Alliance Data Systems Corporation

Q2 2021 Earnings Conference Call

7/29/2021

spk00: Good morning and welcome to Alliance Data's second quarter 2021 earnings conference call. At this time, our parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. If you would like to ask a question at that time, please press star then the number one on your telephone keypad. It is now my pleasure to introduce Mr. Brian Vareb, Head of Investor Relations at Alliance Data. Sir, the floor is yours.
spk01: Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the investor relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data, and Perry Bieberman, Executive Vice President and Chief Financial Officer of Alliance Data. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers will 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. With that, I would like to turn the call over to Ralph Andretta. Ralph? Thank you, Brian, and thank you to everyone for joining the call this morning. I'm excited to have our new CFO, Perry Beiberman, joining me today. He's been on the job for less than three weeks, but he's jumped right in, and we're happy to have him on the team. I'll start on slide three with the takeaways from the second quarter. We continue to make considerable progress on our strategic initiatives. During the quarter, we hosted an investor event where we discussed our three-year strategic plan, highlighted our enhanced product offerings, reviewed our lending philosophy, and released our long-term financial targets across key metrics. We also announced the expected spinoff of our Loyalty One segment, which is key to our strategic transformation to strengthen our balance sheet metrics and deliver a long-term focus, sustainable growth. We've successfully implemented several monetization and efficiency initiatives, that I will discuss later. At the end of the quarter, we launched our bred Fiserv relationship and continue to sign new partners and build our prospect pipeline, along with renewing several of our valued brand partners. We are pleased to see credit sales rebound to pre-pandemic levels as we exit the second quarter. Consumer confidence and mobility continue to improve as retailers focus on engaging their customers through an omni-channel shopping experience with our Gen Z and millennial sales of double digits compared to pre-COVID levels. Digital sales were up $400 million versus the first quarter as total overall sales continue to grow. Finally, our credit performance remains strong as a result of our disciplined risk management and the ongoing impact of the economic stimulus payments and programs. We anticipate the credit metrics, including our delinquency rate, will normalize once government stimulus programs expire in the latter part of the year. Slide four highlights the key financial metrics for the second quarter. Total revenue for the quarter was $1 billion, and net income was $273 million. Revenue increased 3% year over year, while total expenses, excluding provision for loan loss, declined 4%. The quarter included a net reserve release of $208 million, resulting in reported diluted earnings per share of $5.47 for the second quarter. Credit sales were up 22% compared to the first quarter and up 54% year over year. Our net loss rate was 5.1% for the quarter, well below our historic average of 6%. Slide five provides a quick update on select initiatives from our ongoing strategic roadmap. Our strategic lending distribution relationship with Fiserv provides a significant opportunity to scale the bread platform beyond the direct distribution model. The program went live June 30th and select merchants will launch in the second half of the year with a broader rollout plan for 2022. To continue to provide a more frictionless experience for our brand partners and their customers, we have accelerated the adoption of our enhanced digital suite and our unified software development kit. These applications provide for a seamless experience for brands to integrate and offer our full suite of offerings, including the bread digital payment platform products. Technology advancements continue to be at the forefront of our strategic initiatives. During the second quarter, we completed the transition of our statement processing to Fiserv, and the transition of our core processing to Fiserv remains on track for mid-2022. The transition of these processing functions reflects Alliance Data's continued focus on tech monetization, delivering enhanced payment and servicing capabilities, and realizing additional efficiencies. The migration to Pfizer's industry-leading processing platform will enable faster speed to market for new products, credit program launches, and product portfolio conversions. The migration will also free up capital, reduce fixed costs, and lower our cost to serve. Our proprietary card, which launched in 2020, exceeded one million cardholders in the second quarter, which we view as a very important milestone. We look forward to driving acquisition growth of a proprietary card through expanded targeted marketing programs in 2022. Finally, we remain focused on responsible balance sheet management. We recently completed a debt refinancing, which extended the maturity of nearly all of our term loan by 18 months to July of 2024, and we received the necessary permissions required for the anticipated spin code debt refinancing activities. The Loyalty One spinoff is on track for the fourth quarter of this year. These activities will help improve our capital metrics and provide additional flexibility for the company. Side six highlights select brand partner additions and renewals. We added several new partners during the second quarter, including new card partners RU21 and GasBuddy. Bread's success in acquiring new online direct acquisition partners also continues. A select few of the new partners added to the platform are displayed on the right side of the slide, including a new opportunity with Wayfair to provide Bread's digital payment platform offerings to their customer base. Also in the second quarter, we signed multi-year card renewals with several partners, including Ann Taylor and Signet. We remain focused on growing profitably with collaborative brand partners and our enhanced product set. Turning to slide seven, I'll provide more details on the progress in each of our Bread business models. We just recently celebrated the six-month mark of our acquisition of Bread, and we are excited about the progress we have made and for the opportunities ahead of us. Bread's direct acquisition pipeline remains strong. We continue to have positive dialogue with many card brand partners to enable Bread's digital offerings, and we are looking to align with their IT roadmaps and release timelines, which may take longer for larger merchants. Once scheduled, Bread's platform makes for a quick, seamless integration. I would highlight the recent signing of our current card partner, Blue Nile, one of the largest online jewelers with over 1.7 million customers now on Bread's payment platform. Moving to the distribution channel. As I mentioned, on June 30th, we activated an e-commerce pilot with Fiserv and anticipated a select few early launches of Fiserv merchants onto the Bread platform during the second half of the year. We are excited about this opportunity and anticipate a full rollout in 2022. Finally, our platform capabilities with RBC continue to improve as we have a quality pipeline of new partner additions expected to launch in the fourth quarter prior to the holiday season. Moving to slide nine. In June, we released our 2020 Environmental, Social, and Governance Performance Report. I am proud of the progress we've made over the past three years, and we remain focused on the priorities that drive long-term success for our business and our stakeholders alike. Among the many accomplishments, I would highlight the results of our multi-year board refreshment program and our human capital management, including our strong commitment to diversity, equity, and inclusion. Alliance Data's ESG strategy will continue to be central to the company's ongoing transformation, which prioritizes delivering long-term, sustainable stakeholder value, modernizing technology, advancing an inclusive culture, and managing our commitment to ethical decision making. These priorities embedded in the company's cultural business practices and corporate governance ensure that we mitigate risk and remain competitive in the dynamic marketplace. Before I turn it over to Perry, I'd like to go back to slide eight and review the performance of Loyalty One, which includes Air Miles reward program in Canada and a Netherlands-based brand loyalty. As displayed in the graph on the right, Air Miles reward miles issued and redeemed improved in a quarter as flight bookings increased in anticipation of reduced travel restrictions in the back half of the year. At the same time, merchandise redemption remains strong. Average daily flight bookings are currently 10 times higher than we experienced in the first quarter, yet remain at 60% to 70% with the pre-pandemic level. So there is an expectation for further improvement as the recovery in Canada continues. Brand loyalty's new program activity is improving with a strong pipeline of clients in the second half of 2021. Of course, we continue to closely monitor the COVID conditions throughout the world, including the rise of the Delta variant and the potential impact on the macroeconomic environment and our businesses. My apologies for being out of order. Now, I'd like to turn it over to Perry Bieberman, our new CFO. Perry started with us on July 6th, and I am really happy to turn over the CFO duties to him. As you likely saw, Perry has over 33 years of experience in the card and banking industry and is a very welcome addition to our team. With that, I'll turn it over to Perry. Thanks, Ralph. I'm happy to be here. Slide 10 provides our results for the second quarter of 2021 compared to the second quarter of 2020. Revenue was up 3%, primarily due to the impact of the pandemic-related consumer relief offered by Alliance data in the second quarter of 2020. Total expenses excluding provision for loan loss were down 4% compared to the second quarter of 2020, with operating expense efficiencies offsetting our strategic investment in bread. Pre-provisioned pre-tax earnings, or PPNR, were up 20% year-over-year, aligned with our focus on driving core underlining earnings growth. Finally, net income included the benefit of a $208 million net reserve release in the quarter, I will provide more details on our results in the coming slides. Slide 11 provides our segment-level results for the second quarter. Loyalty One revenue was essentially flat year-over-year, while card services revenue increased 4%. Loyalty One EBT was slightly up due to the increase in travel bookings at air miles, favorable currency exchange rates, and lower amortization expense. The improvement in card services at EBT is primarily a result of the lower loan loss provision expense resulting from continued strong card member payment behavior and the improvement in the delinquency rate year over year. Moving to slide 11, I will review some of the key business metrics for the company. Starting on the left of the slide, we show our average receivables and our total credit sales trends. For the quarter, we saw credit sales come in at $7.4 billion or up 54% year-over-year and up 22% sequentially. As Rob highlighted earlier, we continue to see a rebound in our credit sales performance as consumer confidence improves. As expected, given seasonal trends, combined with elevated payment rates driven by strong customer liquidity from government stimulus, average receivables were down slightly in the second quarter sequentially. Moving to the right, revenue yields declined slightly from the first quarter as payment rates remain elevated, leading to lower delinquency rates and related late fees. Card services cost of funds continues to trend lower, down approximately 10 basis points from the first quarter, as our consumer deposit portfolio rates continue to move lower. Turning to slide 13, I'll start in the upper left. Our delinquency rate dropped 50 basis points versus the previous quarter to 3.3%. On the upper right, you can see that we finished at a loss rate of 5.1%, down 250 basis points versus last year. These low rates are the result of our disciplined risk management as well as the economic stimulus, which is driving higher consumer savings rates across the industry and greater ability to pay. Turning to the bottom left of the page, our allowance decreased $208 million to $1.6 billion, primarily driven by the improved delinquency rate and improving economic conditions for a reserve rate of 10.4%. Lastly, on the bottom right-hand side of the page, our revolving credit risk distribution continues to trend slightly higher towards the greater than 660 segment, accounting for 64% of our total portfolio in the second quarter. I would note that we believe these numbers are slightly elevated in part due to the economic stimulus aiding consumer scores. Slide 14 provides our financial outlook for the year. Our full-year receivables guidance remains down mid-single digits year over year, while we now look for credit sales to be up double digits in 2021. While payment rates have slightly moderated from the peak in March, the elevated level continues to put pressure on receivables growth relative or related to credit sales growth. Our outlook for the full-year revenue and total expenses remains unchanged. expenses will increase in the back half of 2021 as we continue to make investments in digital, data and analytics, marketing and bread to fuel future growth. We also anticipate an increase in expenses related to our core process and transition to Fiserv, as well as higher brand loyalty redemption expenses aligned with the increase in revenue expected in the second half of 2021. We have the ability to flex our investment dollars up or down as needed to align with market conditions and our outlook. As both loss rate and delinquency rate remain low, we're adjusting our full-year loss rate guidance to be in the low 5% range. We anticipate that credit metrics and payment rates will begin to normalize in the latter half of the year as stimulus programs wind down. We remain dedicated to simplifying and strengthening our business and investing in our strategic initiative to continue to drive sustained profitable growth. We expect to resume high single to low double-digit receivable growth in 2022. Operator, we're now ready to open up the line for questions.
spk00: At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Robert Napoli with William Blair. Good morning, Bob.
spk01: Thank you. Good morning. Good morning, Ralph, and welcome, Perry. Perry, this is a big change for you coming from where you were to Alliance Data Systems. What attracted you? to ADS and what do you see, where do you see the ability, what do you see that you can add to the outlook or the story or the strategy, if you would? Thanks, Bob, for the question. Again, as I said, I'm really happy to be here. You know, I've been watching ADS for quite some time. When you've been in this industry for, as noted, 33 years, It's a small community in the credit card and payment space. And so when we heard of Ralph going over to ADS, obviously that got some headlines, and then Val joining and a number of other industry vets. coming over it certainly piqued my interest and then with the bread acquisition a lot of buzz going around that the company was certainly going through a transformation and so to be part of this leadership team and work with this group is a terrific opportunity and it takes me back to the early days in my career where we basically IPO the company and they grew at quite a nice rate but everyone's focused on a singular mission I can tell from being part of this group for only three weeks This is an incredibly collaborative team, and I hope to bring that collaboration and bring my experience to them. And I was here a couple weeks ago in New York, and we had the opportunity to be with our leadership team and the board, and I was incredibly impressed with the engagement and the collaboration was incredibly evident. And this group is agile, nimble, and we're going to drive towards the transformation effort. So I'm excited to be part of this group. You know, Bob, I – I would say Perry's first port of call is finance, but aside from being a trusted financial advisor, he is a strategic decision maker with the company along with the rest of my leadership team. So we are very happy and lucky to have him here, and I am very happy not to have to do the CFO job anymore. Great. A question on bread and just the momentum. I thought Wayfair was a really interesting addition, and You're very curious on that because I know they were an affirmed partner, and they still are. And Wayfair was an ADS private label customer that's shifting off, or if it hasn't, I think it may already have. So is that an exclusive relationship? And then just related to that, have you added, was Blue Nile a private label customer? Is there a pipeline of ADS private label customers that are going to become bread customers? Yeah, let me first start with Wayfair, and I am happy to be associated again with Wayfair. Upon my arrival here, Wayfair was exiting the relationship with ADS, and I was disappointed about that because it's such a you know, such an interesting and innovative brand. So for us to be back in a relationship with Wayfair, although not exclusive, I'm really happy to do that. We're going to really focus on making this relationship very profitable for them and and equitable for us because I think it's great to be associated with such an innovative band. So, you know, hopefully you'll welcome me back. I'm welcoming them back with open arms. In terms of Blue Nile, Blue Nile is a private label customer of ours, and we've sold into them, and it's 1.7 million customers that in October, you know, will be on the Bread platform and be able to, you know, we'll provide them additional types of financing. So really excited about that. with that partner. And there's more to come in the second half of the year. So there's a number of partners that we will sign and our private label partners and our co-brand partners that will be on the Bread platform. It does take a little time, as you can imagine, but we have a steady pipeline of our current brand partners. And if you think about Bread, it's not a one-trick pony. There's three elements to Bread, right? You've got the direct to You know, you've got the direct acquisition, then the focus on Fiserv and really scaling up in 2022. We spent a lot of time the first six months getting that signed and focused on getting that done. And then, obviously, the RBC relationship and ensuring that we'll have partners on that for the fourth quarter. So I think we've made really nice progress on bread across all three, you know, what I call all three, you know, legs of the stool. Thank you. Just to sneak in just one last one. On page 13, the bottom right, the revolving credit risk distribution, big change from the second quarter of 19 to the second quarter of 21 for ADS. Is that the right mix or generally in the range of the mix that you would like to have long-term? Yeah, it is. It's going to fluctuate a little bit, but it is the right mix. You know, that's a mix – Two things are driven by that. One is product mix and risk mix. And that's how you get there. So it's a combination of both. It'll moderate back and forth, but that's about where we want to be. Thank you. Appreciate it.
spk00: Your next question comes from the line of Sanjay Sekwani with KBW.
spk01: Thanks. Good morning, and congrats, Perry. I guess the first question is on the yield. As we look at that gross revenue yield, I understand it's stabilized, but do you expect that to start picking up as loan growth materializes? Maybe you could just speak to the directional trends in yield. Yeah, you know, I think it's going to be stable for the rest of the year, Sanjay, and for a couple of reasons. I think the second quarter is seasonal, so you have to factor a little seasonality into the second quarter. But because payment rates are elevated, you know, that yield is going to be steady. So I don't see it picking up quite a bit, you know, for the rest of the year. As payment rates moderate, you'll see that yield improve as we go into 2022. Am I correct you guys think it will migrate back to the highs that we've seen in the past or some intermediate point? Again, I think it will be in the intermediate point because of our product and risk mix. So, you know, the yield will improve, but our loss rate won't deteriorate as that yield improves. I think you'll see a nice balance between yield improvement and loss rate, which is exactly what we're looking for. Okay, great. And then I guess a follow-up question on the Fiserv onboarding. I think I heard you, Ralph, talk about that it's a process to onboard these merchants. I guess when we think about your targets out to, like, 2023, could you just speak to the cadence of the onboarding? Like, do you expect to be fully ramped by a certain point in time to hit those targets, or how should we think about that? Yeah, so... Here's how I think about it, Sanjay. We want to get it right, not going to get it fast, right? Because this is a long-term relationship, and we want to make sure that we're doing things correctly so that the ease of integration and ramp is simple. So we're learning from, you know, we went live June 30th. We're going to learn from the partners we bring on this year, and we're going to ramp Our hope is to ramp quickly in 2022, and that'll carry us into 2023. The Fiserv is a really nice part of our receivables growth, but if you think about it, it's just one part of our receivables growth. Another part is a deeper penetration in our existing partners and our re-signs with our new product set. That's part of our growth. The growth in co-brands, again, is part of our growth. And then I expect with the team we've put together to get, you know, my fair share, probably more than my fair share of opportunities out there in the marketplace. So the combination of all those gives me, you know, certainly gives me confidence that we'll hit the, you know, the 2023 metrics. Great. Just one last one for Perry. Just following up on Bob's comments, maybe you could just talk about your strategic priorities over the next year. Thanks. Well, my strategic priorities are the same as the leadership team's strategic priorities. You know, to make sure we execute, spin, you know, ramp up bread, deliver the efficiencies that we need to do to continue the investments in the company, and make sure that we have disciplined practices I'll say financial management and that we support the business leaders with all the investment decisions we're trying to make. And as Ralph said, compete and win our fair share of new deals and make sure we have the proper economics for the renewals that we have. Great. Thank you. It's really good to be aligned with your CFO. I'm really happy about that.
spk00: Your next question comes from the line in Mahir Bhatia with the Bank of America. Hi.
spk01: Thank you for taking my questions and congratulations, Barry. I wanted to maybe just ask about the receivables guidance. Just trying to understand some of the dynamics going on there, because we've increased your credit sales guidance. Receivables, if you look at the monthly data, start seem to have crossed in May, and then you have good momentum in terms of bread coming on this year. So with government programs, I'm just trying to understand what's keeping the receiver guidance from down mid-single digits. Are there incremental portfolio losses that maybe we should be thinking about or some other headwinds, or is it still just all payment rates staying higher than you'd expect? You know, I think payment rates is a spotlight. You know, right now, you know, we're seeing that elevated payment rate. And, you know, we are, you know, our forecast is that will abate in the second half of the year. but we're still seeing it elevated. I think that to me is, you know, if I had to pick one reason, that's the reason. You know, we're seeing, you know, strong sales growth. You know, that sales growth is still outpacing, is outpacing the payment rate moderation a bit, but it's still, payment rates are still high. Okay. So there's nothing else, like there's no portfolio loss or something? No, we've already talked about, we've already packed it in, that portfolio loss in the third quarter. You know, that's impacting us, but really it's payment rates. That's not impacting our receivables. Got it. And then just one quick one for me. You mentioned acquisition of proprietary cardholders being an opportunity in 2022. Maybe talk a little bit more about that. Is it bread? Is it something else? Yeah. So, you know, in 2020, when we did lose the Wayfair partnership, The result of that is the successor, which was Citi, declined to buy the portfolio. So we had this portfolio sitting out there. We had a couple of bankruptcies sitting out there. So quite frankly, we had never done this before through Val and I's suggestion and the team. So why don't we put a proprietary card in the marketplace and not just let that receivable run off, but improve the receivable. So we're able to find good prospects in those files, in those portfolios, and we offer them a general-purpose card with a good cashback a good cash back program and some incentive. And they've been good card members. We've seen, quite frankly, millennials spending on that card more so than any other part of our population. So we think it's a real opportunity for us. It started as a saved product, but we're going to go direct to market. And it just diversifies our portfolio and kind of lessens our dependence on bricks and mortar, on private label, and partnerships. It's in the mix. It's one of several things we're offering now as part of our new product set. So we're excited about it. We're getting better at it, you know, a million customers, and I'm really proud of that, crossing that million-customer mark. Thank you.
spk00: Your next question comes from the line of Jeff Adelson with Morgan Stanley.
spk01: Morning, Jeff. Hey, good morning, Ralph and Malcolm Perry. Just wanted to follow back up on the Wayfair point and the loan growth. I agree that it was pretty interesting to see that you guys were able to kind of reenter with that company. Just wondering if there's anything in your strategy that you're doing to go after maybe some other card portfolios that you lost in the past or how you're viewing this as perhaps a hook to win more of those relationships that you don't currently have on the card side today? Yeah, listen, we have a crack sales team, and I've kind of unleashed them. to go after good business and profitable business for us. So, you know, will I revisit where we, you know, where we've lost certain partners? I mean, I'm happy to sell buy now, pay later installment loan to them, but their card relationships are long-term. So when they're up again, you know, we may decide to go after them, but in the sense that we could continue to work with them, like we're working with Wayfair on a different lending model, I'm very happy to do that. So, but you know, it's, it's, That itself is not a definitive strategy. The strategy is to go after and sign profitable partners for ADS and Brent. And then just on the payment rates, are you seeing – I know they're so elevated. I'm just wondering, are you seeing any signs that that's actually starting to maybe go down from here? And then when you think about the high single-digit, low double-digit growth for next year, Just kind of wondering how exactly you're thinking about the payment rates. Do they need to go back down to the pre-pandemic level, or can they remain a bit elevated and still hit that target? Yeah, so, you know, as of July, as of July 29th, you know, the payment rates are elevated. Obviously, we look at them every day. And, you know, and they're still elevated. But they don't have to go down to pre-pandemic levels necessarily. you know, for us to get to that high single double, you know, low double-digit growth in 2022, as we predicted, because our sales growth is outpacing that moderation in payment rates. They're still high, but our sales growth are double-digit, and we expect that to continue. I'll be at the Delta variants out there. We're monitoring that. We're not turning a blind eye to what's in the marketplace, but as we see today, our sales are, you know, outpacing the moderation, you know, the high payment rates in And then just one last housekeeping for me on the half a billion portfolio. I know that's coming out. Can you just remind us of the timing of when that actually happens or when it happens? That would be end of third quarter. End of third quarter? Okay. Thank you. That's all for me.
spk00: Our next question comes from the line of John Pencar with Evercore ISI.
spk02: Good morning. Good morning, John. On bread, can you perhaps help us out with the updated loan balance for bread as of June 30th?
spk01: I believe it was around $130 million as of the first quarter. And do you still expect a doubling in that loan balance by the year end, 2021? Yeah, we expect that loan balance will double as we exit 2021. I think the loan balance is in the 10-Q. Take a look at it there. But we expect, you know, we're on track to double that loan balance in 2021. And related to that, do you still expect a GMV of about $10 billion by year-end 2023? And how should we think about the loan balance by year-end 2023 if that's achievable? Well, let me say we will approach $10 billion in 2023. And we're not – you know, the loan balance is going to be a combination of – you know, we're going to – keep ADS within the card services division. So it's a, you know, it's part of the greater loan balance, but we view it as being a big part of our loan balance going forward, particularly if we approach that $10 billion of GMV in 2023. Okay. And then lastly, on your receivables growth in 2022, the high single to low double digit, regarding the last answer to the last question on that, is it that the payment rate's are coming in that much, I mean, the sales volume is coming in that much better than expected, that it's offsetting the payment rates remaining elevated for a longer period, and that's why you're still confident in that high single-digit to low double-digit expectation? Because I would have thought that you might have tempered that a little bit, given the way payment rates have been projecting for the industry. Yeah, well, I would say, you know, the sales are coming in better than expected, and it's marginally offsetting those payment rates. They're still high, but, you know, it's outpacing it a little bit, so it's marginally offsetting that to give us enough confidence knowing what's in our pipeline that that 20, you know, that 2022, you know, high, single, low, double digit is achievable. Okay, got it. Thank you for taking my questions. Thank you.
spk00: Our next question comes from the line of Ming Zhao with Deutsche Bank.
spk01: Morning, Ming. Hi, good morning. Good morning, guys. Thanks for taking my question. I wanted to ask quickly on the in-store versus digital sales. It looks like percentage of in-store versus digital new account growth had sort of moderated the pre-pandemic levels. I guess, is there an expectation for that to trend higher with bread coming online? And as you mentioned, the focus on the propriety card next year. Just your general thoughts there. Yeah, it certainly will. I think our digital sales will trend higher as we bring partners on to bread, as we enhance our digital suite, as more partners adapt that, and we sell more of our products to partners which are digital and omnichannel. I would expect that to increase at a good clip. Gotcha. Great. And then, separately, I guess, do you guys sort of disclose the exclusivity of partnerships, you know, coming online with Red? No. You know, here's what I will say. You know, some of those partnerships are exclusive. Some of them are not. They're competitive. And we're very happy to, you know, to compete in the marketplace. so you know we you know obviously you want exclusive partnerships those are the best kind but uh clearly if it's not exclusive we're we're very able to compete on price and product and quality and then lastly for me um
spk02: On the payment rates, is there an expectation that as government stimulus sort of ends in, you know, September slash October, that you're going to start to see more, you know, I guess a gradual acceleration of payment rates coming down? Is your expectation in terms of when the decline in payment rates happens?
spk01: You know, boy, I wish I had that, my magic eight ball. But, you know, we think as the government stimulus rolls off, you'll see a moderation of payment rates in the fourth quarter. I don't think you're going to see payment rates go to our pre-pandemic levels because we have changed our product mix and our score mix. That was intentional. So, you know, we'll see payment rates moderate because of the stimulus, but I think they'll be elevated. You know, they won't be our traditional payment rates we have pre-pandemic because we have, you know, intentionally changed our product and score mix and risk mix. as well. So they'll moderate, but not, you know, in my view, not to where they used to be in 2019. Got it.
spk02: Great. Thank you, guys.
spk00: Our next question comes from the line of David Scharf with JMP Securities. Morning, David.
spk01: Hi. Good morning. Welcome. Welcome aboard, Perry, and thanks for taking my questions. Two things. First, you know, Ralph, when I You know, when I saw all the jewelry brands listed under the renewals, I guess the Cigna brands, you know, it kind of reminded me to maybe ask for an update on vertical concentration. And in particular, I'm assuming that beauty and health, you know, is still the fastest growing vertical or best performing. Can you provide an update on perhaps for all the Sephora and Sally's sort of where they fall in terms of, you know, the maturity sort of renewal schedule and whether or not that vertical, you know, the growth expectations for that vertical are a key part of meeting receivables targets? Yeah. So, you know, I'll speak to our portfolio in total. You know, we have 160 brand partners and You know, those renewals are staged over five to seven years, and, you know, not one year of renewals really hurts us. You know, a non-renewal really impacts the P&O in a great way. We hate to lose partners, but, you know, we've structured it in a way that, you know, it's over a period of time, and we've been focused on early renewals with our partners. And, you know, we really are leading in the beauty space, and it's been very, very healthy. And, you know, we've worked closely with the partners you have mentioned, and we continue to work closely with them, bringing new products to the market, making it easy for acquisition, giving them options on, you know, in terms of products and penetrating deeper into their loyalty base. So, you know, I think we'll continue to diversify. You know, I think, you know, pet's an interesting product line. Beauty's an interesting product line. You know, jewelry, as you've kind of noted, you know, plus sizes is an interesting vertical for us. So we've been doing a lot of work in a little different verticals, which really helps us pivot away from, you know, the traditional bricks and mortar and, you know, and retail that we were before. So we're excited about them. We're working with all those partners and all those verticals. And the key is, you know, ensuring that we're growing the pie for them and for us with new products, data and analytics, and good service. Got it, got it. I appreciate the color. Hey, just a follow-up on yield. Maybe a little more of a longer-term question. Obviously, the elevated payment rate, what you're talking about, is no different from what every other lender is during this transitional year of stimulus. But I'm wondering... you know, as we look forward, and I know there was a question earlier about, you know, where yields ultimately normalize, you know, as you look at sort of the current credit profile, you know, it was provided in one of the slides, and as you also think about by 2023, you know, the composition of the portfolio that's coming from buy now, pay later, can you talk about sort of what percentage of gross yield you think will be coming from late fees once things normalize versus maybe the profile of ADS a few years ago when it may have been as much as a third? Because I'm trying to understand. I think, you know, that may give the biggest window into ultimately, you know, what the gross yield kind of secular outlook is. Yeah, so, you know, as I said, we've changed our product mix and our risk profile. So we're not relying on late fees as ADS was in the past. So it's not a place where we want to place our bets. We want to place our bets on returns with good products and getting good yield from people that are good payers. So that's important to us. So we don't see late fees as being a predominant. you know, that predominant in our go-forward yield. I'm sure it will play a part, but it won't play a predominant part as it did in the past. You know, if you think about, you know, yield and you think about bread, the bread yields are creative to us. because it's a low cost to acquire and low cost to serve, and those yields are accretive to us, and they will enhance our yields going forward. So I'm confident that our yields will be steady going forward, and I'm also confident that given the product mix and the risk mix, it's not going to be just driven by late fees. Got it. Thank you very much. It's helpful.
spk00: Our next question comes from the line of Dominic Gabriel with Oppenheimer.
spk01: Morning, Dominic.
spk02: Hey, thanks so much for taking my questions. And I just want to say welcome, Perry. And Wayfair returning really is a testament to the strategic transformation here, for sure.
spk01: Yes, I got two gifts this quarter.
spk02: Seriously. And it came at a discount, right? Exactly. So I guess... As we look at the people who have been really focusing on the Fiserv piece saying it's not an exclusive relationship to some extent, and I was actually just going to flip that on its head and ask you, could you sign up another partner like Fiserv within that type of channel to get after perhaps different – partners, merchants that they maybe, I mean, Fiserv basically has everybody, but is there a way to kind of diversify those partners as, like, lenders will diversify their sub-banks?
spk01: Yeah, well, let me just talk about, first talk about the Fiserv relationship. Although not exclusive, we are integrated into their dashboard. So when a merchant turns on, you know, a Fiserv relationship dashboard, We are there and integrated into the dashboard, so it's ease of use. So that, you know, although not exclusive, that to me is really important. You know, we have a, you know, so FlyServe is a very important partner of ours, and, you know, we're doing many things with them across the patch. But to the second part of your question, of course, we can, you know, work with another third party as well. You know, the place where I'm really interested and really want to be bullish on this particularly internationally if we can, is on the technology platform that we have with RBC. So we are the white label solution to RBC in terms of buy now, pay later installment lending. And we get a transaction fee there. So the revenue is without receivables. That's something that we could roll out around the world pretty quickly. That's where there's a real opportunity for us there to have RBC-like relationships you know, in other geographic locations. Great. Yeah, absolutely. Big opportunity.
spk02: And I know it's a bit early to maybe ask this question, but maybe you could take back out the APOL. But, you know, if we think about the consumer's excess liquidity, I mean, I think one of the big banks talked about 50% of stimulus still being in their bank accounts. you know, when, I guess, when we think about the holiday season coming up, I guess, can you talk about how your new relations relationships over time can diversify that fourth quarter receivables jump and how you're thinking about this holiday season with your partners, the spend turning into balances. Thanks so much guys. I really appreciate it.
spk01: Yeah. You know, I think, you know, I think you're, you're, you know, if you look at the, You know, the baseline forecast, you'll start to see in the fourth quarter, at least what's projected, you'll start to see, you know, savings, you know, those savings dissipate a little bit in the fourth quarter. You know, our stimulus rolls off and holiday season rolls on, and we're seeing, like I said, high double-digit sales. So, you know, we're positioned in our sales very well for the holiday season, you know, and I'd say over – I think about it in three areas. One, as Perry talked about and I talked about, we have been ramping and continue to ramp up on marketing dollars. Those marketing dollars are focused on driving incremental spend with our existing partners and acquiring new customers in the third and fourth quarter. So that helps us through the holiday season. We continually add partners to the bread portfolio. That will help us through the holiday season. I mentioned earlier that we have a number of really good prospects with RBC that will be ready for the holiday season. So all those things, you know, in my view, although RBC is not receivables, but it is a revenue, all those things, you know, will help us really drive to, you know, to jumpstart 2022. And in a combination of payment rates moderating and sales continuing to grow, I think we'll see that as we exit the year, you'll see that receivables growth.
spk02: Excellent. Thanks so much for the help. Thank you.
spk01: You bet.
spk00: As a reminder, to ask a question, you will need to press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our next question comes from the line of Reggie Smith with J.P. Morgan.
spk02: Morning, Reggie. Hey, good morning, guys. I got two quick questions. Number one, just trying to understand, I mean, you guys have talked a bit about the bread integration process, but I'm curious, like, how does that compare to the standalone B, buy now, pay later companies? So specifically, like, does it take you longer to integrate? Given the nature of the integration, are you on par with how quickly they can be up and running with a client?
spk01: Yes, we are. Probably, you know, we could be running as fast. And I think the distinction between us and the standalones, there's a couple of distinctions. One is we're on the merchant's side. So we integrate into the purchase path and give that merchant the option, give the customer the option to pay different ways at the merchant. We're not interested in taking the transaction away from the merchant. We're interested in adding the transaction to the merchant. because the merchant's our partner. So that's one distinction. We're not asking them to download an app. We're asking to execute a transaction within the purchase path of that merchant. That's a real different distinction than the stand-alongs. Secondly, for our existing partners, we can offer relationship pricing because they're a partner of ours beyond just that transaction. And we have a balance sheet. we have better funding, and we have a relationship. So we could be very competitive in terms of pricing as well. Another distinction from the third party. But in terms of up and running, we're as quick as they are.
spk02: Got it. And if I can squeeze one more follow-up in. You mentioned, I guess, the success, early success you're seeing with millennials on your proprietary card. I was curious, is that a function of Are you kind of picking off former Wayfair customers, or are there certain features about the card that resonate with millennials? And that's what I'm asking is, you know, have you considered or are you thinking about integrating like buy now, pay later functionality or installment functionality into your proprietary card or maybe even rebranding it to make it more of a consumer-facing product? Thanks.
spk01: Great question. Yeah, I mean, I think we're seeing early success of millennials because it's a cash-back card. So, you know, millennials are rational and they like cash flow, so they see it as an opportunity to get something back for their spending. You know, also we're skewing towards digital with the product as well, and we'll continue to make that product digital as well. So in terms of, you know, making it a bigger part of our portfolio, we're certainly, you know, bullish on this product and, you know, you know, you'll see us, you know, lean into this product next year.
spk02: Got it. I guess, just to make sure it was heard, is there any idea or thought about making installment like a feature in that product, or could you not talk about that?
spk01: Yeah, I don't want to. Yeah, I'm sorry if I didn't answer your question fully. Yeah, we're going to bring all of our product capabilities to our proprietary card. So installment, buy now, pay later, all the capabilities we have we'll make available to our proprietary card. Cool. All right. Thanks a lot. Nice work.
spk02: You bet.
spk00: At this time, there are no further questions. I would now like to turn the call back over to Mr. Ralph Andretta.
spk01: So thank you all for the call today and your interest in Alliance data. As you know, we remain focused on executing our strategic plan building for the future, and really excited about the progress we've made and our outlook. So everyone have a terrific day, and thank you all very much. Take care.
spk00: This concludes today's teleconference. Thank you for participating. You may now disconnect.
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