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

Thanks, everybody, for joining us today at DB's tech conference. My name is Meng Jiao, and I'm the consumer finance analyst here at Deutsche Bank. I'd like to welcome Ralph Andretta, CEO of Alliance Data Systems, along with Perry Bieberman, CFO; as well as Brian Vereb, Head of IR. Ralph has a few slides that you want us to focus on first, after which we'll transition to a fireside chat. We encourage everyone listening to ask questions by submitting them through the Q&A box on the left-hand side of your screen. And with that, I'll hand it over to Ralph. Ralph?

Thank you very much. There's 3 things I'd like to cover today. One is really talking about our business pipeline and product pipeline. To give you a quick update on the third quarter and our full year outlook; and third, of course, answer your questions during the fireside chat. So if you start on Slide 3, I'd like to first highlight the efforts of our business development team in support of our Card Services business. The team covers all of our prospects and product offerings and has really reenergized the way we go to the market. We now cover a diverse set of prospect pools, including de novo opportunities and small and medium enterprises as well as what I refer to as a string of pearls, which is the approach we have with our brand partners of $100 million or so when you string those together, it's quite profitable for us. And lastly, but not least, goes after the larger RFPs in the marketplace. We have products, experiences and a skill set to cover the gambit of these opportunities. Our leadership team continues to focus on driving net portfolio growth and optimizing our portfolio to drive industry-leading returns. Having a full set of product offerings allows us to satisfy merchant and consumer needs and balance the impacts that different products have on our returns and our credit metrics. We also are diversified across 650 brand partners within Bread and Card Services and have reduced our reliance on specialty apparel and private label programs. We are now exceptionally strong in the Beauty segment and have recently moved into the growing pet vertical and have enhanced and added to our digital offerings, our digital capabilities and our digital brand partners. All of these changes provide increased flexibility, continue to optimize our portfolio and drive profitable growth going forward. We continue to evaluate our portfolio for opportunities to improve margin and grow with an emphasis on responsible economics. We are not reliant on a single partner or a product to drive our success and the long-term growth we've outlined at our May investor event remains intact. Finally, given our focus on growth and enhancing our product offerings, we continue to invest heavily in digital capabilities. We have an abundance of opportunities with great partners and platforms and are focused on laying the foundation in 2021 for scalable growth in 2022. We continue to make progress on all our initiatives across our business models, and we'll have more success to share with you during our third quarter earnings call. I want to take a moment and talk about the trends we're seeing in this quarter. Consumer activity and credit sales remained strong. In the third quarter, we see continued improvement in partner sales, which is expected to be offset by the impact of the previously announced nonrenewal portfolio we sold in August. The portfolio had a much higher level of transactors compared to the average we're seeing across our portfolios. As a result, the nonrenewal will have a greater impact on sales volume and a lesser impact on revenue and our bottom line. As we have said before, this has been incorporated into our guidance and our long-term outlook. Consistent with traditional seasonal trends, we are seeing a modest lift and gross revenue yields from the second quarter in advance of the expected step down that we'll see in the fourth quarter. Credit performance remains strong, reflecting a disciplined risk management approach and the improvements to our underwriting models we put in place in 2019. Payment rates remain elevated and are expected to decline over time as the benefit from the broad stimulus support wears off. Turning to our LoyaltyOne segment, which we previously announced and is expected to spin off as a separate U.S.-based public company in the fourth quarter, we are seeing modest sequential improvement from LoyaltyOne revenue in the third quarter. Both AIR MILES and BrandLoyalty comprising the LoyaltyOne segment continue to be impacted by the pandemic and its effect on travel and the global supply chain. We have strong visibility on a rebound in the fourth quarter as business activity is gaining momentum and airline bookings improve. That said, we continue to monitor the impacts from the pandemic. The fourth quarter is typically the strongest quarter for BrandLoyalty. The majority of the fourth quarter grocer program contracts have already been signed. So we have confidence for a strong fourth quarter performance. As I just referenced, we remain on track for the anticipated completion of the spin in the fourth quarter, and I would direct you to our public disclosures for further details. Quickly turning to Slide 4. There are no changes to our outlook for the year. We remain confident in our outlook with a talented, accountable and energized workforce, a full suite of product capabilities and continued investment in digital offerings and customer experience to drive profitable growth. Our team is focused on executing on our ongoing transformational strategy and key initiatives to deliver on our growth objectives on our long-term financial goals. With that, I'll now turn it over for your questions.

Great. Thanks. Thanks so much, Ralph. First question is just start off, have you seen any indication that the Delta variant is impacting consumer shopping and suspensions to a sort of greater degree than you expected or any other unexpected ways? Any color on how you're seeing sales volumes being impacted, if at all, would be helpful.

We're -- listen, we monitor this every day. We closely monitor this, obviously. And we have not seen or noticed an impact to our sales volume at this time. And we said sales will continue to grow. They're strong. That said, over the last 18 months, we've helped our brand partners pivot their strategies to lean in on digital capabilities as a result of the pandemic. So if we do see a softening of in-store sales, we're ready to stand right by them if digital sales ramp up as they did during the pandemic. So we continue to invest in technology, and we'll focus on digital as we see that's part of the future. But we have not seen really a decline in sales due to the Delta variant.

Okay. Great. And then just a follow-up on that. Have you seen or has the resurgence of the Delta variant impacted how Alliance Data looks to sort of run its own business? Any sort of changes in terms of people coming back to work or anything that you could?

Yes, sure. So we -- the safety and health of our associates always top of mind in every decision we make. So we are -- we kind of pushed back our return to office until January of 2022. We originally were going to start to come back this month in September in 2022, and we've been running a pilot since July. Pilot is going fine, but we've kind of pushed back the opening, given the Delta variant, given the question on vaccine, no vaccines, we thought it would be prudent to push back our opening in the beginning of 2022. That said, that's all that we've done so far. And we'll continue to monitor it. But as I said, the health and safety of our associates is at the center of every decision we make concerning a come back to office.

Got it. Okay. Second question I had is, how has the merchant onboarding on to Bread trended so far in the second half of '21? You guys have had Apartment 2B earlier this year, and I'm fully cognizant that it is a process, but how would you describe the overall timing of these launches? And then sort of tangentially, could you speak on the Fiserv launch as well and how that's going?

Yes. So a couple of things. So we announced Apartment 2B. We've announced Blue Nile. We've announced Wayfair, and we'll announce more in our third quarter earnings. It is a process, and we want to make sure we get it right. So in 2021, it's about onboarding correctly, getting ready for scaling in 2022. So we feel good about where we are. We expect to continue the direct acquisition space that are going to direct-to-consumer. We're ramping up the Pfizer. We went live with Pfizer on June 30. We have a select number of pilots. We expect to scale Fiserv in 2022. And with our -- we have a good pipeline of merchants with Royal Bank of Canada. We expect to add holiday season merchants there and continue to scale in 2022. So to me, 2021 is about getting it right, getting it efficient and effective and then scaling in 2022.

That makes sense. Focusing, I guess, on installment loans. Installment loan receivables have increased roughly, call it, 30-plus percent as of June 30 to roughly $150 million. But you've reiterated an expectation for Bread's loan balances to double in fiscal year '21, which would sort of imply fairly strong growth in the second half of this year. Are you still confident in that ability to double the receivable by year-end? And if so, what gives you that sort of confidence?

Yes. So a couple of things. So we expect to see continued strong growth through the end of the year. But a couple of things I mentioned earlier kind of have a little bit of risk to that doubling. One of them in particular is the payment rates are still high, particularly the payment rates and the higher cohort. So the payment rates are high. So that presents a bit of a challenge. And secondly, it's supply chain management. As I mentioned, if the inventory is not there, particularly in electronics, sporting goods, home goods, the sale, it's hard to kind of double that -- double load receivables if the inventory isn't there. I have confidence we have good momentum in the rest of the year. We'll continue to build receivables. We'll have good momentum into 2022, but the headwinds for us are the higher payment rates and the supply chain management, which may pose a challenge to that doubling.

Okay. I wanted to touch base on the pipeline of merchant partners for Bread, both private label and co-brand partners as well as the distribution channel with Fiserv. Can you speak to the momentum of gaining new partners in each like? And then separately, given Alliance Data's ability to offer a variety of payment products versus the buy-now-pay-later Fintechs, are prospective merchant partners seeing this as a strong selling point?

Yes. It's interesting. We have now a basket of products. We can go to merchants with. Well, I'll talk -- let me talk about Bread first. So if you think about Bread, we have 3 offerings in Bread. One is that we go direct to the partner, direct to the merchant, and we have a building and efficient and very focused sales force to do that. So I feel confident we're adding partners all the time there. The second is what we've talked a little bit about before, which is that Fiserv relationship. That truly is scaling at a rapid pace. If we want to get that right, we have -- as I said, we went live June 30. We've got merchants on now that we're testing with. We're making sure that the process is right. Integration is seamless, and we will scale that starting in the beginning of 2022. And the World Bank account relationship, which I like to call my network relationship, which is revenue with limited risk because we don't carry the receivable, we've got partners. We'll have more partners in the back end of this year, and I expect us to scale RBC in 2022. Again, it's dependent on the pipeline -- the supply chain pipeline, products to sell. But I feel confident that we will certainly scale all 3, starting in the back end of this year, totally direct to merchant. We'll have more partners on RBC for the holiday season, and 2022 really is a year that we will scale Fiserv.

Got you. Okay. I wanted to go more in depth a little bit in terms of exclusivity. Now I know that some partnerships are exclusive and some are not. Given the relationships that you've had with some of these merchants, are you able to sort of push for exclusivity in certain cases? And just broadly overall, how do you think about the exclusive relationships with merchants going forward?

Yes. So if you think about the traditional relationships we have with private label and co-brand, those are, by and large, exclusive relationship for a period of years. The buy now, pay later installment loan relationships tend not to be exclusive. We would love them to be exclusive, but sometimes they are and sometimes they aren't. I think the white label element of our buy now, pay later and installment loan products, even though we're not exclusive, really drives -- helps the merchant drive sales for the merchant. If you think about our competitors in the buy now, pay later and installment alone, they're about disintermediating the merchant. They want you to download their app, right? So they want to take a merchant out of the process. We want to keep the merchant very much in the process. In fact, we want to generate a transaction, not just capture a transaction because we have a relationship with that merchant. So we're able to generate a transaction because we have data and analytics that help us do that. So -- and being in a white label, we're in the purchase path. So we can offer the customer choice on how they want to pay. And so I feel that might not be exclusive, but I feel the merchants are going to value that more and more because we are their partner. We are not trying to move them out of the process. So exclusive or not, I think our white label solution will be certainly more engaging with merchants.

Makes sense. Now speaking of the white label opportunities, I believe you've mentioned real opportunities to have other white label BNPL relationships similar to the RBC partnership in other geographical locations. Can you speak to the potential there? And then secondly, can you -- you've mentioned new brand partner additions with RBC that could be ready for the holiday season. How have those partner additions trended according to your expectations?

Yes. So I think there's opportunity in other geographic regions to employ the RBC model. I certainly think there's opportunity to do that, and we will focus on that. But right now, we're focusing on scaling the RBC model in 2021. I think that's critically important. And because that's in preparation of future opportunities, right? Because I think success is going to bring success. And our reputation for ease of execution will only help us drive this model in another geographic location. So I'm pretty bullish on this, and I'm also really happy with them. I think the merchants will have on time for the holiday season, and we're on track. And we're very focused on those merchants for the holiday season.

Okay. Got it. And then, Perry, a question for you. You recently joined ADS in early July, and I think you spoke on noticing the incredible sense of collaboration within the company during your first few weeks on the job. I wanted to ask you now that you've had some more time on the management team. What are some things have you noticed that gives ADS a strategic advantage over peers? And then conversely, what are some things that could be tweaked that would give -- provide additional benefits?

Sure. Thanks for the question, Meng. Yes, I'd say that the observation I had early on has been reinforced over -- now that's been 2 months on job. The collaboration is definitely strong. But it starts with people and the talented, experienced team that we have continue to be impressed with the depth of talent and I'm doing more and more roundtables and being more involved with the leadership on different business things. And the degree to which we do collaborate, we challenge each other, come up with the right answer. This is an incredibly nimble group. And I think that being nimble and agile in these types of times is really important, and that's a strategic advantage. You've heard Ralph talk about the products that we have and that full spectrum underwriting, which is an advantage for us, and we can go, I'll say, deeper to capture more opportunity both for us but also our partners. And that's often enabled because of our depth of that data and analytics and those capabilities that we've built. To your question around things where there's additional opportunities and benefits, I think most companies, but with us included, where can we continue to invest in digital to continue to lower our cost to serve to meet the expectations of our customers and clients, that's important, capitalizing on the Bread acquisition. I think we're all keenly focused on that. And then last thing I would comment on is just as we grow, we're going to continue to improve our cost of funds and that's something that we should be able to do as we go more direct to consumer.

Hey, Meng. I'm not hearing you.

Excuse me. Can you guys hear me now?

I can hear you now.

Perfect. I wanted to focus a little bit on expenses. I know that you both have mentioned an increase in the back half of '21, mainly in investments, in digital data, marketing and Bread, as you mentioned. But there's some flexibility depending on market conditions and outlook. Has there been any need to sort of change/update us on these expense expectations? And secondly, has there been an increase in sort of competition for top-tier talent as you make investments in digital and in data?

Yes. So I think a couple of things. So I don't think we've not changed our guidance on 2021. So our expenses year-over-year are going to be flat. In that flat, there's $150 million of investments in the business going forward, digital, talent and marketing. So we continue to hire engineers at a good pace, sales representatives to our Bread staff, which is critically important. The combination of engineers and frontline sales staff, it's critically important for us for our success. We continue to drive that business model. And in terms of talent, there's always a war on talent. And we all focused on not only attracting talent, but keeping the talent that we have. And the way that we do that, we kind of referenced it before, right? We're going to make sure that we keep the health and welfare of our associates front and center. We're making sure that we are competitive in the marketplace in terms of what our compensation is. Everybody we've brought into the company, they're terrific leaders and they have following. They have a following. So they are, in turn, bringing top talent into the organization. And our challenge is to keep that talent in the organization. And again, being nimble and focused and ensuring that people have a path forward and exposure is a good way to keep talent in the organization. Perry, anything to add?

No. But I think you've got it.

I make sure you always watches me on expenses.

Absolutely. I guess with 130 brand partners, Alliance Data certainly has a portfolio that runs a pretty wide gamut. Which verticals are you seeing robust growth? And anything in particular that you'd like to call out? I know Ralph, in your prepared remarks, you mentioned the Pet Care and what noninsurance. And any color there?

Yes. We've pretty much, I would say, own the market. But we have a really good market share in Beauty. If you look at our partners in Beauty, we have a really nice market share in Beauty. As you said, we've expanded to Pet Care. I think that's another critical market for us. With 650 partners, if you think about it, if you add Bread and our Card Services business, 650 partners that we can offer just amazing capabilities too. And we've really leaned in to the digital world and digital partners with the acquisition of Bread. So we feel good about that. And we're in -- home goods is a good vertical for us. Still soft goods is a good vertical for us. So there's a number of them, and we feel we have opportunity to compete in a number of those verticals, whether it's in-store or online.

Got it. Makes sense. All right. Ralph, you've mentioned that you're reaching 1 million cardholders on your proprietary card was definitely a highlight in the quarter, and it was driven by strong millennial spend. And previously, you discussed how millennial shoppers have sort of surpassed pre-pandemic spending levels. Has the millennial cohort been the engine driving growth recently? And how much of an opportunity could the proprietary card become as you ramp up investments there in next year?

Yes. I'm really pleased with having that 1 million card members in our proprietary business. If you think about it, we had -- beginning of '20, we didn't have a proprietary card business. Here we are in the back end of '21 with 1 million customers. And I'm thrilled about that. And we're going to lean into that proprietary business because that just derisk our portfolio, right? So we're not a one-trick pony. We have private label. We have co-brand, buy now, pay later and installment loan are own proprietary cards. So we feel good about that. In terms of millennials, the acquisition of Bread, as you would imagine, or new capabilities to us that are really very popular with the millennial demographic, right? -- budgeting cash flow, ensuring that you're not going into it in an amount of debt. So we feel good about that. We'll continue to grow that. We'll continue to grow our proprietary card. And all these new capabilities really diversify our portfolio are giving us good, sustainable, repeatable growth.

Okay. I would be remiss if I didn't and I have a question about credit. But you guys have guided to a net loss rate in the low 5% range. Delinquencies are around 3.3%. The reserve rate has come down steadily over the past few quarters. It's pretty safe to say that the environment is benign. Is there anything, I guess, on the horizon that's concerning to you guys on a credit point of view?

So I'll ask Perry to chime in here. I don't see any major concerns right now. But this stimulus wearing off, all of the support from the government as it wanes could that be an impact. It's such a strange time, having billions of dollars in the U.S. economy and trillions of dollars in the U.S. economy and then having all this help and then having shelter in place, it's -- there's so many dynamics. But as I think about it today, I don't see any major concerns, but we're monitoring the impact of as a stimulus expires what the impact would that be on spending, what impact it will be on credit.

Yes. And just to add in to what Ralph said, I think that's the key. There's a lot of uncertainty around what's ahead. But I don't think anything that we'd say is incredibly concerning. As you've asked a question around -- we've been getting a question around payment rates, what's happening as payment rates remain elevated, okay, delinquency remains low, what's going to happen as payment rates start to come down, you expect to see a bit of a delinquency rise again, that's not concerning. That's expected. So I don't think we're expecting some normalization. It's just a matter of when and at what pace that happens.

That makes sense. And I mean that's a perfect segue into my next question, which is on payment rates. As you guys have noted and I think the investor community knows that they continue to be elevated. I think July levels were around 18.25%. And we're going to get data next week. But I did want to ask, do you still expect a moderation, I guess, of payment rates in the fourth quarter? And I know that you've mentioned payment rates won't fall to fiscal year '19 levels. But how would you characterize the magnitude of the expected moderation?

Yes. If I had my magic April here, I'd shake in terms of when will payment rates come down. But I think they'll moderate over time. We will the first fourth quarter, first quarter. We're starting to see some moderation in some cohorts, not overall. But in certain cohorts, we're starting to see payment rates kind of level out, which is indication that things may go back to a bit of a pre-pandemic payment rates. We will never go back to the payment rates of '19, as you mentioned, because we have a different product and risk mix, right? So we have a stronger portfolio and a more diverse portfolio than we did in '19, throw off a good return. So every portfolio is doing this job, but -- so we'll never go back to the '19, but we do see the moderating over time and not the fourth quarter. It will be the first quarter. But again, hard to predict, but we do see the moderation going forward and starting to see some moderation in some colors.

Got you. Perfect. We've got a question from the audience that I wanted to post you guys. And it's basically the thought of the BNPL environment. And the question is how do you see the competitive landscape evolving over time? The product seems pretty fairly commoditized, but what are your general thoughts on the overall landscape there?

Yes. I mean first of all, the competitive of the landscape doesn't concern me. It kind of confirms why we did do the transaction with Bread during the pandemic, right? Because it's a product that we didn't have and it's something that we felt that we needed to offer our customers and our merchants. So I feel good about that. Like every other product, I mean, if you just take credit card, what's going to distinguish us in the marketplace different from some other credit card or some other BNPL. It's service. It's price. It's consistency. It's data and analytics. And we can do all of that because our relationship with our merchants is just that. It's a relationship and not a transaction. We're they're on their side. We have data and analytics to help them drive transactions. We're not looking to steal transaction, we're looking to add transactions. So as competitive as it gets, the standout will be good customer service, good relationship with your merchants, fair pricing and the ability to use data analytics to generate transactions. That's what will make us stand out in the BNPL community.

Got you. Another question from the audience, which is how should we think about card yields and then to play with payment rates? Well, card yields increase as payment rates decrease, which is expected to begin in fourth quarter, as you mentioned. Any color there between those 2 would be great.

Perry, do you want to take that one, and I'll follow.

I think that's a fair assumption as payment rates come down, your revolve rate goes up a little bit. So I think that's a good way to think about it.

And you got to remember, I think in the second quarter to the third quarter, you're going to see yields a little stronger. And traditionally, in fourth quarter, they come down a little bit seasonal. That's what we would expect. But our yield to be consistent -- have been consistent over the course of the year and will continue to be.

Got it. Perfect. Those are actually all the questions that I see in the queue. Ralph, any lasting comments that you want to make?

No, I just want to thank everybody for their timing. Thank you for the questions. I feel good about where we are. I feel good about our transformation. We've got good momentum. We've got a strong pipeline of new products and new partners coming on. And I think we'll talk a little bit about that in our third quarter earnings release. But thank you for your time, and thank you, everybody, for your time.

Great. And with that, let me thank you guys for being here. Thank you so much.

Thank you.

Bye-bye.