the retailer is a partner. So the card member continues to pay us. And Val mentioned this a bit earlier, but we introduced the Comenity Card, which is a general purpose credit card, and we're able to use that card to identify individuals within those portfolios that we want to continue to extend credit to so that the ANR is still active and they're still spending. We're giving the opportunity to spend. That has been pretty positive for us in the midst of the pandemic, introducing that new product. I'll let Val talk about the portfolio and the additions that we've made.

Sure. Thanks, Ralph. Yes, and I would say, no, in addition to the Chapter 7, we've had some retailers have a little bit of headwind on Chapter 11 and are now emerging through the other side of it. So J.Crew emerged from bankruptcy. We've got Ascena, who was just acquired by Sycamore Partners. And so we have a number of retailers who are moving forward more in a stronger position. Those are folks who have really focused around their omnichannels, putting in the right capabilities and features for their customer set to drive sales, including more investment on the e-commerce side. So we have a number of partners stronger and better coming out of the other side.

Well, Ralph, Val, Tim, I have lots more questions but unfortunately, we've -- we're out of time. So on behalf of me and investors, I just want to say thank you for all the information you provided in the presentation. We look forward to talking to you on the 4Q earnings call, and look forward to having you back, hopefully, in person for next year's conference. Thank you very much.

Hey, Ryan, thank you. And I want to thank all the people on the call today for joining us and your interest in Alliance Data. We are excited about the future. And for us, it's about execution and focusing our execution on those priorities we talked about to drive the organization forward. So listen, everyone have a terrific day, Ryan, and thank you for hosting.

Thanks again.