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

Good morning. On behalf of the Board of Directors of Alliance Data, I'd like to virtually welcome all of you to today's investor event. The past 1.5 years has been a transformational period for the company. We've put in new leadership, strategy and direction for the company. It was also exciting for me to get back together again with Ralph. He and I worked together 30 years ago at American Express. And he provides a unique combination of operational leadership, day-to-day operations controls and sound strategic thinking as well as a vast background in financial services. We're proud of the way the company and Ralph stepped in to support our associates, partners, card members and communities during the pandemic. Ralph and the leadership team have an exciting agenda for you today to highlight the remarkable changes they've made and the opportunities that lie ahead for Alliance Data.

Welcome, everyone, and thank you for joining us today. My name is Brian Vereb, Head of Investor Relations for Alliance Data. Before turning the event over to our President and CEO, Ralph Andretta, I will quickly review the agendas and disclosures for today's event. I should remind you that some of the comments made during today's meeting and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in our filings with the SEC. Alliance Data has no obligation to update the information presented during the event. Also, during today's meeting, our speakers may reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at alliancedata.com. Ralph will begin today's event with a brief overview of the company before he joins John Grund, a well-recognized adviser to the payments industry, for a discussion on Alliance Data's strategy and outlook. Then our Card Services Executive Vice President and Chief Commercial Officer, Val Greer, will go deeper into our payment services business, focusing on our enhanced digital capabilities and growth opportunities. Next, Executive Vice President of Card Operations and Credit Risk, Tammy McConnaughey, who will provide insights into our lending philosophy and credit outlook. Finally, Ralph will provide our long-term financial targets and closing thoughts. As far as logistics, we have planned for a 10-minute break around the hour mark of the event. We will also have a brief Q&A session after both Val and Tammy's section. At the conclusion of the presentation, Ralph and the leadership team will take your questions. With that, I would like to welcome Alliance Data President and CEO, Ralph Andretta.

Thanks, Brian, and thanks to everyone for joining. We are excited to have you with us today. Although we would have had preferred to host an in-person event, we are excited to demonstrate how Alliance Data is uniquely positioned in the marketplace to drive sustained, profitable growth for our shareholders. I want to start by presenting our Board of Directors. The Board's guidance and counsel have enabled us to swiftly chart our way forward. First, our newest board members. John Gerspach and Rajesh Natarajan. John's financial services experience, audit and risk expertise added deep insight to our Board and committees, while Rajesh has an extensive and impressive resume in technology and product development. We continue to expand and enhance our Board's value with the addition of Karin Kimbrough to our slate of nominees. Karin serves as Chief Economist at LinkedIn and is a member of the Board at Fannie Mae. Upon election at the annual meeting later this month, Karin will be joining John; Rajesh; our Chairman, Roger Ballou, from whom you just heard from; Laurie Tucker; Sharen Turney; Tim Theriault; and me. Our very experienced and knowledgeable board is a valuable asset to Alliance Data. Our ongoing board refreshment strategy has substantially changed the makeup of our Board over the last 7 years, with 7 new independent directors nominated in that time. The program has also significantly reduced average tenure and increased diversity while expanding the breadth and depth of expertise. Our Board represents both gender and ethnic diversity with 3 female directors following this year's annual meeting, 2 of which will serve as committee chairs. In summary, we have a diverse board with the breadth and depth of skills and expertise to match the oversight needs of our evolving business. Next, I'd like to introduce you to Alliance Data's impressive and diverse leadership team. Today, you'll hear from Tammy McConnaughey, who leads our operations and credit risk functions and has nearly 30 years of experience at Alliance Data as well as Val Greer, who joined us as our Chief Commercial Officer in 2020. Val formerly held executive positions at Citi and JPMorgan. We are excited to welcome Perry Beberman, who will be joining the company in July as our CFO. Perry brings deep financial industry expertise and 30-plus years of experience at Bank of America and MBNA. I'd like to take this opportunity to highlight a few milestone events that have occurred in the past 1.5 years. We are thrilled to celebrate our 20th anniversary as a public company in 2021, and are excited to see what the next 2 decades will bring. Alliance Data continues to evolve and reposition itself for future sustained success. As we announced last week, we plan to spin off our LoyaltyOne segment. This transaction fulfills the goal of simplifying our business story and narrowing our focus while unlocking the growth potential of both companies. Further, the transaction is expected to strengthen Alliance Data's balance sheet and improve key metrics. For today's presentation and Q&A, we will focus solely on our payments business. February marked my 1-year anniversary with Alliance Data. The strong culture continues to impress me. We were able to learn and adapt through the pandemic and made responsible strategic investments and improvements in our business despite a challenging macroeconomic environment. From a talent perspective, we added new talent and industry veterans with extensive experience across the financial and operational sectors. From a capabilities perspective, some of our key milestones included, introducing the Comenity Card, launching the Enhanced Digital Suite, transitioning our core processing to Fiserv, the acquisition of Bread, the Bread and Royal Bank of Canada's strategic relationship and, most recently, the Bread Fiserv strategic relationship. With the acquisition of Bread came innovative talent, the addition of installment loan, buy now, pay later products, which rounds out our product suite and an advanced digital platform that opens up new value pools. We will continue to invest in our digital and data and analytics capabilities while working with our partners to drive sales. We continue to build momentum with the execution of our recover, rebuild and regrow initiatives. It has been both a challenging and rewarding first year at Alliance Data, and I'm proud of all we've accomplished over such a short period of time. We stepped up for our employees, our partners, our card members and our communities. We've demonstrated resiliency and sustainable, responsible business practices, which helped us through our recover actions. We are now focused on the rebuild and regrow elements of our plan. We will continue to invest in digital to remove friction from the customer's shopping journey and enable easier self-service. These enhancements will result in operational efficiencies, which will allow us to self-fund investments going forward and drive positive operating leverage. Rebalancing our portfolio for sustained, profitable growth remains key to our success. We will maintain prudent balance sheet management to better align with our peers, and we'll grow with new verticals, clients and products. We are confident our balanced approach to risk will ensure we provide our shareholders with an advantaged return on their investment. Tammy will address our risk management strategy in her section. Our go-forward strategy revolves around 4 main pillars. First, we offer a robust product suite focused on customer choice. If we offered only 1 payment method, we'd be missing out on 40% of the customer's preferred way to pay. Our products can be offered to consumers directly, like our Comenity Card or through a white-labeled or partner-branded option. The white label or partner-branded option offers the payment product in our partners' voice, enhancing their brand and is a differentiator compared to the competition. The addition of Bread's buy now, pay later payment solutions expands our consumer base into a younger, digitally native demographic. Those that are new to credit or are budget-conscious will gravitate towards our buy now, pay later option. Especially among millennials, this offer is an appealing budget and cash management tool. Our card products tend to appeal to a more diverse population. Therefore, we are able to use our full product suite to support consumers across their lifetime shopping experiences. Through the use of our product graduation strategy, we can continue to engage consumers as their needs evolve by ensuring that the right product is available at the right time. Second, we provide a full spectrum of lending capabilities to drive sales. Our ability to approve more applicants with our advanced underwriting tools and historic data sets us apart from our competitors. Third, we will continue to enhance our capabilities with an emphasis on digital. Our digital enhancements have been a focal point of our new direction and are accelerated with the acquisition of Bread. We continue to invest thoughtfully to adapt to an ever-changing omnichannel world. Finally, we are committed to driving sustainable, repeatable, profitable growth. We will continue to evaluate our current portfolio and future opportunities, prioritizing those that expand the entire economic pie for us and our partners. Our goal is to achieve top-tier metrics and exceed $20 billion in receivables by 2023. In addition, we anticipate that Bread's gross merchandise volume or total platform sales will approach $10 billion by the end of 2023. I will go into more details on the long-term financial targets later in the presentation. Before I welcome John Grund to the stage for our industry discussion, I would like to share the following video highlighting our approach to doing business at Alliance Data. [Presentation]

I hope you enjoyed the video highlighting our responsible business practices and the linkage between our business strategy and the commitments to our key stakeholders, which drives our long-term success. Our goal every day is to create value for our investors, our brand partners, our card members and customers, our employees and our communities. It's not just what we are doing, it is how we are doing it. That drives our performance. Diversity, equity and inclusion is a top priority for Alliance Data. Our annual environmental, social and governance performance report comes out in the second quarter and will further showcase our commitments and the progress we're making to demonstrate our responsible business practices. As a company, we are focused on our vision, which is thinking outside the bank as a leading tech-forward financial solutions provider, serving people in their everyday lives and passions. Now I'd like to introduce John Grund. John is a recognized adviser to the payments industry. He was an early partner of First Annapolis, where he spent over 20 years before its merger with Accenture. His clients include large banks, retailers, airlines and financial service providers. As background, I have had the opportunity to work with John, both as his client and when he was advising partners on the other side of the table. He is uniquely suited to facilitate a candid industry discussion as he is as close to the market as anyone. John, welcome, and thank you for joining us today.

Ralph, great to be here. Let's hit this head on. 2020 was quite a year to take on a role as a new CEO. Looking back, what gave you the confidence to take the leap to running an organization like Alliance Data?

John, I've been part of really large organizations and financial services for the last 30 years, a lot of different roles. CFO, Head of Reengineering, Head of Product and then, finally, Head of Portfolio. This gave me the opportunity to turn a company around in a smaller venue, not a big multinational, but in a smaller company, to turn it around and be ultimately accountable for the decisions that were going to be made. That was exciting for me and engaging. John, it's a real privilege to be a public CEO. It's exciting for me. And I'll be very frank with you, this is probably my last big job. And I really have the opportunity to do it right, to do with people I admire, people I think are terrific leaders and leave a terrific legacy. And that's what's important that's why I made a switch.

Interesting. Well, speaking of interesting, 3 weeks on the job, the pandemic shut down much of the U.S. and the world for that matter. I'm sure that made things a bit more interesting for you, so if you could take us through your thinking about this event.

Yes. Well, I had 3 good weeks and then the pandemic hit. But it did a number of things. It really helped galvanized my thinking about what had to be done. It really highlighted the weaknesses at Alliance Data. And we had to solve those. Secondly, it really helped me pick my team. Who are the field generals? Who are the people I can count on right away? And third, it highlighted the gaps that Alliance Data had in terms of products and capabilities. In a very short period of time, probably shorter than it would have been had the pandemic not hit, I knew who the players were, I knew who the real leaders of this organization were and, as important, I knew who they weren't. And I knew where I had to bring people in to kind of fix that. And we did that, and I'm really excited about our leadership team. Our lack of digital in the beginning was apparent as people were just pivoting towards digital, and no one -- there was no mall traffic. Acquisitions were down, sales were down. Everything was going online. And we had to really up our game in digital and other capabilities for our customers and our partners.

Ralph, as the U.S. makes progress in battling the pandemic, what do you see as the lasting effects of the pandemic on business, industry, consumers? And specifically, can you speak to fintech and buy now, pay later, just how front and center that is in the industry right now?

Sure. I think the pandemic has taught us a number of lessons, and we have to adapt to those lessons that they've taught us. One is the switch of employees from in the office to home was overnight, and we made it work. And employees seem to like it. And I think going forward, I think you're going to see more work-at-home employees. And we, as leaders, have to figure out how to work with top talent. And if top talent wants to work at home or work in different locations, we've got to accommodate that. That, I think, will last way beyond the pandemic. There's an upside for industry. There's an upside for us, is I was able to shed half my real estate. So when you shed half your real estate, half your real estate cost and your infrastructure, you kind of reduce your cost to serve. But I think we have to be able to work with people wherever they want to work and how they want to work if we want to retain top talent. I think that's critically important. The second thing is we've got to be where our customers want to shop, where they are, how they want to interact. If the pandemic taught us anything, digital is front and center. And omnichannel is front and center. They want to have choice, and we have to give them choice. Wherever they want to be, we've got to be there. And I think we've done a nice job over the last 1.5 years getting there. The buy now, pay later, which goes along with digital and fintech was a critically important piece for us to get into. And in 2020, in the midst of the pandemic, we acquired Bread. We acquired Bread for a number of reasons. One, it had products that we did not have. We did not have buy now, pay later. We did not have an installment loan. And we were losing volume to competitors. And so we had to kind of think how do we want to stem that? And the way you stem that is 3 ways: either you build it, you buy it or you partner. Building wasn't an option because it would have taken us 14 to 24 months, I've been down that road before. Partnering is interesting, but you don't own the customer, you borrow the customer. So we decided to buy it, and we found a terrific partner in Bread. They're innovative. They're focused on the future. They're focused on the consumer. And they have terrific technology and a terrific pipeline of opportunity. So the buy now, pay later functionality just opens up a whole new demographic that Alliance Data didn't have before in terms of millennials. Millennials tend to lean away from credit and are more budget-conscious and cash flow-conscious, and buy now, pay later just fills that gap for them.

Great. Looking forward, this massive shift to digital that has occurred, does it put the nail in the coffin on mall-based retail, which you still have a pretty significant presence in? Any thoughts on that front?

Yes. I get that question a lot, John, and it's an interesting question. And here's the way I view it. People are social creatures. They want to get out. They want to be social. And the mall is an interesting place to do that. And I think the malls are evolving, too, in terms of features and meeting places. And the stores in the mall, I've noticed now, are more of showcases than places to buy. It's pretty interesting. So you go to the mall, you look at things, but you go buy it online. So we've got to be there online to buy it. There was a recent article about mall traffic in the journal, and it said it's almost back to where it was pre pandemic 2020. Not quite back, but pandemic 2020, the mall traffic is back. And I think with the vaccines and the spring and summertime coming, I think you're going to see people going back to the mall. Does it mean we're going back to the way we did things? We've learned we've got to be omnichannel. So we've got to kind of derisk our portfolio. I still want to be in the mall, but I certainly want to be online.

Now with so many new competitors entering the space, and as you know, we know the industry has always been competitive, how's Alliance Data going to differentiate itself and stand out going forward with the pieces that you put together here?

That basket of products offering to the partner and customers, I think that's key for us. We used to be a one-trick pony. We're not a one-trick pony anymore. We have multiple products that can entice customers and enhance our partners' brand. That's what we're going to focus on. Secondly, we are good decision-makers and quick decision-makers. With the bigger banks, there's usually some bureaucracy. When I was at the bigger banks, I was on 4 or 5 committees, you had to get approval for it to move forward on a variety of things, business practice, control and compliance, a whole host of them. We do all that but within my leadership team. We make the decision with the partner and we pivot and move forward. And speed to market is going to be key, and we can do that. And third, we're upgrading our technology. We've outsourced our core technology, our traditional Alliance Data technology, to Fiserv. Just gives us amazing capabilities as we move forward. Ease of integration, better bank consolidation capabilities. And they're innovators, and we're going to innovate with them as we move forward. I think those things really make us more competitive than we've ever been.

You mentioned a few moments ago the Comenity general purpose card. Stepping back, how does Alliance Data think about opportunities that are nontraditional or not in the core partnership space? What is -- are there direct-to-consumer ambitions? And what fits your profile looking forward?

Yes. I think, listen, we'll always be in the private label space. That's what made this company, and I don't see us being out of that private label space. It's in our DNA. So we'll always be there. But the acquisition of Bread and their capabilities really gives us an opportunity to go direct-to-consumer. If you think about our partner base before Bread, we had 130 partners. We've now ballooned to 650. They're small- and medium-sized partners. Those are direct-to-consumer. We're using the Bread brand to attract consumers to Alliance Data now. So that's a direct-to-consumer brand. I see us growing the Comenity Card. I think it's a good card. I think it's a good way to grow receivables and kind of get rid of a little bit of our risk in terms of concentration risk, I think that's important, too. But just opens up a whole new number of customers to us, small- and medium-sized customers that we can integrate within 45 days, probably less. So that's exciting. That's exciting for us. It's a different new revenue stream.

Okay. Ralph, you've got a lot on your plate, to state the obvious. Can you talk about how it all comes together as you start to execute and deliver?

It all comes together under the banner of leadership. I have a terrific leadership team that is focused on the future and focused on returning great value to shareholders and building a legacy in this company. That's exciting. As the pandemic gets more and more in our rearview mirror, I hope, we're starting to see sales come back, which I think is critically important, really important for us. We're seeing 4 things. One is that sales are going to increase with our current partner base. We're going to go deeper in our current partner base because we have more products and services and capabilities than we've ever had. So we're going to dig a little deeper in that base and drive some volume. Bread, brings us partners we never had before and a revenue stream we've never had before. So that's really exciting for us. And fourth, we're going to be able to compete more effectively in a marketplace for those renewals and RFPs that come out of partners because we have this basket of products. And again, our decision-making is quick, and we execute on it. So I'm excited about the future.

Great. Sounds interesting. With the new administration -- pulling up a few levels, so with the new administration taking shape in D.C., what concern do you have? And how will Alliance Data work through any changes and react to any changes?

Yes. Well, whatever the administration is, you have to lean into it. You've got to work with that administration. You and I lived through CARD Act. That was probably the most sweeping changes ever to the card industry. And maybe it's more innovative. It kept us on our toes and made us creative in terms of how to get through that. And I think that's what you have to do. So the administration is going to do what they think is right for the country, and we're going to lean into it, and we're going to be smart about it and work through it. Like I said, just keeps you on your toes.

Okay. Pulling all the way up, are there any additional areas of focus or parts of the Alliance Data story that don't hit the headlines that you'd like to kind of project out?

Yes. We're being more transparent and forthcoming with analysts. I hope they appreciate that because that's important. We are putting commitments out there, and we're hitting those commitments. I want the analysts to kind of measure us by what we're doing and how we're doing it rather than what we're saying. And I think that's important for us, that the analysts recognize that we told them we would take steps, we're taking those steps. We told them what our commitments would be, we're meeting those commitments. And we're very focused on continuing to do that and continuing to be transparent.

Along the same lines, what should investors get excited about thinking about Alliance Data?

I think they should get excited about our leadership team. Our leadership team is exceptional. They should get excited about the prospects that Bread brings to us. We never had that before. I think that's something to be excited about. We've demonstrated that we've taken decisive action to position the company for the future, I think that's critically important. The other thing we've done is we've increased our total addressable market. We've expanded it. Bread really expands that for us. Our product groups really expand that for us. So our addressable market is bigger than it's ever been before. The reduction of our infrastructure and how we're going to work going forward, that's something to be excited about. All of these things contribute to driving positive operating leverage in the future. They should be excited about our data and analytics. We have more information on more customers. We're a bit of a closed-loop in private label, as you know. So we've got more information on more customers, and we can turn that to decisionable data and information and be very focused on how to drive spend for our partners and how to really deliver good payment options for our customers. Those are the things I'd be excited about. You know what I would tell our investors? That we have the discipline and governance of a public company but the heart and curiosity of a fintech. That's a great combination.

Ralph, great discussion. That's all I have for today.

John, thank you for coming. It was a pleasure to talk to you, and I hope to see you soon.

Likewise.

Now I'd like to introduce Val Greer, our Chief Commercial Officer, to talk about our products and partnerships. Val, we've worked together for almost a decade. We were part of the biggest co-brand transition in history, and I couldn't be prouder to have you by my side to transition Alliance Data. Val, welcome, and take it away.

Thanks, Ralph. Exciting times and happy to be here to share all the great work we have done. I'm pleased to provide updates for our card services business. I'll highlight our product offerings, our recent investments and our opportunities to drive continued growth. But before I jump in, I'll hand it over to our new SVP of Digital Strategy and Experience, Dashon Williford; and our Head of Bread Product, Parilee Wang, to show you the exciting developments that we've brought to market and what we have in store for the future.

Hello. I'm Dashon Williford, SVP Digital Strategy and Experience at Alliance Data. Today, I'm excited to show you one of those capabilities, our Enhanced Digital Suite. EDS is a unified suite of digital capabilities that drive awareness early in the shopping experience through presentment of contextually relevant and personalized messaging and the ability to apply and buy with instant spend upon account approval in-store or online using a digital shopping pass with a specific use payment token. Whether someone is looking for a onetime or multi-purchase payment option, Alliance Data's Enhanced Digital Suite powered by the Bread platform will allow the presentment of our breadth of purchasing products, from split pay to private label, co-brand or installment lending, all through a simple and easy merchant integration. Rest assured, data and analytics are at the core of what we do, and our data-driven product recommendation engine will inform what, how and when we present relevant offers to consumers. EDS is just one of the exciting new digital advancements on the horizon. In the coming weeks and months, I'll share 2 more key capabilities, a modernized digital platform and account center. We'll introduce an improved look and feel to all customer-facing digital properties and navigation engine. We'll also overhaul our security and identity verification capabilities through a partnership with an industry leader. We'll optimize the rewards redemption process, making it easier and more flexible for customers to redeem rewards and retailers to provide bonuses to their most loyal customers. Watch as my colleague, Parilee Wang, shows you how we are unifying EDS and Bread products into a singular experience for our clients.

Alliance Data's Enhanced Digital Suite powered by Bread provides a fully white-labeled, dynamically delivered, frictionless set of payment options. We enable brand partners to offer the right product to the right customer at the right time across credit card, buy now, pay later and installment offerings. In this demo, we'll see just how quickly Paul Smith can turn his deep passion for baking into a new stand mixer. Strategic placements highlighting Paul's recommended payment products, unique to Paul's profile and basket, engage him early in his shopping journey. He sees that he could pay for his mixer with 4 interest-free payments or that he could earn up to 6% cash back using a nebella store card. Paul decides interest-free payments are the best financial option for him and clicks to learn more. Paul is presented with an overview of the interest-free payment terms and a link to explore the full suite of payment options available to him. For most consumers, the initial offer they engaged with is the right one for them. Paul clicks to get started with biweekly payments, Alliance Data's split pay product. Since Paul is new to Alliance Data, he comes to our streamlined prequalification process. If Paul were already authenticated with Alliance Data, he would skip right to his customized offers. Paul's billing information is prepopulated, either with data from the merchant or using Alliance Data's patented frictionless prefill process. He validates his information, enters any final data needed and proceeds immediately to his offers. Here, Paul sees the details of his biweekly payments offer and that his personal purchasing limit is up to $1,000. He can also view the purchasing limits of other financing options he qualified for, which gives Paul optionality to upgrade or add-on additional products. Paul adds the stand mixer to his cart and checks out. His prefilled data is prepopulated on the merchant site for seamless checkout. He inputs his card details, accepts the terms and conditions and completes his purchase. The entire process is quick, truly frictionless and fully integrated with the merchant's website. Our brand partners and Alliance Data's relationship with Paul doesn't end at checkout. As Paul completes repayment on any Alliance Data payment product, we robustly reengage him in e-mail and in our self-serve repayment experiences. As you see here, Paul is reminded in his confirmation e-mail that he is able to claim the points from his previous purchase and get 20% off his next purchase if he graduates to our premium card product.

As Parilee showcased, integrating prominent and flexible marketing placements early in the customer shopping and purchasing journey is essential to drive customer awareness and conversion. We improved our brand partner experience by shortening the merchant integration to a few weeks. All the capabilities we share today will be offered via Alliance Data's Enhanced Digital Suite powered by the Bread platform, making it faster and easier for all of our brands to benefit from our latest technology offerings, while providing consumers flexibility and breadth of choice to select the payment option that best meets their needs.

Over the last year, we've witnessed an unprecedented acceleration in customer-centric growth as consumers made digital their channel of choice to stay connected, shop online, self-service and facilitate contactless payments. We directed resources to support our retail partner needs, including, as Dashon highlighted, in developing our Enhanced Digital Suite, a digital shopping experience that increases awareness of payment options early in the purchase journey and gives consumers confidence in their buying power and removes friction in the process. The Enhanced Digital Suite is a bundled offer of marketing and credit applications that create a seamless process for customers to adopt, apply for and use our payment options. It includes dynamic, real-time offer messaging that brings credit to the forefront of the customer shopping journey, messages that can be driven off a variety of data elements, including product, price, loyalty member status and redemption history to create personalization at scale and includes secure application features that let customers apply for credit without leaving a brand partner's website. Enhanced Digital Suite was designed to provide brands with a fast, simple integration to get up and running and capitalize on e-commerce growth. With a single software development kit, EDS integration is fast, easy, secure and allows customers to immediately use their account with a digital shopping path. Marketing placements have the look and feel of existing partner branding. Content is both compliant and customer-friendly. And as a result, we've seen an increase in conversion and average order value. The acquisition of Bread was an efficient way to expand our product offerings and gain access to a broader audience and younger demographic. The fintech platform advances our digital capabilities and offerings, and the addition of Bread's highly skilled and innovative team brought in key talent in critical areas. We're also creating a new innovation hub in New York City to drive digital advancement throughout the organization. The Bread payment technology platform is scalable, nimble and allows merchants, in many cases, to be live in a matter of days. There are more than 500 merchants on Bread, a strong pipeline, and we expect continued growth that is diversified across verticals. In 2021, we are investing more than $100 million in expanding digital capabilities. We are also investing in technology flexibility and efficiency with the outsourcing of our core processing platform to Fiserv. The Fiserv core processing platform will allow us to improve partner conversions and speed to market, including the ability to quickly and seamlessly add new products and capabilities that benefit our partners and card members. The platform enables efficient integration of digital technology, while supporting our data and analytic capabilities and improving operational efficiencies. The savings from these activities is redeployed to fund growth initiatives, such as data and analytics, including machine learning and artificial intelligence. We focus on data insights that drive actionable strategies that fuel revenue growth through increased trips and spend, increasing the lifetime value of the customer. Last year, we automated more than 30 manual processes across the organization and continue to introduce intelligent automation to drive marketing and operational improvements. Alliance Data is now ranked in the top 5% nationally in terms of robotic process automation and bot usage. Unifying data and analytics, digital capabilities and Alliance Data and Bread product offerings into a singular experience for our clients and customers creates a differentiated market position. Since closing on Bread in December of last year, there has been a lot of interest from our brand partners in Bread's products and capabilities. Split pay or buy now, pay later is of interest to many of our softline merchants in beauty, apparel and pet, while installment lending has been a topic of conversation with many of our big-ticket merchants in home furnishings, jewelry and sporting goods. Bread offers a white-label solution that matches our go-to-market approach with our brand partners. This means that the products have the look and feel of our partner brands, which carries a lot of equity with their customers who have come to their site to shop. The white-label solution is unique to Bread and distinguishes the Bread offering. In addition to being the only white-label provider, we are also the only provider who is primarily focused on deeply integrating with merchants. This allows the customer to stay on the merchant site throughout the shopping journey rather than being directed to a third-party site. This is an important distinction. Many third-party sites promote multiple merchant offers and their #1 priority is having their app downloaded so they become the entry point of the shopping journey. This ultimately disintermediates the merchant. Our #1 priority is sales conversion for our brands. The beauty of the expanded product suite is that our brands now have the ability to offer a payment option to meet the needs of a wide variety of consumer segments and to do so in a coordinated thoughtful approach that allows brands to manage the product mix as well as manage and optimize profitability. We will offer a unified application process across products using the Bread platform. Our unified front-end experience will enable Alliance Data to offer the widest payment product suite of any competitor in the space, with products that serve the entire generational spectrum. If we only offered 1 product, like many of the competition, we would miss 40% of our customers' preferred payment method. Younger demographics value buy now, pay later, with millennials 2x as likely as Gen Xers and 3x as likely as baby boomers to have used a buy now, pay later service in the past 2 years. While buy now, pay later is a product often sought by millennials, offering just a buy now, pay later solution does not provide consumers the flexibility they crave. Consumers want the ability to spread their purchases across different payment options, often based on the size of their basket. When surveyed, 35% of Gen Z and millennials preferred a buy now, pay later solution for $100 purchase, but approximately 65% of them selected other payment types. By having a rich product mix, consumers can grow with a partner brand by graduating into more mature product offerings over time based on behavior and needs. Partnering with Alliance Data and Bread for buy now, pay later unlocks a graduation strategy. And our analytics team can pull new cohort of shoppers, identify purchase patterns and enable targeted acquisition tactics for co-brand and private label products, deepening customer engagement with the brand. Unlike our competitors, we offer complete payment stack coverage, meaning a single messaging strategy will be presented to consumers. We solve for the complexity of managing competing consumer propositions by offering a personalized, intelligent and optimized messaging solution, targeted to convert and grow shoppers with our partner brand. To meet growing customer needs and expectations across the digital ecosystem, we are taking a customer-centric approach to design new experience and capabilities that are modernized, intuitive and connected across channels. As our product offering has evolved, so have merchant and customer expectations on our ability to provide access to a variety of payment options in the channel of their choice, whether applying for credit, purchasing or accessing rewards. We continue to invest in our digital capabilities, making it easier for consumers to apply and seamlessly transact with their product across channels. Today, customers may start their shopping journey browsing on their tablet at home, then shop in-store, feel the fabric, sit on the couch, then buy through mobile with a scan of a QR code to unlock incremental purchasing power. Cross-channel transacting has accelerated, and the use of buy online, pick up in-store saw 18% of shoppers used the service compared to only 3% in 2019. As Dashon touched on earlier, frictionless mobility provides a customer with the ability to scan a QR code with their mobile device, instantly apply and immediately receive a tokenized digital shopping path that can be scanned at checkout. As part of this process, application fields are often prepopulated using merchant or third-party data sources, which reduces abandonment rate by as much as 50% and has a 30% average lift on first purchase. We have over 40 brands live with frictionless mobile today. And in first quarter, 2 million consumers leveraged our frictionless acquisition capabilities using tablets, QR codes and mobile devices to apply for financing. With our unified software development kit, merchants have access to all products through a single integration and customers have access to a choice of financing options. As Parilee walked through in the demo, we use data ranging from data provided by the merchant on previous purchases, products and price points browsed to determine one or more payment methods to highlight for the customer. Our ability to deliver the right payment product at the right time to each consumer optimizes customer conversion. There are almost 400,000 annual logins to our account servicing platform, representing over 80% of customer interactions. The last year has further accelerated demand for digital channels and seamless experiences, and we are continuing to evolve our digital experiences to meet that demand. Card members rely on digital channels to self navigate their servicing experience to find information and complete actions to manage their account. We are modernizing our digital properties by creating more intuitive connected experiences for customers to learn about their product, rewards and benefits. These engaging card member experiences will help customers unlock personalized content and offers, creating loyal customers and increasing lifetime value. Once an account has been established, we make it easy for customers to access their accounts wherever and whenever they choose. Our co-brand and proprietary card can be provisioned into all of the digital wallets. And we've extended that capability to certain private label cards. Today, the Victoria's Secret private label card allows card members to make contactless mobile payments using Apple Pay, bolstering card member convenience and security. And we've seen an increase and digital wallet adoption, with usage more than doubling year-over-year. We continue to progress in developing our digital capabilities to support top-of-wallet engagement, customer choice in an increasingly omnichannel ecosystem. This modernization provides our clients and customers with a flexible and scalable front-end experience that works seamlessly with our back-end modernization with Fiserv. A key reason we acquired Bread was the quality and versatility of Bread's leading payment technology platform. This platform can be deployed and leveraged in various ways and opens connections to new points of distribution to drive scalable growth and diversified value pools. Under the direct acquisition model, Bread continues to onboard digital partners at an impressive rate, with approximately 100 additions in the last 2 quarters. Under this model, Bread receives merchant fees as well as earning interest on installment loans. Bread was an ideal partner to strengthen the expansion of our verticals and the addressable market of small- to medium-sized merchants, while providing our existing partners with additional white-label products. We're actively talking to existing brand partners to incorporate Bread payment options into their suite of offerings. And in Q1, we launched our first Alliance Data client, Apt2B. Alliance Data is uniquely positioned to provide a branded, full spectrum payment suite for our partners. We can now offer brands and new prospects a differentiated white-label product offering across split pay, installment lending, private label and co-brand. A few weeks ago, we announced the expansion of our business relationship with Fiserv through a new strategic relationship. This relationship is distinct and different from the outsourcing of our core processing, which we announced with Fiserv last October. Under this new relationship, Fiserv will integrate Bread's payment platform to enable Fiserv's merchants to offer buy now, pay later and installment loans. The Fiserv relationship opens up an extensive distribution model for Bread, driving platform sales and receivable growth. The rapid growth and proliferation of buy now, pay later and installment lending solutions for e-commerce has been unparalleled. While the online retail economy will undoubtedly continue to experience high growth, the in-store retail channel remains substantial and still accounts for over 85% of total retail sales in the U.S. Many fintech providers offering buy now, pay later and installment loans have yet to crack the code in achieving success with their in-store distribution of their payment methods. Through the Bread-Fiserv relationship, we have several key advantages, which will position us well for success. First, the partnership takes advantage of Fiserv's existing connectivity and integration with the merchant's POS in order to facilitate both online and in-store new account acquisition and payments for buy now, pay later and installment lending. By utilizing the merchant's existing process and tool set, the barrier to entry is significantly lowered and operational complexity greatly reduced. Additionally, taking the learnings and maturity from our Card Services business, the Bread team will work with Fiserv to develop best-in-class engagement and content distribution for the vast market of small and midsized merchants within the ecosystem. Many of the smaller to midsized merchants lack access to competitive installment lending today, so this new solution will open the door and provide them selling tools to drive sales conversion on Bread payment products. We anticipate having our first merchant launch with Fiserv in the third quarter of 2021. Let me frame the relationship by giving an example. Picture a small, midsized consumer electronic retailer with 80% of sales occurring online and 20% in-store. This retailer currently partners with Fiserv for merchant services in order to offer a wide range of payment acceptance solutions. With the new Bread partnership, Fiserv can now offer the retailer incremental payment solutions to include buy now, pay later and installment loans. Fiserv merchants will be able to offer these payment methods, both in-store and online, delivering an omni-channel customer experience and enabling more sales than ever. Merchants are trained on how to offer and promote the new payment programs and can simply download the marketing collateral, signage, QR codes, stickers in order to be able to promote the program. Bread will be fully integrated into Fiserv's merchant servicing dashboard, where they can view and manage settlement, chargebacks and process returns across all tender types. This is a differentiated, strategic relationship that goes beyond referrals to an integrated product offering that leverages sales distribution. We are also excited about our relationship with the Royal Bank of Canada. The Royal Bank of Canada is leveraging Bread's digital payment platform to expand its payment solution offerings for Canadian merchants. As merchants are added to the platform, we are in a gateway and servicing fee per customer transaction. So the more the program scales, the more we earn, generating revenue without the credit risk. The Royal Bank of Canada is an ideal partner to expand our reach to Canada and build Bread's platform provider business. As Canada's largest bank, the potential to scale is exciting, and we know that through this strategic alliance, we can help thousands of Royal Bank of Canada's merchant partners increase their e-commerce sales and profits. Five years ago, we were predominantly focused on specialty retail and department stores with a strong DNA in soft goods as a result of our heritage. We provided private label programs that were highly integrated into the retailer's loyalty program, offering consumers purchasing power and rewards. That market represented about $539 billion in sales. While we continue to embrace our retail heritage in private label, we've now expanded our verticals and product offerings, including co-brand cards for general retail with a growing number of partners. We then acquired Bread and further expanded and diversified products in customer-centric digital capabilities. Opening up e-commerce lending nearly doubled our addressable market in the past year, and this market is continuing to grow. With Bread, we were able to unlock the online retail and travel universe, particularly the smaller e-commerce, direct-to-consumer brands that were out of reach with our classic product set. We've also seen strong engagement with our newly launched proprietary credit card. This general purpose cashback card has exceeded our early expectations, and we are seeing robust adoption, especially among millennials. We now have a full suite of products to serve the total consumer spending marketplace. When paired with our strategic underwriting and growing number of diverse verticals, this expansion drives higher sales and market share. You can see the expansion of the company's total addressable market from a more single focused provider to where we are today at a $7.7 trillion total addressable market. Over the last 5 years, our portfolio has evolved significantly. While we value our roots in specialty retail, we now have a more diversified portfolio that is not dependent on one vertical. In recent years, we've seen our beauty segment grow significantly with the addition of Ulta, Sephora, Sally Beauty and others. The plus-size fashion segment has also flourished, and we are excited to have recently signed a renewal with Torrid. Our brand partners have also expanded over time to meet their customers' needs by providing a more omnichannel experience and leveraging our in-store and digital products and capabilities. In recent months, we've seen consumer confidence start to improve and in-store shopping has picked back up, yet our online sales remain at over 40%. As we roll out our Bread platform, we expect online sales to grow even as traditional channels ramp up. Next, I'll share how we bring value to our partners and customers. First, though, let's hear from a few of our partners directly.

Ulta Beauty has been working with the team at Alliance Data for 5 years to help deliver on our omnichannel strategy, attracting and engaging guests with new offerings, new programs and new experiences. Together, we've developed the Ulta Beauty Mastercard, and our first ever private label card, the Ultamate Rewards Credit Card, which celebrates our loyalty program members. Today, we have well over 4 million cardholders, and they are some of our most loyal and most valuable guests. Our dedicated Alliance Data team acts as an extension of our team, really thinking about our guest needs and bringing forward the strategic resources and broader thinking with a true marketing lens. It was really critical that we offer private label and co-branded credit card options to reach the broadest number of Ulta Beauty guests. Importantly, we wanted both options to carry the same value proposition. Alliance Data's proprietary algorithm helps select the right card for our guests to really maximize the long-term engagement without compromising the in-store or online experiences as they apply for the card. Together, we released data on the pulse of cardholder spending trends and leveraged data to remain as strategic and as flexible as possible to be able to fuel our growth and to delight our guests. And at the end of the day, our partnership with Alliance Data has unlocked many possibilities, and we're proud to call them partners.

Through our Signet banner credit card programs, we provide a robust PLCC program across banners with a wide promotional plan offering to support our customers' unique needs and preferences. We use Alliance Data's integrated application process. Customers can apply in-store, online or through their mobile device, and it creates an application experience that is quick, simple and allows for real-time access to financing upon approval. Alliance Data has been in lockstep with Signet as we focus on digital growth. We have introduced dynamic credit messaging that drives financing option awareness earlier in the shopping experience, resulting in better conversion. Providing the right customer experience is really important to us, and Alliance Data has been instrumental in bringing data insights to help us reach our customer wherever they are in their shopping journey. This includes the creation of predictive shopping models that help us grow our existing customer base by identifying new customers we can welcome to Signet. Alliance Data is an important partner and an extension of our team, bringing value to our brands and our customers. We value our partnership and all that we have been able to achieve together.

We are proud to grow our business relationship with Alliance Data. In addition to providing world-class credit card processing services for Alliance Data, Fiserv will enable our merchant clients to leverage Bread's turnkey point-of-sale lending technology. Our expanded relationship will allow Fiserv to offer point-of-sale lending solutions, such as installment payments and buy now, pay later options to our merchant-acquiring clients which, in turn, enables these businesses to provide their customers with flexible payment options when shopping in-store and online. We made a strategic decision to partner with Bread for a number of reasons. First, Bread's innovative point-of-sale financing solutions will facilitate merchant transactions of any size, giving our merchants and their customers more flexible payment choices. Second, the Bread solutions offer an API-driven, modern customer experience for consumers across the full credit spectrum. And it helps our clients. By enabling pay over time financing solutions, Bread can help merchants drive more sales, reduce friction and boost conversion rates by engaging shoppers throughout the sales funnel. Our partnership with Alliance Data and Bread enables us to provide even greater value and service to our clients and their customers.

When we chose Bread, I mean, originally we were looking for a provider for point-of-sale financing. We wanted somebody that was flexible and could adapt and grow with us. Bread's suite of products was fantastic. They came highly recommended. It really felt right. The technology was right, the team we were working with felt right. And we've been fortunate, it's been a great partnership, and we're doing some amazing things. As we were talking with Bread about the solution we wanted to bring to market and the things we wanted to build with them, we already had a number of very, very large partners that needed this capability. And so initially, it was very turnkey. And now as we go out to our merchants where we provide lots of different services, we help them grow their sales through our offers, engines, but now we have a capability that we can kind of easily deploy via Bread's technology to those merchants to help them kind of grow their sales through point-of-sale financing. And we've just had really, really good response from merchants we've talked to. So it's been a huge boost. And from a consumer perspective, obviously, point-of-sale financing is growing dramatically. And so now we also have a solution that we can put in front of our own customers for their purchases.

We're so appreciative to have such strong partnerships with the brands we serve. As you saw through our partners' lens, we bring value in several ways, including relevant product experience, rewards and loyalty capabilities, technology and data and analytics. We have a long history of working closely with the brands we serve and are focused on creating sustainable relationships where we increase value for both parties. We are dedicated to providing solutions that drive loyalty, whether that be through credit reward programs, promotional financing or payment flexibility that is branded and part of the shopping experience. Bread's quality and versatile lending payment technology platform, in combination with our Enhanced Digital Suite, further expands the value we provide to our brand partners. Our full product suite allows brands to manage their payment product mix, to drive incremental sales and optimize profitability. Data and analytics is also a key area of differentiation we bring to our brand partners. Our brand partners can use self-service reporting solutions available through Alliance Data's partner analytics portal. This provides near real-time access to comprehensive brand acquisition and sales data as well as underlying driver analysis, providing immediate insight into what is stimulating performance. These tools help our partners to understand changing behaviors and emerging preferences of their customers to analyze customer performance by demography, geography, tenure, channel, trip and basket size, and to develop and support their internal planning and forecasting capabilities. In addition to data access, Alliance Data supports our brand partners by providing dedicated analytics support. Our award-winning data scientists and analytic professionals are embedded within our brand management teams. And for a selection of brand partners, Alliance Data associates even serve as the primary on-site data science resource for our brand. Because of this tight integration with our brand partners, Alliance Data is able to understand and anticipate our partners' needs and proactively delivered unified solutions supporting their goals and strategic objectives. Recent developments on this front includes: one, a strategic customer acquisition tool built on a custom artificial intelligence engine, leveraging over 900 data points on 180 million individual U.S. households to identify and predict those most likely to respond to partner membership opportunities; and two, a digital product recommendation engine, incorporating customer shopping history and digital footprints to create and deliver individually tailored marketing content. The product recommendation engine drove 2x response rates to e-mail and digital marketing campaigns. This approach to leveraging data and analytics in support of targeted acquisition and sustainable business growth creates a differentiated set of outcomes for us and the partners we support. To meet growing customer needs and expectations across the digital ecosystem, we are taking a customer-centric approach to design new experience and capabilities that are modernized, intuitive and connected across channels. With our robust product suite and integrated software development kit, we provided unparalleled customer choice, and we've enabled that choice with seamless application experiences through mobile, digital and in-store, utilizing intuitive design and prefill to increase conversion rates, reduce abandonment rates and drive sales and loyalty. We've armed our brand partners with access to marketing and product placements that drive consumer awareness of payment choice and purchasing power early in the shopping journey through our Enhanced Digital Suite. Data is a critical element here. By having the full product suite and the supporting capabilities, we offer the right product to the right customer at the relevant time. And we've deployed machine learning and artificial intelligence and data and analytics to drive insights and personalization from application to engagement to servicing. We put control in the hands of our customers to engage with us in the channel of their choice. And in 2020, over 16 million customers used a digital device to access their account online, including reward and benefit information, and we are continuing to evolve our customer journeys. We have invested in the products, capabilities and data and analytics, and when paired with our strategic underwriting, which Tammy will cover in more detail, drives higher sales and market share. It feels like we covered a lot because there's been a tremendous amount of work completed over the last year.

Welcome, Val.

Thanks, Brian.

All right. So as you'd expect, we have a lot of questions coming in from investors on Bread, so we'll jump into the first one. What more can you share on the economics of Bread? And can you help us size the opportunity with the 3 different Bread models?

Sure. So we'll continue to run Bread as part of our Card Services segment, which provides for efficiencies as well as some exciting cross-sell opportunities. Bread, it will be embedded as part of our overall product suite, so we won't be breaking Bread out and reporting separately from a P&L perspective. We do expect to have some great growth across the platform from the Royal Bank of Canada, Fiserv as well as our direct merchant relationship. So we feel very confident in our ability to more than double Bread's receivables by the end of the year. Although we've not provided targets by channel, we do expect to have significant contribution from all 3 models. So our direct model, where we will acquire receivables and earn interest in merchant fees; our distribution model with Fiserv, where we will also generate receivables and earn merchant fees and finance charges; and our technology platform with the Royal Bank of Canada, where there are no receivables and no credit risk and we earn a gateway in servicing fee. The future mix and growth will largely depend upon our partners' prioritization road map, but we believe that we will lean a little heavily into the direct model, given the large number of Bread merchants already up on the platform, the robust pipeline that we have and our ability to cross-sell into our existing 130 card program partners. When we acquired Bread and opened up the e-commerce lending opportunity, we almost doubled our total addressable market, and this market continues to grow.

Great. Thank you. Next question what does your rollout plan look like for Bread? How many card partners can you expect to see added in the second quarter and second half of this year? And when can you expect one of your larger partners to be running on the Bread platform?

Yes. So Bread continues to onboard their digital partners at an impressive rate and continues to increase their pipeline of prospective digital clients. With Fiserv, we also have an opportunity to further penetrate the small and midsized market where our traditional product was less relevant. We've been talking to our existing card program partners who have been excited to add Bread into their product suite and provide a more robust consumer choice. We launched Apartment 1B (sic) [ Apt2B ] in Q1. We'll have additional clients come on board in Q2 and further ramp that up in Q3 and have one of our larger partners up by the end of the year.

Great. Thank you. One more question. What does your new business pipeline look like? And then are there any large portfolios you are hoping to acquire?

Yes. So we're constantly evaluating opportunities in the market and look forward to growing our portfolio, and doing so in a way that achieves sustainable profitable growth. Last year, because of the pandemic, we saw opportunities lighten up. That started to pick up in Q4, and we've seen that further accelerate in 2021. We've also seen prospective clients look for more robust payment offerings across multiple products in omnichannel. We launched Famous Footwear and Petco this year across all of their digital properties as well as in-store and expect to have further announcements in Q2.

Great. Well, thank you very much, Val. With that, we will take a 10-minute break. [Break]

I'd like to welcome Tammy McConnaughey, Executive Vice President of Card Operations and Credit Risk, who will provide insights into our lending philosophy and credit outlook. Tammy has been in Alliance Data for nearly 30 years and has experience in a variety of roles throughout the organization. Tammy, I have to tell you, it's been an absolute honor to work with you over this past year.

Thanks, Ralph, and I'm excited to be here today to talk about one of the key enablers of our growth strategy. Ralph talked earlier about how we are now at 20 years as a public company. Our history though stretches back even further and has a strong retail heritage at its roots. That retail DNA has been a key driver to how we approach credit risk management here at Alliance Data. Retail is all about the consumer and ensuring that we can meet their needs in the moment. When you think about the full spectrum of retail and the new products that both Ralph and Val talked about, ensuring that we can meet those needs in terms of lending approval in the moment, dynamic line assignment, instant line adjustment to accommodate larger purchases requires agility, flexibility and speed to ensure a friction-free experience. Today, those requirements still hold. If anything, they're amplified as we all embrace an increasingly digital- and mobile-centric buying model. To stay ahead of consumer needs, you need flexible technology to manage the broad range of products, consumer profiles and purchasing needs. In addition, since retail has not been predominantly about 2 people interacting face to face for a while, and we want to responsibly meet the consumers' buying needs, we have the ability to bring in multiple scores designed to manage underwriting, identity and brand data that is critical for full-spectrum success. Speaking of full spectrum, we are excited about the new products like buy now, pay later to help further differentiate our grow-and-expand approach. We believe that every consumer deserves the opportunity to establish credit. Our approach is to grant credit lines that are manageable, provide consumers the ability to manage their payments and spending power and then gradually grow their lines with good payment behavior. Our data indicates that approximately 2/3 of lower-scoring cardholders significantly improved their bureau risk scores in the first 24 months after opening an account with us. This also builds loyalty to the brand and Alliance Data. All of this comes with our well-established risk appetite metrics. The metrics provide an important foundation for all of our decisions. Not surprisingly, our metrics are focused on credit risk and profitability since we see our accountability to make profitable risk decisions and not just focus on a targeted loss or delinquency rate. This balanced approach is why we really see our mantra as being about profitable, fair and responsible lending. How consumers spend and engage is ever-evolving, and the world of underwriting has to stay ahead of that demand. Highlighted here are just a few of the key investments we have made over the last 12 to 24 months that allow us to provide leading approval rates within our risk appetite metrics. Upgrading to VantageScore 4.0. While FICO has been a well-recognized name in credit scoring, we have always been more partial to the tri-bureau VantageScore. We leveraged their latest version 4.0 currently, and use Vantage for its proven ability to score more applicants, very important to our brands and its enhanced stability to better segment good and bad performance, especially below prime. So not only can we score and approve more applicants, we also have seen higher profitability since more of the good accounts get approved. In short, a superior score from our perspective, which is why we have used Vantage for well over a decade. It does scale similar to FICO and a score of 660 remains the general industry standard for prime. We have also invested heavily in upgrading our core platforms. Predictive modeling has come a long way as technology has enabled artificial intelligence and underwriting has been a key focus area for deployment. Machine learning models, more sophisticated strategies that involve multiple model overlays as well as introducing dynamic variables are critical for finding the best approval rates and strong profitability. We are also long-time proponents of alternative data sources beyond the credit bureaus to manage the broad spectrum of brands and consumers that we serve today. We are constantly developing or testing commercially available scores, with an emphasis on really 3 areas. One, protecting our consumers. Leveraging tools, data and models to refine identity theft prevention and malicious intent or synthetic identity detection and deflection. These are critical for protecting consumers, especially in the higher end of credit scores due to the continued movement to digital acquisition. Two, enhance our future state solution for the broad spectrum of consumers. With younger consumers likely to be on or underbanked, alternative data sources to identify responsible payment behaviors are key to helping these consumers establish credit and ensure they can build their credit history over time. Three, deliver strong approval rates with the right credit lines by strengthening traditional credit scores with alternative data overlays as well as custom bureau overlays to optimize in across all score segments. We are consistently searching for the best scores and tools to enhance credit management but also support our brand partners. The acquisition of Bread has strengthened our underwriting tools and talent. We have one team dedicated to researching tools and scores and another dedicated to consistently challenging our internal models. Our emphasis on full-spectrum lending is not only critical as a differentiator for Alliance Data with our partners, it is also important for driving strong profitability. The figures on the bell curve represent the risk-adjusted return for the different score bands as compared to the return we receive in the super prime space. As the chart shows, we are very comfortable and optimized in the area around prime, which falls into the range of 600 to 740. Accounts in these segments have over 2x the return of an average super prime account. We also generate a good risk-adjusted return in the subprime segment due to the advanced algorithms, data and tools we use to selectively approve customers that are relatively good risk within those score segments. As a result, while the segment has a lower approval rate, these customers are highly incremental to our brand partners as we provide purchasing power through our grow-and-expand approach that provides very manageable credit lines. Super prime is less about credit risk and more about identity protection for our consumer and remains an important segment in terms of purchasing power, and we find that these customers are largely transactors or are those seeking financing of large purchases. Our commitment is to be more transparent, and this includes sharing risk score distribution quarterly moving forward. What is reflected on this slide is our VantageScore risk distribution at the end of first quarter for 2021 and 2020. What this reflects is a shift in our risk distribution driven by our deliberate actions in 2019, supported by our enhanced scores and tools. Our focus has been more about optimizing our less than 600 segment, ensuring that the segment remains profitable and responsible. Our above 660 mix is growing, and it is important to highlight that our strongest growth is coming from prime and prime plus, also our most profitable segment. Near prime is also highly profitable, and this is the segment where our grow-and-expand approach is critical. We recognize that our risk mix is different than our competition, and that is deliberate. It represents who we support and reflects the benefit of our innovative underwriting, product mix and fair and responsible lending. Given our credit risk mix, you can expect to see steady loss rates, while maintaining leading approval rates within a diversified product mix, driving profitable growth. I've shared our underwriting philosophy, our focus on continuous innovation and a well-balanced risk appetite that allows us to provide leading approval rates to our brand partners and customers. When you then pull that together with the terrific progress and plans Ralph and Val shared on expanding our products in markets, you see how this all comes together in harmony. Providing full-spectrum lending and underwriting with an expanded product mix ensures that no matter the product or consumers our brands are targeting, we can meet their needs and help them grow. That same innovative underwriting approach, coupled with our commitment to ensure we provide manageable lines and protect consumer identity gives consumers across the credit risk spectrum an opportunity to better budget, finance and earn rewards. Ultimately, from a credit risk perspective, it best enables our mission to deliver steady losses and sustained profitable growth to our shareholders.

Hi, Brian.

Welcome, Tammy.

Thank you.

All right. Let's jump into your questions.

Okay. Great.

First question, thank you for the VantageScore distribution data. We are curious as to what your target average Vantage score is?

So Brian, as I shared, we are really focused on making profitable, responsible decisions within our risk appetite metric. Therefore, we don't really target an average Vantage score. However, we are focused on optimizing the approval rate for our brand partners and their customers. We are, however, always focused on continuing to strengthen those scores, algorithms and models that we leverage. Again, we don't focus on a specific Vantage score. We're really focused on making profitable decisions.

Makes sense. Do you have any plans to underwrite deeper in the future?

Good question. So we certainly have normalized our strategy as we have started to come out of this pandemic. We've been very cautious with doing so. I did share that we do already underwrite below 600 very selectively, and we leverage a lot of those scores and algorithms and models that I shared with you to really make responsible decisions in that below prime segment. So I don't foresee us going any deeper. What I do foresee us doing is continuing to strengthen our scores and our models that we're leveraging and continuing to find ways to strengthen the profitability within that segment.

Thank you. How do your April credit metrics impact your outlook for the second quarter and full year on losses?

Well, we are certainly very pleased with our losses year-to-date in our delinquency levels, and April was another very strong month for us. The April loss rate at a 5.2% really gives us confidence in our guidance for the second quarter, really focused on achieving really the lower part of that range that we gave for the guidance for the second quarter. So we believe we'll be in the mid-5% range. And then as you think about the delinquency, it was another low point for us at 3.4% for the month. And so certainly, that gives us even more confidence in our full year guidance for the year coming in below 6%.

Great. Last question. Do you anticipate that your risk mix will change given the strong growth expectations from Bread?

So I know I believe I've shared, the Bread risk mix is very strong, relatively 85% or greater than 660. What I believe really this leads us to is an ability to open up the buy box for Bread. We can leverage both their tools and technology, also, our data elements and our scores as well to continue to expand the buy box for Bread. So I don't foresee that as Bread grows, that it will fundamentally or significantly shift our overall credit risk mix.

Great. Well, thank you very much. With that, I'll now turn it back over to Ralph.

Last, but certainly not least, I'd like to speak to our financials. Working with the Board and my leadership team, we have set the following long-term financial targets for Alliance Data. These targets were set with a planned LoyaltyOne spin-off and represent our targets for the remaining company. As I mentioned, we see a path to high single-digit annual receivables growth over the long term and expect to exceed this in 2022. This trajectory positions Alliance Data to exceed $20 billion of receivables in 2023. The receivables growth, combined with our outlook for stable yields, suggest a similar revenue trajectory going forward. We are targeting positive operating leverage in 2022 and beyond, driving improvement in our pretax pre-provision net revenue run rate. We are focused on strong year-over-year core underlying earnings growth. Importantly, our projection include a high level of investments in digital technology and efficiency projects as we are committed to continue to invest in our drivers of growth. As Tammy pointed out, our business mix and underwriting strategic advantage continues to drive lower projected losses. We would expect our average through-the-cycle net loss rate to be better than our historic level of 6%. Our underwriting philosophy is designed to drive higher risk-adjusted returns and balance sheet growth. As a result of these items, we are targeting an ROE level in the mid- to high 20% range. This level will allow for continued balance sheet growth as well as continued proactive investments each year. Putting this all together results in a very compelling outcome, driving both sustainable growth and strong returns. As you have heard, we are confident in our growth opportunities. Sales are reaching an inflection point that will start to drive receivables growth going forward. We expect our revenue yield to remain steady, assuming no change in the prime rate. We are seeing the revenue yield for Bread coming above the portfolio yield and anticipate further yield accretion as the Royal Bank of Canada relationship ramps up. We are also watching out for pricing compression in the buy now, pay later space. We have not yet seen that pressure materialize. Finally, we remain focused on maintaining prudent expense management. We have proven over the past 2 years that we can become more efficient while continuing to invest strategically in our business. Many of the investments we have made, including machine learning, bots and fraud tools helped to lower our cost to serve. Our focused effort to drive positive operating leverage will allow more revenue to fall to the bottom line. Our typical growth in receivables is driven by 3 key factors. First, increasing sales growth from our existing retailers, which is loosely aligned to GDP growth. We expect these sales to provide a 2% to 3% lift in our receivables. Second, introducing new products and services to increase our tender share at existing retailers, accounting for an additional 2% to 3% growth. And third, new brand partner acquisitions and the ramp-up of new vintages, which would offset attrition, leading to an additional 2% to 3% growth. We would expect the combination of these 3 factors to lead to high single-digit organic growth each year. Additionally, we are forecasting incremental growth from the execution of the new Bread platform relationships as well as the potential for portfolio acquisitions. We anticipate additional tailwinds in 2022 from pent-up customer demand and payment rates stabilizing at more historic levels. In total, we believe these drivers of growth will increase receivables in the high single to low double-digit range for 2022 and potentially beyond. Next, we will quickly review our mix and funding costs. In 2019, we introduced our Comenity Direct business, which has grown our retail deposits to approximately $2 billion. This new funding source has helped to lower our funding cost and is expected to continue to do so as we grow the program in the future. We expect to continue to grow our retail deposits and anticipate that almost half of our funding will come from the consumer channel in the future. We expect this will lead to a lower cost of funds relative to interest rates over the next few years, while maintaining a diversified funding mix. Our capital priorities have not changed. We have prioritized funding organic growth and investing in capabilities like those that Bread brought us in 2020. We expect to maintain shareholder dividends at the current level and are focused on improving our enterprise capital metrics to be more in line with peers. The primary way we'll achieve this is through paying down debt. The planned spin-off of the LoyaltyOne segment will contribute to moving us to parity with peers. Finally, once we are comfortable with the level of enterprise capital metrics, we will ask the Board to consider additional capital returns to shareholders in the form of stock purchases or increased dividends. We will provide more guidance on our targeted levels as we move closer to our goal. When I joined the company over a year ago, the Board and the leadership team saw an opportunity to improve our company to better compete and serve our partners and card members. We have made great strides, but we are not taking our foot off the gas. We will continue to make investments in key areas, including technology innovation, product development and digital advancement. We continuously strive to become more efficient while improving our offerings, capabilities, user experience and data and analytics. We will leverage our Bread team to drive digital innovation that appeals to consumers and lean on our engineers to continue to create the digital offerings of the future. We will harness the power of our data to reduce the cost to serve, drive partner sales and provide consumers with a product most likely to engage. Our strategic initiatives are built on the solid core of our company. The key foundational elements include: proactive risk management; prudent balance sheet management, which aligns with our capital priorities; and disciplined expense management, which will drive positive operating leverage and allow for self-funding of continued investments. We would like you to leave with a few key takeaways. First, we expect exponential growth with the addition of Bread and anticipate Bread to approach $10 billion in platform sales in 2023. We have the right people, products and technology and are laser-focused on execution. Second, our diversified products and robust underwriting increase our total addressable market and improve sales for partners by helping them build their brand. Third, we will continue to innovate to meet our customer and partner needs. You will continue to hear us talk about evolving with the consumer and their changing preferences, providing them with choice on how and when they pay, and enhancing the shopping and payment experience, especially through digital technology. As I said before, we will have the discipline of a public company and the curiosity and the heart of a fintech. We are redefining who we are as a company and how we will compete. We have a committed leadership team and dedicated employees, all of whom are working together to drive a successful transformation. With this comes opportunity and excitement for the future. The combination of the changes we have made and our direction for the future sets up Alliance Data to provide long-term value to shareholders through sustainable, profitable growth for years to come. We will now open it up for questions.

[Operator Instructions] Your first question comes from the line of Sanjay Sakhrani from KBW.

Thanks for all the info. Ralph, I appreciate all the color on the financial targets. I'm hoping you can help us think through the associated revenue growth relative to the loan growth expectations you've discussed. Maybe you could speak to the Bread volume and sort of the take rate there. And I know you talked about efficiency gains. And maybe you could talk about what this means in terms of EPS growth, assuming you get some operating leverage as well.

Well, thanks for joining us, first of all. So in terms of revenue growth, I think it's going to be commensurate with that single -- high single, low double-digit growth. I think you'll see that consistency there as well in terms of revenue growth. In terms of take rate for Bread, I think it's going to be really important that the take rate continue to go up and I think we've got the best product. And with really good pricing, we're going to see take rates increase over time. So I'm really excited about that. After 2021, positive operating leverage is going to be where we are. And you should see, again, that commensurate growth rate in the EPS. I can't give you an exact growth rate in EPS, but given positive operating leverage, high single to low double-digit growth in revenue and receivables, good take rate on Bread and continue us -- us continuing to introduce new products, I think you'll see a nice rise in our EPS.

Okay. And just one follow-up on strategy, perhaps for Val as well. You guys obviously worked at larger private label issuers. I definitely see the synergy between buy now, pay later plus private label altogether. And clearly, you're ahead of your peers. It sounds like some of them are coming around to embracing the strategy as well. How do you think that positions you in terms of customer acquisition or retention? And how long do you think it takes the others to catch up?

Yes. Well, I'll start and I'll throw it over to Val. So I'm really excited to be out in front. It's a good position to be in, so I'm really excited about that. And if you think about our products, it really is a basket of products rather than one-offs, and we can give bundled pricing. And I think that's really interesting for our partners. And right now, we're signing new partners, we're renewing new partners. So I feel that our competitive advantage will run through the cycle as these things happen. With that, I'll ask Val to kind of jump in.

Sure. Thanks, Ralph. So our current partners have responded pretty positively to that very robust product suite that we've now brought into the market. So if you only offer one product, you're not providing the consumer choice that they're looking for to really use the payment solution that's most relevant to them at that point in time. So we have seen a very good interest from our current clients on expanding that product suite, be it the buy now, pay later, installment, co-brand or private label. And in our current prospective merchants that we've been talking to, they more and more are looking for that very multi-product robust offering to address a multigenerational customer that's coming to their shopping. So we do see some distinct advantages to the strategy that we're deploying.

Yes. I mean Sanjay, I'll finish it up. We're a one-stop shop for payments. And I think that's a really good place to be right now.

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

Very good presentation. Really appreciate all the information. Question on the Bread volume. I think, Ralph, you suggested that Bread volume would be, I think, $10 billion exiting, I think, 2022 or '23. And maybe what does that translate into, into loans that would be held on the balance sheet into revenue? Is there a hybrid model here of selling some Bread loans and holding some on the balance sheet? But any color on what that $10 billion means to revenue, loans on the balance sheet?

Bob, first of all, again, thanks for joining. Just to be clear, that was 2023, and that was approaching $10 billion. And our view is we keep the loans on our balance sheet. And as Val explained earlier, there's really 3 revenue streams for Bread. One is direct to consumer, the other one is distribution and the third one is a tech platform. Obviously, the tech platform doesn't drive receivables, but the other 2 do. And our view would be approaching that $10 billion in 2023. Val, anything to add?

Yes, exactly. I would say, in addition, that mix between those 3 is ultimately really going to determine where the receivables land. And also, recognizing we offer both buy now, pay later and installment and so the tenure on those products is also very different. And the receivable growth in Bread is part of the guidance we provided.

Okay. And then, I guess, maybe on the tech platform. You've talked about RBC quite a bit. Is there a pipeline beyond that? And can -- is the tech platform going to be -- do you feel like it's going to be a material part of that $10 billion?

Yes. So I -- there's a pipeline at RBC for sure. So they have a pipeline of merchants that we will put on the platform, and we are actively looking at other opportunities for that platform as well. Val, anything else to add?

Yes. One of the reasons that we acquired Bread was the fact that their platform is so scalable and nimble. And so RBC has been a great partner, a lot of opportunity for growth, and we'll continue to look at opportunities to scale that platform.

Great.

Your next question comes from the line of Jeff Adelson from Morgan Stanley.

Just also want to voice my thanks for all the added disclosure. I know everyone has been asking for that, and I think investors would really appreciate that. Just wanted to dig in again on Bread. What do you think the size of Bread can be in 3 to 5 years in terms of the receivables? And I know it's been asked, but just trying to understand what the potential upside there is to the loan growth. And is that all completely incremental to the kind of $20 billion of balances you're highlighting? I know you've already discussed this kind of more than doubling this year, but just wanted to kind of understand how that all factors in.

Yes. So I'm glad you said doubling this year because that was going to be my lead line. We're going to certainly double the Bread receivables this year. And then you can see that growth high single, low double digits as we predicted our growth going forward. And yes, there is upside in our projections for Bread as we move forward. I'm going to toss it over to Val one more time and see what else she has to say.

Great. Thanks, Ralph. Yes, I would just say, we're pretty excited about all of our new relationships with Bread and Pfizer, in particular, really allows us to scale in that small- and mid-merchant segment that our traditional products didn't play. So some good opportunity for scaling there.

Okay. Great. And then how additive can RBC be to your gross yield upside? It seems like perhaps you might be guiding us to flattish yields from here, but just wondering how you're thinking about the range of expectations with RBC on the gross yield?

Yes. So our yield is going to be steady as we look out through 2021. I think the Bread yields are a bit better or a little accretive to our overall yield. And RBC, in particular, if you think about RBC, we get a continuous fee. It's not a onetime fee. It's a continuous fee by transaction and no receivables. So it's a nice revenue stream that adds to our yield. So we see that as accretive to our yields going forward. But our yields -- our yield was up a bit in the first quarter, and we expect our yield to be steady for the balance of this year going into next.

And then if I could just maybe slip one in on strategy. Have you ever kind of done an analysis on how hard it is to go to market with a kind of multi-point -- multi-price point, multiproduct offering from an underwriting perspective on BNPL versus maybe more of a simplistic offering that I think some of the competitors are out there offering with just a very simple payment for product?

Yes. It's interesting, but I think we're able to segment -- the data and analytics, we're able to segment and really offer people what they deserve in the marketplace rather than a one-size-fits-all. We're able to be very specific about what we can offer and how we underwrite people. So I think that's a really good strategy for us. We get a lot of good take rate on that because people are engaged with where they -- with pricing. I'm going to ask Tammy to kind of jump in.

Yes, certainly. Thanks, Ralph. So I would add to that just to say that certainly, as we bring our 2 organizations together, we've really continued to strengthen our underwriting and then our tools and technology. And to your point, we'll leverage those different data elements to make the best decisions in regards to the products that we're underwriting for our brands.

Your next question comes from the line of Mihir Bhatia from Bank of America.

And firstly, let me also echo, Ralph, my thanks for the session today and really to the whole team. I think very informative, and clearly something investors have been asking about. Maybe I could just start with Bread a little bit. I guess the first question I had on it was just in terms of the opportunity on -- I think I heard you say there's opportunity on take rates. Can you just clarify that a little bit? Is that just the RBC fees layering in? Or are there like opportunities on the core take rate like on the MDR, I guess, that you charge to merchants there?

Yes. I think there is. We are -- our pricing is going to be very competitive because we price overall for a partner. It's not pricing for a specific transaction. We price overall, so we can give them a basket of prices. So we think the take rate is going to be very attractive for the consumer for buy now, pay later, even in installment loan that will be extremely competitive. Val, anything to add?

Yes. No, I think that's right. We have an opportunity to price very robustly across the products, and we do so. And we offer a very competitive product that creates incremental value. We're the only buy now, pay later that does the white label solution and is also fully integrated at the point of sale, which reduces friction, increase incremental value for both parties.

Understood. And then just in terms of -- I understand you're not disclosing Bread financial separately, but maybe you can at least help us with just stack rank or just give us a way of thinking about what the returns on a Bread loan. Are they comparable to the core private label business? Is it privately -- like if you had to choose -- if you could only do 1 of the 2, which -- like which has like more interesting return, or more interesting return profile?

Well, I'm not Meryl Streep, it is not Sophie's Choice. I like having a robust set of products, in my view. I think Bread will be accretive to us. That's why we spent the time and energy to acquire Bread during a pandemic because we knew it would be accretive. It closes product gaps, it focuses on millennials, it gives us a larger addressable market, all of those are accretive to our franchise. So it's a good complement to our traditional products and really gives a consumer choice and gives the -- our partners the ability to -- for the right product, at the right time to the consumer within their buy flow. So to me, I don't want to choose one or the other. I like them all, and I like the fact that we're integrated.

Okay. And then just one last question, just on the Enhanced Digital Suite. The solution you demoed today certainly looks very customer-friendly and interesting. And I guess the question is when will we see that more widely across your retailer base? Can you just update us on the timing on that just as your retail merchants start integrating that?

Yes. So let me start, and then I'll turn it over to Val. So it's really built to integrate quickly. It's built on a series of APIs. And the key is getting into our customers' schedule of technology implementations. That's the real key. Once we're there, it's really easy to integrate in a short period of time, but I'll let Val talk a little bit about our schedule.

Sure. Great, Ralph. So we are starting to integrate, more broadly across our merchant base, the Enhanced Digital Suite. We brought up both Famous Footwear and Petco on Enhanced Digital Suite. So we generate awareness around those payment options very early in the shopping journey and remove that friction through the transaction. We also have more than 40 merchants up on frictionless mobile, where they can scan on the QR code and immediately get approved and transact and checkout all on mobile.

Great. And my last question just on credit and then I'll get off, is just Tammy, the statistics you all shared, clearly, there was a lot of improvement in 2021 over the last year, I guess, right? But the question I would have is how much of that was driven by just the pandemic and your tightening credit? And what should we expect just in terms of what those metrics look like? I understand your guidance overall is a little bit below 6%, but just what are those metrics from a VantageScore perspective look like as we go out like a year or 2? Should we expect similar or should they normalize, I guess, back a little bit?

Yes. So certainly, I would say that a smaller portion of our improvement in the credit risk mix was driven by the pandemic. But more importantly, it was driven by the changes that we implemented in 2019 and really around those enhancements that I spoke to. So improvements in our score, improvement in our models, the ability to bring in more data elements to really continue to strengthen our risk score distribution. So while there may be a slight normalization in some of the risk mix distribution, I do expect it will continue to be strong. And so again, I don't believe it was primarily the pandemic. It really was the decisions that we made at the end of -- really throughout 2019 to continue to enhance our scores.

Your next question comes from the line of Vincent Caintic from Stephens.

First question, so loved the detail about the positive operating leverage. I was wondering if you could talk maybe a little bit about the components of that when you think about top line growth versus expense efficiency as you're doing a lot of core processing improvement spending there. And maybe sort of maybe if you could talk about how you drive operating leverage versus other factors.

Sure. So it starts with revenue growth, right? So we're anticipating high single-digit revenue growth in 2022. And to be clear, positive operating leverage will occur in 2022. And all of the things we're doing around digital are they're customer-facing end to end. So we're also driving down our cost to serve. We think that's critically important. So when we reduce our expenses in terms of cost to serve, revenue growth at high single digits and our ability to flex our expenses and our investments as we move forward, that combination, we can manage operating leverage with those combinations. We'll continue to invest as long as the revenue is there. We'll continue to invest in capabilities and products, but that's -- we have control over that. We can moderate that with -- as we think about investments going forward. So positive operating leverage in 2022, we're confident about that. And the combination of that revenue trajectory, managing our cost to serve through digital and other innovation and then managing our investments based on that revenue growth. So we feel that's how we'll achieve our positive operating leverage.

Okay. Great. And then following up, so you quantified a number of growth drivers to get to the high single-digit year-over-year receivables growth. I guess kind of related to existing capabilities. So maybe another Bread question, but kind of tying it all together, and I think you gave us bits and pieces of it with some of the volume metrics. But when you think about Bread as an overall contributor to that high single digits, could you maybe help us break it out there or how incremental it could be to your receivables growth?

Yes. We're going to manage Bread as part of the Card Services segment. Call it a payment services for -- as we move forward. And the way I see Bread is it just increases our penetration in our current product, in our current portfolio, right? So where people might have opted to do something differently, now we have a product where we can go deeper with them and give them choice in our existing partner base. Secondly, Bread on its own, in terms of acquiring small- and mid-sized partners, I think that's critically important. Those are -- that will drive incremental benefit for us. And then as we mentioned, the RBC relationship with others like it to drive incremental revenue. So Bread will be a -- as we move forward, it won't be the only growing part of our portfolio, but it will contribute significantly to our revenue growth as we move forward.

Okay. Got you. And maybe I'll just follow up here because I know we're asking a lot about the -- just breaking out Bread metrics on its own. But I think the reason that we're asking is because when we look at these other buy now, pay later guys with their amazing equity valuations, we're trying to do with some of the parts and maybe argue for Alliance Data to get some of that nice valuation as well. So maybe last question, but just kind of a broad one. When you think about yourselves versus the competition, why should ADS maybe have that higher multiple? What advantages do you bring? Do you think there's going to be consolidation where you win out in terms of taking market share from the rest of the guys? Maybe if you can help us out there.

Sure. So I think a few things that should be considered when we think about Bread and the valuation. One is that -- the other is, we're a bank. We have a strong balance sheet. We have good funding capabilities. That's a positive as we move forward. So we have that discipline of that public company with that heart of a fintech. That's a nice combination. We're profitable. We know how to drive profitability. We know how to underwrite. We've been at it a very long time, and so we know how to underwrite through the cycle, good times and bad times. We know how to manage that. We know how to manage collections. We know how to manage receivables end to end. That's important as you think about a cycle over the long term. So I really feel good about those types of things. We're -- at the end of the day, we're a payments company, and this is a payment type and we know how to manage that very well. So those are the things, quite frankly, I see as benefits to us. We have a strong balance sheet, a balance sheet that's getting stronger. That's what we're focused on. And managing receivables is what we've been doing for 20 years. We know how to do. We know how to do it well, and we'll continue to give [ and to boost ] the right products at the right time because we have such great data and analytics. And so that combination should really help the analysts think through what the valuation of this acquisition is for ADS.

Your next question comes from the line of John Pancari from Evercore ISI.

On the receivables growth, the high single digits, I know you indicated you expect that you could exceed that level in 2022, I think you mentioned. So if you could talk about perhaps maybe the level that you think is -- or the upside to that high single digit where that could be? And what are the drivers for the better expectation for 2022?

Sure. So to be clear, 2022 is average receivables. Just to be clear with that, is that's $20 billion of average receivables as we -- in 2023 as we move forward. And the upside there is a little take rate in Bread. There's always an inorganic growth in terms of a -- winning a portfolio, winning a new partner, that gives us some upside. I think those are the areas where I look to upside as we move forward. A booming economy also helps us in terms of upside. Those are the 3 areas I see us getting maybe a boost in that estimate of $20 billion. So $20 billion high single-digit growth, low double-digit growth, feel confident about that in terms of average receivables in 2023. And the opportunities with Bread and the opportunities with potential new partnerships because we have a basket of products always is -- contributes to upside.

Got it. Okay. And then again, on the Bread side, on the merchant discount rate there, is there a way you can maybe help us think or size up the discount rate or at least give us a range? I know there might be, for competitive reasons, it's tough to disclose. But is there a way to help us think about the merchant discount rate that you're getting on your Bread relationships or at least a range?

Yes. I'm going to -- hard to disclose, but I will say, we are very competitive because then we price on relationship, not on product. So our view is we'd be very competitive. We're not going to price low. Because we're not going to do that, we have responsible economics, so it will be competitive in the marketplace. But we do price on relationships, that gives us an advantage in terms of take rate. But let me ask Val her perspective.

Yes. I would just expand on that. To your point, Ralph, we price for relationships. We also price for value. And we do offer a differentiated product offering because of the data analytics that surround and allow us to present products at the right time and most relevant for that consumer. And we also have the white label offering, which is unique in the market and helps our partners grow their equity and brand as a result of that. So we have some differentiators. We price for those differentiators. And when you create value, you get paid for the value.

Okay. Great. If I could ask just one more. If you could maybe update us on the partner renewal front. I believe you have indicated in the past that about 40% of your renewals will be before 2024 and 60% thereafter. Maybe if you could give us a little bit more color there on the update on what you're seeing if there are any other renewals that you flagged that may be at risk of going elsewhere in the near term?

Yes. So we're doing really well on important renewals. And I think the resurgence of digital and products has really helped us move forward in terms of demonstrating to the partner on how we can grow the pie for both of us, both us and the partner. We announced that we're losing a partner $0.5 billion of receivables. That is already within our forecast. Like I said, nobody likes to lose a partner, but it was something that happened and we can't go back, so we're moving forward. We think we have partners to fill that gap and products that fill that gap, so to drive incremental receivables. But in terms of other announcements, we don't see any other major partners leaving us at this point.

Your next question comes from the line of Ryan Nash from Goldman Sachs.

Thanks for all the color during the presentation. Maybe to go in a different direction of some of the other questions. So Ralph, on Slide 19, you gave us a nice breakout of credit sales, and you talked about greater than 40% coming in the form of online sales. And that's even with the expected ramp-up of traditional channels. So can you maybe just talk about how do you -- where do you see the underlying partner mix evolving from here? Are you where you'd like to be? There had been this huge move for the company sort of off-mall historically. And I'm wondering where are we in that journey at this point?

Yes. I always think there'll be a place for the mall shopper and the mall shopping, and it's a good place for us. Whether the customer buys at the mall or they go home and buy online, I think the malls are evolving to be more a showcase and a gathering place and a demonstration of what products can do when they buy online, but it's also a good place for us to acquire customers. And we have some really slick technology with QR codes to acquire customers right in that space. So I don't think that mall is going to go away in any time soon. It continues to evolve. It was different 5 years ago. It's different now. I'm very comfortable with the new verticals, whether it be in pet, home improvement and getting digital merchants on board in a very short period of time, that also drives sales. But I like the mix. So why I think it will remain around 40%, maybe a little higher, but the pot's going to grow. So we'll have -- we'll see sales grow in the malls, we'll see the sales grow online, but that mix may stay consistent. But I feel good about the partners we're adding and the Bread partners we're adding every quarter, we add new partners. And as malls open up, we're seeing better foot traffic and we're seeing better acquisitions and we're seeing better sales. So I don't think it's going to be a deterrent from online. It's just going to be additive. The denominator is going to be bigger.

Got it. Maybe one question on the financial side. So post the spin, at least on our math, you're going to reach TCE levels that are pretty close to the peers, but I guess you'll still likely have more debt. So can you maybe just clarify for us, I know you talked about it in your prepared remarks, once you reach those TCE levels, how do you foresee the priority shifting? Do you think it will be more of a hybrid of continuing to pay down debt and repurchasing? And is there a certain level of debt or is there a certain level of debt you want to achieve before opening up share repurchase? Can you maybe just help us with how to think about the evolution of the capital structure?

Sure. So as I said in my prepared remarks, our capital priorities haven't changed. We're going to continue to invest in the business. I think that's critically important. I think we haven't invested in a while. That's why you're seeing us upping the investment in the business. In terms of our debt, I like the fact that we can pay down debt and the spin helps us do that and gets us closer to our peers in terms of ratios. We'll continue to do that. In 2022, when we have -- we'll think through how do we want to return capital and value to our shareholders, whether we increase our dividend, talk about share repurchases, but I think that's the right time to do it. I want to see our balance sheet get a bit stronger. I think we get a boost from the spin. And then good consistent earnings also gives us a boost and good expense management. And then all of that put together, we can consider how we return value to our shareholders and what type.

Great. And if I could squeeze in one last one. You talked earlier in the presentation about the Comenity Card. I was just wondering what are the opportunities to expand that? I mean clearly, the big focus today has been private label and Bread, but just wondering what are the aspirations for the product? Could we move more to a hybrid structure like we see some of the competitors where your customers can get more upgrades to that product and drive incremental sales? How do you think about that product evolving over time?

Yes. Let me -- I'll start and I'll turn it over to Val. I am very pleased with the establishment of the Comenity Card. If you think about in the past, we would -- a partner would either leave us or bankrupt -- go bankrupt, and we have to wind down the receivable, which was always painful. Now we have a product. It started as a safe product to save that customer and really worked well, so much so well that we think there is an opportunity for us to go forward and grow that product. And I've asked Val to keep a watchful eye and determine our growth of that product. So I'll let her just chime in.

Yes. Thanks, Ralph. So it is a product that we continue to invest in and continue to see growth. We've seen pretty significant growth already, an uptake, particularly from our millennial population who's been very engaged. That product has moved to top of wallet. We see cross-category shopping continue to improve. And so it is an area that we'll continue to focus on in the market.

Your next question comes from the line of Michael Young from Truist Securities.

Wanted to follow up kind of on the ROE question that was previously asked. And just ask if there's kind of over the medium or longer term, any focus or change in terms of on-balance sheet risk-taking versus off-balance sheet risk-taking and the ability to become more capital efficient from that perspective?

Yes. I'm comfortable with our capital plan and how we're thinking about growing -- getting to mid- to double -- high 20s ROE. I think it's a combination of having a good receivables base, driving that revenue, being very maniacal about our expense management and driving that and ensuring that we have the right amount of capital. We're not overcapitalized or undercapitalized. We have the right amount of capital as we move forward. So I'm a big believer in a strong balance sheet and keeping things on-balance sheet and being well capitalized, but not overcapitalized and achieving those -- achieving that, our goals from an ROE perspective.

Okay. So more steady state kind of the current business model there?

Yes.

And then I guess, the other question would just be with kind of the new Bread platform, is there an ability to go after maybe nonfinancial institutions, but maybe more merchant platforms that could use buy now, pay later solution to have smaller merchants? Just any thought around that, something like a Shopify-type platform?

Yes, there is. I mean I think we have a really slick technology platform, and we're demonstrating that with RBC. I think the rollout of that platform to some nonfinancials is certainly within our opportunity set. Val?

Yes. And we do continue to grow in that space. So we do have some relationships today, including with Shopify and BigCommerce. And so we'll continue to look at those as we continue to look to grow in that small merchant category.

Okay. Great. And one last one from me. Just as we look at kind of strategic priorities, you mentioned more share repurchase and dividend in terms of capital return. We've had the acquisition and the divestiture. Anything else that you see as maybe a product gap or interest on the M&A front or technology platform, et cetera, that we should kind of just have in the back of our minds going forward?

What I really like about where we are today is I don't see any big gaps. I think we've closed a lot of the gaps, whether it's digital buy now, pay later installment loan. I think we've kind of closed those gaps down. Either we brought a leadership team together, both existing and new, that's very focused on the marketplace and focused on the horizon. I feel good about that as well. I also feel good about our ability to pivot if we have to. So if there's an opportunity in the marketplace, if there's something on the horizon, we could drive to it because we're flexible and agile. So I don't see any big gaps in our product offering now. I think we have a pretty substantial product offering. But if there's something on the horizon, and we see something out there, our ability to respond quickly is really a competitive advantage for us.

Your next question comes from the line of Meng Jiao from Deutsche Bank.

Ralph, you and your leadership team have done a pretty tremendous job so far on the transformation of the company. I guess one overarching question I had is what keeps you up at night? What are, I guess, some potential pitfalls that you currently see or are concerned about that could derail some of the growth that you and your team have talked about today?

I think when I was talking to John, he talked about taking over during the pandemic, and I said I joked I had 3 good weeks. The pandemic keeps me up at night, the what's going to happen? Are the vaccines going to work? What do the variants look like? Are the malls going to stay open? That's pretty -- that's still very present in my thinking in terms of how things move forward. Is this a stutter step or are we back to normal? Those things keep me up at night and how we have to adjust accordingly. And I think we've adjusted accordingly with digital, we've answered that and we've pivoted. But those things keep me up at night, the health and safety of our associates. We have an associate base in India in Bangalore, making sure they're safe and healthy and able to perform, that keeps me up at night. So pretty much traditional things, but really a hangover from the pandemic is what continues to worry me a little bit. But I think we've answered that very well. I think we're very focused on our future. We have the right products and the right tools to move forward. But there is that always keeping one eye on what's happening with the pandemic.

Great. And then secondly, Ralph, the team has mentioned the focus on tech investments and use of data to drive sales, consumer uptake and in partnerships. Could you sort of speak to how ADS looks to protect consumer data and sort of mitigate any potential cybersecurity issues that might pop up?

Yes. So we are -- that is job one for us, protecting our customers' privacy, and we're very focused on that. We've got -- we've built our privacy mode, and we'll continue to do that. We are very focused on the latest technology to prevent cyber attacks, we monitor them on a daily basis and where we have a team wrapped around that. That's critically important. That's job one. That investment, among all others, comes first, is to keep the privacy of our customers and protect that privacy.

Your next question comes from the line of Dominick Gabriele from Oppenheimer.

Great presentation. So I think the white labeling is key to all this. And traditionally, ADS is focused on implementing their capabilities when the partner is typically small and then ADS grows with the partner over time. And you did a great job showcasing your capabilities for SMBs. But do you think some larger partners today, and given your full suite of products now with Bread, could you actually target larger established RFPs on a more regular basis? And could this become a part of the growth as we move forward?

And the answer is yes, but selective big partners. We're not going to go after every big partner. We're going to have to partners that make sense for us, partners that are profitable for us. We're really focused on responsible economics. So when we go after an RFP with our basket of products, we're ensuring that the returns are there for us that makes sense. Val's team is very focused on kind of looking at what's in the marketplace and what is, one, profitable for us; but two, that we have a high probability of getting it and how that fits into our portfolio and the portfolio we want to grow for the future. Val?

Yes. Thanks, Ralph. I think with the investments, as you said, we've made across the products, the digital, the data and analytics, all of that really wraps itself nicely into being very competitive in some of those more mid-market, higher market deals and -- but keeping very maniacally focused on deals that will be accretive and profitable for the business.

The last thing I would say, too, is because where we have the -- we're agile and the ability to pivot, we can get to market quicker and make decisions quicker probably from our larger competitors. Well, we have less bureaucracy, and we could make decisions in a reasonable amount of time and work with a partner to get to a solution. I think that's, again, a competitive advantage of ADS.

Okay. Great. And maybe just one more follow-up. You mentioned and we haven't really talked in the Q&A yet on the funding mix actually, and that going to 50% over time. Can you just talk about how that trends over the years? And how long it takes to hit your target there? And then when you think about the combination of flat yields and this mix towards funding inside and outside of rate hikes, could the NIM expand for ADS as we move out in outyears?

Yes. I'm bullish on deposit collection. I think we've done a nice job. I think there's more opportunity there. We've just scratched the surface in terms of marketing, in terms of products we offer. So I'm very excited about it. We've proven we can do it. We have a good platform. And we could do it gathering the deposits at probably less of a cost than some of our bigger competitors because it's digital. So it will impact our funding going forward, I think. It won't be dramatic. You'll see some improvement in yield. It won't be a dramatic improvement. But over the next -- I anticipate over the next few years that we'll up our deposit gain quite a bit.

Your next question comes from the line of Reggie Smith from JPM.

Just had 2 questions. One, so I appreciate the disclosure, and it looks like the interface for Bread is pretty slick. I noticed that you guys had, at least in the demo, there was like a little blurb about powered by Bread. And I'm kind of curious how you think this whole thing evolves. I know some of your partners today accept, "I have to pay in a firm." and things like that. Curious how you think it ultimately evolves from a perspective of multiple buy now, pay later offers being presented to clients or customers rather and how you win in that, Ralph. Why they would choose Bread versus something with maybe a bigger brand name? I'd start and let you guys kind of move one there for a second.

Yes. Again, I will answer, and then I'll turn it over to Val in a second. So I think the white label solution is the key competitive advantage. If you're in a buy flow or the purchase flow and we serve up a way to pay, that is during your decision. It's not after you've decided to buy and you have to punch out to one of our competitors. We have your information, we pre-fill your information. You're already approved. So I think that gives us that competitive advantage. Again, pricing and the ability for us to offer a good price to a customer because we know more about that customer than a third party was just meeting that customer for the first time, helps us in terms of targeting them with the right product at the right time. So I think we have that advantage because Bread is a white label solution as well. Val?

Yes. I totally agree, Ralph. And I think the other piece of that is when you offer all of the products together to a merchant, you have the opportunity to then move from a product that can be more transactional to one that drives more loyalty. So we have an opportunity to also upgrade clients and move them. They might come in on a buy now, pay later product. Because of the data that we have, we can very specifically target to move them into a private label or co-brand and really drive that incremental loyalty for the client.

Reggie, it's the difference between the transaction and a relationship with the customer, and we have that relationship with the customer that gives us a good competitive advantage.

Got it. So just -- [ sort of means ] correctly, it sounds as though you guys feel like Bread will be presented earlier on in the purchase process. And obviously, there's an incentive for the retailers to use you guys over a firm and Afterpay. But I guess, drilling down a little bit deeper like from a consumer perspective, do you guys plan on increasing the brand marketing for Bread, so that it resonates with consumers at all? Because it's 2 sides. Obviously, the merchants do want to promote Bread and do want people to use Bread, but like how do you get consumer that may have seen your competitors and may be more aware about those guys to select you guys? Or how are you guys thinking about that? Do you follow my question?

Yes, I like the Bread brand. We'll continue to promote the Bread brand. And it has a reputation, and we continue to -- we're going to trade on a reputation as well. And you'll see that -- you won't see that brand go away. You'll see it in the marketplace, and you'll see it prominently in the marketplace. Val, anything to add?

Yes. I think also as equally important for our clients is that we offer choice. Because we can do both the white label and branded in their own look and feel as well as branded Bread, It does provide that choice. And so our clients can manage that message in terms of which type of product they want to position to their customer.

Got it. Perfect. And then I have one kind of balance sheet question. You guys have talked about, I guess, some of your ratios looking more like your peers. I was hoping that you can kind of level set and be a little more specific there, kind of what ratios in particular? What are the numbers you're kind of driving towards and kind of where you are now? Because obviously, your balance sheet has a number of intangibles, goodwill and things like that. Just want to kind of level set to make sure that we're all on the same page there.

Yes. So I look at it to be competitive with the low teens, high single digits, low teens. We're going to get there over time. I think the spin gives us a step change. And then we will continue to add to our tangible common equity with good earnings, good expense management and thoughtfully returning value to our shareholders. But that like high single digits, low teens is where we're going to be.

You're talking about equity to -- your equity -- okay.

Yes. Tangible common equity. Yes.

Perfect. Perfect. And if I can sneak one more question. I look at your cash balance has definitely come down in recent quarters. Is there some ratio of cash to receivables we should be thinking about? Or is there anything that's restricting you from kind of lowering or reducing the amount of cash?

Yes. You should see our cash balance strengthen a little bit as we move forward. Yes.

There are no further questions at this time. I turn the call back over to Ralph Andretta.

Thank you. Well, first thing I want to do is thank both Val and Tammy for their excellent presentations today, did an excellent job. I hope you've all enjoyed today. We had fun doing it. It was important for us to introduce our strategy, to introduce our team and to focus on the new products we have in the marketplace and, most of all, to be transparent to our investors as we move forward. So thank you all for your time, thank you for your attention, thank you all for your questions. And we are looking forward to the rest of this year and moving into 2022.