Bread Financial Holdings, Inc. Q3 FY2020 Earnings Call

Good morning, and welcome to Alliance Data's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host Ms. Vicky Nakhla of Advisory Partners. Ma'am, the floor is yours.

Thank you, operator. By now, you should have received a copy of the company's third quarter 2020 earnings release. If you haven't, please call Advisory Partners at (212) 750-5800. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; and Tim King, 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, Vicki, and thank you to everyone joining the call this morning. We have had an exciting week with the Fiserv announcement as well as the announcement this morning of our agreement to acquire Bread. The new capabilities, digital advancements, technology upgrades, and efficiencies from these transactions better position the company for sustainable, profitable long-term growth. I would like to start today's call by thanking our associates and leaders for what they have accomplished this quarter; our associates continue to step up to the challenges and changes brought forth by the pandemic and through their dedicated service, move the company forward on these strategic goals. Starting on Page 3, here is an overview of the key highlights of the third quarter. The company posted strong financial results, which I will touch on briefly, then Tim will provide more color. As is evident with our recent announcements, we are making substantial progress on our strategic priorities and making significant investments in our business. We will address these themes in more detail throughout the presentation and then provide insight on our focus going forward. After our prepared remarks, we will open up the call for your questions. Slide 4 provides the highlights for the third quarter. We reported net income of $133 million, an increase of $95 million from the second quarter 2020, and earnings per diluted share of $2.79. We continue to build capital and liquidity through income improvement and strong cash flow. Importantly, credit sales improved 28% sequentially and both AIR MILES, reward miles issued and redeemed improved from the second quarter of 2020, which I will discuss in more detail on the following slides. Overall, we saw a pickup in our business as stores, states, and countries reopened. Moving to Slide 5. You can see more detail on the improving credit sales trends for our card services business. While the sales were down year-over-year, we are seeing encouraging signs across our channels and industry verticals. Like most, we are seeing the benefit of stores reopening and customer spending beginning to increase. While the positive September U.S. retail figures are very encouraging, we remain focused due to the many uncertainties our economy faces, among them, the potential resurgence of the virus. We remain cautiously optimistic on the future and are prepared for a potentially uneven but gradual economic recovery for the U.S. and world economies. As you can see on the bottom left chart, our sales channels continued to rebound from the lows during the shutdown period earlier this year. The chart on the bottom right provides the channel details for the 28% sequential growth in the third quarter versus the second quarter of 2020. We saw a substantial improvement in multichannel spend as stores reopened, leading to a sequential 92% increase in-store, in-person brand sales at the brand's brick-and-mortar locations. We are seeing more purposeful shopping in-store traffic is still down versus a year ago, but when a consumer does come into a store, they are spending more. Our non-brand sales on our co-brand cards increased 27% sequentially. We are pleased with the early results from our community general-purpose card, which we launched late in the third quarter. With stores reopening in the third quarter, consumers reverted back to multichannel spending resulting in a pullback in online sales, but an overall increase in total spend. Finally, I would like to highlight the success we are seeing in the transition from our traditional brick-and-mortar apparel focus to a more diversified payments provider across industry categories. Diversified verticals defined as partners, excluding specialty apparel, department stores, and jewelry represented 65% of our sales in the third quarter of 2020 versus 55% in 2019. Slide 6 highlights select partner renewals, new vertical growth as well as our new proprietary credit card, The Comenity Card. As discussed on our last call, we are focused on signing and renewing key partner relationships. We are partnering with companies that have their shared interest in driving sustained profitable growth for mutual success. Here, we highlighted two renewals in the quarter and some of our enhanced capabilities these partners are utilizing. The middle column highlights our beauty partners, which is one of the many diversified verticals where we are seeing strong profitable growth trends. With the recent addition and program launch of Sally Beauty, the largest distributor of professional beauty products in the U.S., Alliance Data now partners with the top four brands in the industry, which makes up 53% of the total market share. Also during the quarter, we launched Salon Centric which is part of L'Oreal. The success we have seen in beauty as a category leader is a good blueprint for our ongoing expansion into additional fast-growing industries. The launch of our new Comenity General purpose cash back card has exceeded our early expectations. We are currently offering the card to select customers and seeing strong activation rates and early engagement, especially among millennials. The development team for this card has extensive experience working with similar offerings and is confident in the value this card brings from both retention and growth. In the situation where a partner leaves or is having financial troubles, we can strategically offer the Comenity card to retain card member relationships and drive increased sales. Let's turn to Page 7 to review the performance for LoyaltyOne, which includes the AIR MILES Rewards program in Canada and the Netherlands-based brand Loyalty. The segment's third quarter revenue benefited from improving business conditions in most parts of the world when compared to the previous quarter. As I mentioned earlier, and as displayed in the graph on the bottom of the slide, reward miles issued rebounded in the quarter from the low in the second quarter. Recall that we recognize most of our revenue when the collector redeems their miles; therefore, a good indicator of our future revenue is miles issued. Given the lingering effect of COVID-19 on travel, AIR MILES continues to pivot its rewards portfolio to emphasize more non-travel options, such as merchandise to drive higher customer redemption rates. Our merchandise redemptions increased double digits as we focus on stay-at-home type products. We have also added streaming services for games and movies to our rewards portfolio. Brand loyalty revenue improved 37% from the second quarter of 2020 as areas around the world began to reopen during the quarter. We are closely watching the pandemic inflection trends, especially in Europe, as cases are beginning to rise. Slide 8 provides a look at our digital engagement statistics for card services. Consumers are rapidly adopting technologies that simplify how they purchase, manage their accounts, and engage with payments. Our suite of digital capabilities reflects the changing landscape by creating a seamless process for customers to adapt, apply for, and use payment options. Several of our brands are now leveraging our patented frictionless capabilities across all channels to drive easy applications, including QR code, text, and applied functionality as well as a dynamic real-time offer messaging that brings payment offers to the forefront of the customer shopping journey. 45% of our card services credit sales in 2020 were made online, up by one-third year-over-year, 70% of applications are now digital, and 78% of our bills are paid digitally, underscoring the importance of investing here and the success of our efforts to date. Turning to Slide 9. I will speak to a number of ways we continue to enhance our technology capabilities. As discussed during the second quarter call, we are focused on expanding our product suite with additional product offerings like buy now, pay later and installment loans. The acquisition of Bread was an efficient way to expand our offerings and gain access to a broader audience and younger demographic. The deal jump starts our ability to offer these products to our brand partners while bringing additional opportunities to leverage and offer our core products to those customers. Bread's leading fintech platform advances our digital capabilities and offerings. Given Bread's advanced technology position in this space, we determined that the right strategy in this case was to buy rather than to build or partner. Our recently announced strategic agreement with Fiserv offers a number of benefits. We leverage Fiserv's highly flexible and scalable credit processing platform to benefit our brand partners and card members while driving operational efficiencies. Through our relationship with Fiserv, we will improve our brand partner conversions and speed to market, including quickly and seamlessly adding new products and capabilities that benefit our partners and our card members. The platform enables efficient integration and use of mobile wallet and virtual cards while supporting our data and analytics capabilities. Importantly, the agreement provides efficiencies that reduce our cost to serve. We plan to reinvest those cost savings in digital capabilities and other growth initiatives. During the third quarter, we announced the launch of our Enhanced Digital Suite. This suite of digital applications and capabilities helps our brand partners capitalize on the accelerated growth of e-commerce. The suite promotes credit payment options earlier in the shopping experience and prescreens customers in real-time, allowing for immediate credit approval without leaving the brand partner site. We also support these offerings with enhanced digital marketing and payment tools. Combined, we expect these offerings to bring through more qualified applicants, a higher average purchase value, and a higher sales conversion, making our suite of services more valuable to our brand partners. Slide 10 provides details on the announced acquisition of Bread. We are excited to welcome Bread's talented employees to Alliance Data. The addition of Bread's highly skilled development team will boost our innovation potential with new perspectives and collaborative thought. We will create a new innovation hub in New York City to drive digital advancement throughout the organization. Bread is an ideal partner to strengthen the expansion of our verticals and addressable market of small and medium-sized merchants while providing our existing partners with additional white-label product solutions. With the acquisition, Alliance Data is uniquely positioned to provide a branded full spectrum payment suite for our partners. The partnership expands the growth potential for Alliance Data and spurs our digital innovation and development. Moving to Slide 11. We made strong progress on our recover, rebuild and regrow action plan in the third quarter. The recovery components are nearly complete, and our efforts to rebuild and regrow are advancing more quickly than we had originally planned. Due to the hard work and resiliency of our associates, we have successfully adapted to a different way of working and in many ways, created a new flexible and adaptive workforce that effectively balances cost efficiencies with high levels of service and support. Tim will highlight a few of the many actions we have taken to reduce our fixed cost base and improve our underlying financial position over the past five quarters. One example of this is our announced transition to Fiserv, which will provide for a lower cost, scalable growth, increasing our ability to reallocate capital to areas of strategic differentiation. Our rebuilding actions involve expanding digital offerings and upgrading platform speed, flexibility, and technology. These actions, along with our ongoing strategic initiatives, position Alliance Data for sustained, profitable long-term growth. This growth will be supported by our regrow action, which includes focused investments, especially in digital enhancements and operational and product efficiencies. Putting this all together, we have the opportunity to unlock long-term value for our shareholders. I will now turn the call over to Tim to cover the financials.

Thank you, Ralph, and good morning to everyone. I will start on Slide 12 to review our results for the third quarter. During the third quarter, revenue was down 27% versus last year as the company and both segments were impacted by the COVID-19 pandemic. The decrease in revenue was primarily tied to a reduction in normalized card receivables, lower card yields from the Fed rate cuts as well as low redemption levels of LoyaltyOne. The year-over-year improvement in earnings before taxes was impacted by a $72 million loss on extinguishment of debt and a $55 million restructuring charge in the third quarter of 2019. Adjusted EBITDA net decreased for the quarter due to the decline in revenue, partially offset by the cost reduction driven by lower volumes and our cost savings actions. Slide 13 provides an overview of some of the key business metrics for the company. Starting at the bottom left, we show our normalized AR, which would include held-for-sale versus our total credit sales. For the quarter, we saw sales come in at $6.2 billion, which was down 21% year-over-year. However, when compared to the prior sequential quarter, we did see a rebound from the COVID low of $4.8 billion, up 28% sequentially. There's still pressure on our AR, but we have begun to see a rebound in our sales and would expect the typical fourth-quarter seasonality to increase AR balances at year-end. Moving to the lower right, we also saw a rebound in our yields. Recall in the second quarter, we were down 350 basis points year-over-year to a COVID low of 20.4%. Since the second quarter, we have rebounded 210 basis points, though we are still off the prior year's number by 220 basis points. As I discussed during the second quarter, our yields have been under pressure due to both customer relief programs and the Fed actions. With fewer accounts in our program, we have now begun to see a recovery in our yields. We'd expect our yields to remain near this range. Finally, turning to expenses. We continue to make progress on our year-over-year expense management initiatives. We continue to benefit from the ongoing reductions of our real estate costs, employee costs, and other operating expenses. For instance, our investment in automation, specifically, robotic process automation or bots, is taking costs out of our servicing model through automating processes that used to be done manually. These bots are now providing approximately $15 million of run rate savings, and we'd anticipate we will continue to find further opportunities with this technology. Let's turn to Page 14, where I'll spend a little time talking about our card member payment behaviors. As we saw last quarter, card member payment trends remained favorable and continue to improve. As shown on the table, 84% of our accounts made a payment in the third quarter, up from 82% in the second quarter. This is above the levels we saw pre-COVID. Additionally, we have seen a reversion to normal for the percent of our card members who pay us in full at 23%. Balances in our COVID-related customer relief programs now represent 3% of total card receivables and continue to decline from the last quarter. Importantly, 73% of the customers in these programs are now making payments, up from 55% in the previous quarter. While we are pleased with these trends, we are not surprised. Our disciplined and seasoned underwriting process is a core strategic advantage of Alliance Data and is a pillar of our company. Turning to Slide 15. I'm going to start in the upper left, taking a little bit of time to talk about our losses. For the quarter, we finished with a loss rate of 5.8%, up 28 basis points versus the prior year. However, sequentially we were down 180 basis points, mostly due to the strong payment behavior and the actions we have taken with our customer relief programs. This compares favorably to our average net loss rate for the past 15 years and is well below the peak we saw in 2009. Like others in the industry, we do expect pressure on this number as we move into 2021, especially in the latter half of next year. However, we do not expect to be near our historic high peak charge-offs as we have much stronger risk management tools and advanced underwriting models, along with an improved underlying card member base. Turning to our allowance. On the right-hand side of the page, our allowance remains at approximately $2.1 billion for a reserve rate of 13.3%, unchanged from the prior quarter. We did release a small amount of our balances due to a decrease in receivables. It is important to note that the reserve level contemplates assumptions in Moody's most adverse economic outlook, the S-4, which reflects only a 4% probability that the economy will perform worse, which we feel is appropriate given the uncertainty in the economy now and into 2021. Moving to Slide 16. As part of our most recent bond offering, we were able to secure additional flexibility with respect to our term debt. At a high level, we have been able to relax our covenant thresholds through 2021 and into the first half of 2022. Additionally, as outlined here, we have been able to extend the maturity of our overall debt. A year ago, we had almost $2.9 million of debt maturing in 1.75 years. We have now been able to ladder this out, including pushing out the closest maturity from coming due at 1.75 years to 2.25 years and decreasing the size of maturity by about half. While certainly not done addressing our balance sheet, our treasury team has made significant inroads giving additional flexibility in time. Slide 17 covers both our corporate and bank liquidity and capital. Since last quarter, company parent liquidity improved with overall liquidity increasing $100 million to a total of $1.2 million. We took the opportunity to pay down our revolver. And as discussed on the prior page, extended the maturity of our corporate debt. At the bank level, cash is down sequentially as we were able to pay off some of our liabilities while maintaining a liquidity ratio of 15.7%. Capital has improved with a total risk-based capital ratio of 20.1%, up 40 basis points sequentially. We also were able to renew three debt facilities in the quarter.

Thanks, Tim. Slide 18 provides an outline of our strategic initiatives. We are opportunistically investing in strategic areas highlighted on this slide as well as ramping up marketing spend in our growth verticals in the fourth quarter. As part of our way forward, we are leveraging our technology as a strategic advantage with continued innovation and a focus on reducing our cost to serve. As evidenced by our recent announcements with Fiserv and Bread, we are continuing to diversify and develop our product offerings to provide our partners with a full suite of payment solutions. Digital advancement remains at the forefront of our development framework. Finally, our data science and analytics capabilities and insights remain a key strategic advantage and will continue to drive efficiencies and effectiveness for our business operations as well as for the economic environment. Jared, we're now ready to open up the line for questions.

[Operator Instructions] First question comes from Ryan Nash with Goldman Sachs.

Maybe I'll start off with the deal. Clearly, it makes strategic sense, just given the emergence of Buy now, Pay later as a borrowing option for customers. But I guess, can you maybe just talk about how you think about the strategic benefits of this versus other uses of capital? And I guess just given where the stock is trading today, it seems that you -- to imply you could have reduced shares by a material amount. So I'm curious just how you weigh the long-term strategic benefits versus the near-term financial implications? And then second, can you still pursue other capital actions over the next few quarters even in the face of this?

Yes, Ryan, so I'll start and then I'll ask Tim to chime in. This is Ralph. So I think a couple of things. I think if COVID-19 has told us anything, it has taught us the value of e-commerce. And you've seen that in the first and second quarter, and we'll continue to see e-commerce almost pretty much explode. So for us, the improvement has been great. The bond offering helped us spread out our debt, as Tim talked about. So I think we're in a reasonable position if there are uses of capital to take advantage of that. But I see this as strategic long-term benefits for our growth. Tim, anything?

Yes. I would just reiterate what is important strategically. While, of course, maintaining the balance of flexibility we have at the parent level, our capital allocation strategy remains. If we're finding things that we find are important to our business, of course, we're going to invest in them. But from there, of course, maintaining our dividend and not doing any share repurchases.

Got it. And if I can maybe switch gears to ask about growth. So you guys saw a really nice sequential improvement yet as was highlighted on the call balances, sales are still down about 20% year-over-year. So can you maybe just talk about how, from a year-over-year perspective, they trended over the quarter? And second, you talked about the expectation to see normal seasonal trends in 4Q to today's levels over the next couple of quarters?

No, clearly, we put that out last quarter that the store reopenings and state reopenings are very dependent. We were very encouraged by the number of folks going back into the brick-and-mortar that Ralph went through that slide. There may be a little bit of pressure on our receivables from where we are now. As we roll into 2021 as COVID starts to abate a little bit and we could have a little bit of pressure, but we start to think that we're getting back to normalized AR at this point.

Next question comes from Mihir Bhatia with Bank of America.

I wanted to ask on the acquisition too. Maybe just a couple of quick questions just to start on BNPL and Bread in particular. Can you talk about just why the accretion is going to take three years? I mean, you're paying a pretty good amount of the purchase price, it seems in my cash, right? I mean I understand a quarter of it is in stock. But what Bread profitable? And then just relatedly, can you just talk about the economic returns of the product? How does the revenue profitability model differ from your core card product? Should we assume long-term as that product grows ROEs decline from your historic level? Or do you think you can get the same ROEs?

Sure. So I'll start with just talking about the accretion. Clearly, we have not gotten into looking at the integration and what type of long-term profitability we'll have. We think there'll be a nominal pressure in the next year or two, mid-2021 and '22, and then obviously, growing from there with most of that dilution coming from just the increase in the share count.

So this is Ralph. I think we shouldn't think of this as a replacement of our product set, but an enhancement to our product set that will attract new customers, particularly younger customers who tend to use debit as a means to pay. So while we will add to our revenue base, I don't see this replacing our existing products. In fact, we will migrate some of these customers to our existing products as we move forward. So I think it is an enhancement, not a replacement.

Okay. Great. And then just one other question. On your Slide 5, if I could just talk about credit sales. I was surprised, I mean, the trend is clearly favorable, but I was surprised by the online brand sales being negative. That seems a little different than what we've seen from some of the other payment companies regarding online things. Is that just a function of your retail partners? Or can you maybe just provide a little bit of color there?

So if you think about the third quarter as opposed to the second quarter, we had our traditional partners opening up their bricks-and-mortar locations. And we have pent-up demand for people to get out of the house and actually get a change of scenery. So we saw people shopping in the stores. And if you look at that, although our online sales went down a bit sequentially, people are shopping, so our sales were up 92%. But if you combine those two, sales were up in the quarter, as I said, 28% sequentially. So while we saw a little bit of a dip in online sales, we saw an amazing increase in in-store sales.

Next question comes from Sanjay Sakhrani with KBW.

Maybe I'll start with credit quality. Obviously, some nice charts there that show credits obviously performing quite well, but you've had the relief programs, you've had stimulus, that's going to be a little bit of an air pocket. I don't know what you guys are doing with your relief programs. Are those sunsetted? Or are you still offering them? But I guess, just to think about the reserve rate and the migration going forward and the direction of credit quality henceforth. I mean how are you guys thinking about that?

Yes. And it's Tim. Yes. So clearly, the quarter benefited from those relief programs that we were seeing back heavy use of those back in Q2. But where we are right now, we would expect, like most of the others in the industry, to have pressure on our credit in 2021, specifically in the latter half of 2020. One is the relief programs have kind of gone a little bit back to normalized levels. In my prepared remarks, I talked about being about three percent for relief programs on our chip and other relief programs, and that's pretty much back to normal pre-COVID levels.

And do you expect the reserve rate to sort of stabilize here? Or can it go higher here? Because I know you guys didn't really move that a whole lot.

Yes. So clearly, we're anticipating the increase in charge-offs and a fairly direct impact on our reserve rates. If COVID starts to abate, and we continue to see the strong payment behavior we've seen from the last six months, there's opportunity on our reserve rates.

Okay. And then just my follow-up question unrelated to that, maybe for Ralph, is, I guess, you guys talked about strategically needing to beef up on technology. Does Bread solve for everything you needed, or do you need more investment in technology from here on out?

Well, technology like anything else is evolving. So what Bread does is it really puts us in a really terrific competitive position. But as I said, our reinvestment is going to be in digital enhancements going forward as well as products. So while it gives us additional capabilities, we're not done yet.

And would you expect to solve for that through acquisition or through internal investment?

Well, the acquisition of Bread gives us tremendous talent in digital, and I'm looking forward to working with that team and having them help us solve our go-forward endeavors.

Next question comes from Chris Kennedy with William Blair.

Bob Napoli here. Just following up on Bread, Ralph. I think Alliance Data has been some of -- I'm sure several of your customers use other buy now, pay later programs like Affirm or Klarna or Afterpay, and I would imagine that you've seen how the two products work in tandem. So I'm just wondering what your thoughts are on how this enhances your cross-sell capability? Would you be able to replace some of those other buy now, pay later programs? And how does the technology at Bread compare to Affirm, Klarna, or Afterpay?

Yes. So I think a couple of things. One is, certainly, we're going to offer this to our partners. And why I think it gives us a strategic advantage is it's a white-label offering. So that means that the customer doesn't feel like they're going yet to another company for some kind of credit. They feel they're invested in the brand they're buying from, and this is essentially an extension of that brand. I think that's tremendously important. So I'm excited about that. And I think that gives us an advantage to potentially replace some of those third parties.

And the Bread technology? And I guess -- and also like maybe the credit quality, is somebody that qualifies that doesn't qualify for an Alliance Data card then offered the -- is that the thought process that -- I mean, I would think the retailer would want the loyalty associated with the private label card first.

You'll see these things side-by-side, right? So ultimately, it's the consumer's choice on whether they want the private label credit card, which comes with all of the rewards, or they want to have an installment loan, giving them something where they can have set payments in a given month. So I think that will be the choice of the consumer going forward.

Okay. Then lastly, can you give some metrics like what the revenue is for Bread, what the -- how -- what the EBITDA is and what the growth rates are? And would you be holding their loans on your balance sheet?

Yes. Well, we'll eventually migrate them onto the balance sheet; that's part of the integration process. There are a couple of different steps we'll have to take there. And we're not disclosing it because it wasn't public the revenue and EBITDA. I just -- I'll go back to that it should be nominal pressure on us in 2021. And as we move into '22, '23, clearly, we expect some fairly significant revenue because we'll be able to integrate them across our board with all 160 of our different partners.

Our next questions come from David Scharf with JMP Securities.

Can you shed a little more light on what the anticipated savings are from converting over to Fiserv? I assume it's the first data card processing platform. But -- and whether that transition to outsourcing was more expense-driven? Or were there speed to market issues that were more impactful?

The savings that we have, we'll certainly invest in the transition to Fiserv, if you think about more products that will certainly help our partners. For us, it will lower our cost to serve as we move forward and just give us more flexibility in the marketplace to scale up and down as the marketplace moves.

Got it. Understood. And then as a follow-up, because it's been a familiar. So you refrain on the call, just focusing on the buy now, pay later offering again, maybe at a higher level, I understand it's viewed as kind of complementary. It adds a potentially younger demographic and there's an upsell opportunity. The addition of private label as a product. It seems like as commerce becomes more and more digital, it seems like the barriers to entry for new competitors to offer loyalty tools like Buy Now pay later increase as well. And I'm wondering, is there any feedback you're getting from your specific retail partners about either a whether the loyalty and value-add associated with a private label card has been impacted at all by some of these other types of shopping card conversion offerings? And b, specifically, have they provided any data on how many of your end consumers that have Comenity-issued cards have started to use an alternative buy now, pay later option in the shopping cart checkout?

So let me take the first one. I believe the private label card will always have a place because there's an affinity to the brand. So when you think about other entrants, they don't -- they're not connected to the brand. So it's pretty much a linked transaction. So there's no brand affinity, there's no brand rewards. And that, we think, is still a barrier to entry going forward. And in terms of your second question regarding how many of the clients are using a buy now, pay later or installment loan, I'm not aware of any specific data that our partners have supplied. Now our partners do have them on their sites, which was one of the reasons we certainly wanted to invest in a leading-edge fintech that has so much great talent and such a digital platform. That's why we did invest in this. We want to be the supplier to our partners of all their payment methods and give them a full suite of ways for our customers to engage with them and purchase bigger baskets as a partner.

Next question comes from William Ryan with Compass Point.

One kind of granular and one a little bit bigger picture. But on the granular side, looking at the Trust data, it looks like there's a little bit, I kind of called it a credit bubble kind of working its way through. On the backside of it, delinquencies are very low again. But it looks like you might be kind of running into a little bit of charge-off headwind maybe in November and December. As I recall, you're kind of restrictive on some of the accounts that you gave for variance to. And I was wondering if you can kind of comment on what that might be or what it might reflect? And then second, as it relates to Bread, looking at the buy now pay later, one of the comments partners have had is about economics of the business being detrimental, but more importantly, [indiscernible] brought up several times in the call is the loyalty side of the equation. Do -- will the retailers I assume they probably would? Would they have the ability and I don't not necessarily like this word, but to steer towards their product offering that you're going to have because it seems like they want to create loyalty side out of this buy now, pay later over time.

Yes. So let me take the second one first, and then I'll ask Tim to comment on your first question. I think that our partners will, as they do today, steer their customers to our products because it's beneficial to them to do that. So I would say this is just another product in a basket that they can use as a loyalty device. And that's why I am particularly excited that it's a white-label solution, and we didn't partner with a third party where it would be just a name out there and it would be a service rather than customer engagement.

Yes. And Bill, when you get to the Trust data, that's just a timing issue with some of the customer relief programs. We're getting a little bit of pressure there that just at the trust level. As I've mentioned, the customer relief programs have a benefit overall.

Next question comes from Jeff Adelson with Morgan Stanley.

I know a lot has already been said on Bread so far, but maybe another question there. You said that you're making that available to your retailers soon. But just wondering how fast you feel like you can get that platform up to speed with your retailers? Is this something that's going to take a couple of quarters? Or do you think it will take like a few years to really get entrenched with your client base? And then I know you've already covered a lot on like what kind of color your retailers are giving you, but maybe you could dig in a little bit more. What percentage maybe of your retailers do you think are actually going to use this? Is this something where some can turn it on and turn it off? Or are you just going to kind of make it available to everyone and just let the customer base kind of unfold?

I'm sorry, I'm not sure who might want it first, how we might go. The beauty of this platform is that integration happens pretty quickly. It's like a 40-day to 50-day integration at a brand partner, that is key for us in terms of the number of brand partners we have and the demand we would be expecting for this as we go forward. And so from my perspective, we will begin working with our brand partners as soon as we hang up from this call.

Got it. Okay. And then maybe just shifting to general purpose. You're clearly moving into a new capability with Bread. I feel like general purpose could be another growth channel for you. I was just wondering, could you give us some insight into where you hope to take that program over the medium to long term? Is that really more just a backstop against retailer bankruptcies? Or do you view that as a real opportunity to really drive growth outside that? And then separately, I know you've also covered a lot about your strength in beauty and some of these other non-specialty retailers outside there. Is there an opportunity for you to do a little bit more outside of consumer on the small business side?

Yes. So let me -- so when we define general purpose, I define general purpose as two things: one being our co-brand cards and the second one being the Comenity card that we just launched. So if you think about our co-brand cards, and our partnership with Fiserv, we now have co-brand capabilities that we can compete head-to-head with anybody out there. Again, that's certainly a beauty of moving to the Fiserv program very quickly. Not only do we have capabilities, we also have experience. So I'm speaking for myself and others in the organization; we've all managed large co-brand portfolios. I think it is a terrific part of our business. Each portfolio in our entire portfolio plays different roles. So although the margins may be a little thinner on the co-brand side, they certainly bring better credit quality. And that bed of credit quality enables us to take a little bit more risk on the private label side. So we're looking for that balanced portfolio as we move forward. As far as the Comenity card, early days, again, really excited about the engagement and early spend we're seeing and the fact that it's attracting millennials. But at this point, we're thinking of that as right now as a save tool.

And Jeff, as far as the question around the businesses, we do have the capability to do small business loans. Most of those are going to be attached to small sole proprietors, et cetera. We already have that ability. Not been a big focus other than to make sure that if it's a consumer that fits running a business that we continue to be able to underwrite those folks.

[Operator Instructions] Our question comes from Michael Young with Truist.

I know we've talked a lot about Bread so far, but I was curious, maybe just on the retailers actually on the kind of more the core business. There's kind of -- was a lot of noise made of bankruptcies and issues there. But just wanted to get an outlook on what's going on kind of with the bankruptcies versus the new additions of new retailers and kind of how those are trending?

Sure. So as you guys -- as you know, when we think about bankruptcy, it's two types, right? There's Chapter 11 and Chapter 7. The Chapter 11 bankruptcies are a reorganization of the partner, and that results in potentially store closings. But that said, we still continue to transact with the partner. We still continue to acquire cards, and we still continue to market to the partner. Although maybe when the partner comes out of Chapter 11, they may have fewer physical locations. That is why we are investing heavily in digital. So when that partner emerges and they have a bigger part of their business as digital, we'll be right in that channel where the customer wants to shop. In terms of liquidation or Chapter 7 bankruptcies, that's why we certainly have the Comenity card as a Save tool. You remember in Chapter 7, the bankruptcies, our customer is a card member. We actually -- margins improve in a Chapter 7 bankruptcy during early liquidation. As far as what I see going forward, it's a stressful time for retailers, but we haven't seen any other retailers right now tell us that they're entering into an 11 or 7 situation.

It's -- one of the things we noticed was as we came into 2020, there were a number of retailers that had weak balance sheets, and COVID hit them very hard. They have obviously done what they've had to do from the organization. The retailers we have a lot of have pretty strong balance sheets and been able to withstand this and look like they're starting to come back out. So for a lack of better term, it feels like we fleshed out some of the weaker players on the retail side.

Okay. So net-net from here, you think you can kind of be in a net add position in terms of retailers and volume even ex-kind of the macro?

Yes. So I think if you look at -- let's take the one category we talked about today, beauty, we see even year-over-year improvement in beauty. We're a market leader; we've got over 50% of the market share there. So we'll continue to add in that area. So we see that as a really good vertical for us. Other verticals that we're adding to are home goods, home improvement; that's been really powerful for us. So we've seen improvement there as well. Most importantly is that we are able to work with partners across different categories and offer them this basket of opportunity for their customers to purchase larger ticket items and give them the opportunity to do it in a variety of ways, private label, co-brand, buy now, pay later, and installment loan. We're just filling our products very nicely.

And our next question comes from Vincent Caintic.

And just a quick follow-up question. So I'm sorry, I might have missed some of this. But -- so I appreciate the commentary on just the current quarter receivables, maybe still shrinking going into 2021. But I just want -- that seems like it's been picking up nicely. And then the yields as well, that picked up nicely quarter-over-quarter. I'm just kind of wondering what you're expecting for trends there? And when you made the comments on receivables, does that include the Bread acquisition? Or is that just thinking of the existing quarter?

Yes. So let me -- I'll start with the yields, and then I'll go to the AR, Vincent. So on the yields, the -- we're obviously down year-over-year about 220 basis points. Look, 150 basis points came from the Fed action, so unless the Fed obviously increases the discount rate and therefore, flows into the prime rate, we all have that pressure. The rest of that pressure is coming from the customer relief program and actually the consumer behavior they're paying us. So the benefits we're seeing in the charge-offs and the delinquencies, and obviously, the downside of that are some of the late fee give up. So we may be able to pick up some of that over time. But I think the 150 basis points is pretty permanent unless we have some action. As far as the AR, specifically, it's going to be dependent on the consumer coming back into the retailers. We obviously had some really positive news for the folks coming back in, as Ralph highlighted in his slides. We think there may be a little bit of pressure, certainly nothing like 2020, and that's prior to the Bread acquisition; we think that might be accretive to that.

Okay. Great. That's really helpful. And then I'm going to try my Bread question. So I'm just wondering how much overlap there is on your existing retailer footprints between Bread and Alliance Data? Because it seems like maybe there shouldn't be just because the product sets are pretty different. And so kind of thinking maybe there is a great cross-sell opportunity between the two different products, but just want your comments on the existing overlap?

Yes, I would agree with you; there's minimal overlap, and it just presents us with a really strong cross-sell opportunity. I would agree with what you said.

And at this time, I will turn the call over to Mr. Andretta.

Thank you for joining our call today and for your interest in Alliance Data. We're excited about the future and our focus on the execution of our strategic priorities to drive our company forward. Everybody, have a terrific day. Thank you.

This concludes today's conference call. You may now disconnect.