Bread Financial Holdings, Inc. Q2 FY2021 Earnings Call

Good morning and thank you for joining Alliance Data's Second Quarter 2021 Earnings Conference Call. I am pleased to introduce Mr. Brian Vereb, Head of Investor Relations at Alliance Data. The floor is now yours, sir.

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 Beberman, 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 Beberman, 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 3 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 spin-off of our LoyaltyOne segment, which is key to our strategic transformation to strengthen our balance sheet metrics and deliver long-term 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 Bread/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 in mobility continues to improve as retailers focus on engaging their customers through an omnichannel shopping experience, with our Gen Z and millennial sales up 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 4 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 5 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 30, and select merchants will launch in the second half of the year with a broader rollout planned 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 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 Fiserv'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 1 million cardholders in the second quarter, which we view as a very important milestone. We look forward to driving acquisition growth of our 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 loans by 18 months to July of 2024, and we received the necessary permissions required for the anticipated SpinCo debt refinancing activities. The LoyaltyOne spin-off 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. Slide 6 highlights select brand partner additions and renewals. We added several new partners during the second quarter, including new card partners rue21 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 multiyear 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 7, 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 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 road maps 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 30, we activated an e-commerce pilot with Fiserv and anticipate 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 9. 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 multiyear 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 a dynamic marketplace. Before I turn it over to Perry, I'd like to go back to Slide 8 and review the performance of LoyaltyOne, which includes AIR MILES reward program in Canada and the Netherlands-based BrandLoyalty. As displayed in the graph on the right, AIR MILES reward miles issued and redeemed improved in the quarter as flight bookings increased in anticipation of reduced travel restrictions in the back half of the year. At the same time, merchandise redemptions remain strong. Average daily flight bookings are currently ten times higher than we experienced in the first quarter, yet remain at 60% to 70% of the pre-pandemic level. So there is an expectation for further improvement as the recovery in Canada continues. BrandLoyalty'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 Beberman, our new CFO. Perry started with us on July 6, 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 industry 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-provision pretax earnings or PPNR were up 20% year-over-year, aligned with our focus on driving core underlying earnings growth. Finally, net income included the benefit of the $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. LoyaltyOne revenue was essentially flat year-over-year, while Card Services revenue increased 4%. LoyaltyOne 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 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 Ralph 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 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 processing transition to Fiserv as well as higher BrandLoyalty 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 are 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 initiatives to continue to drive sustained profitable growth. We expect to resume high single to low double-digit receivable growth in 2022.

We are now ready to open up the lines for questions.

Perry, what motivated you to join Alliance Data Systems, considering your previous experience? What do you believe you can contribute to the outlook or the company's strategy?

Yes. Thanks, Bob, for the question. Again, as I said, I'm really happy to be here. 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. 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. 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'd a company and they grew at quite a nice rate. But everyone was 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 of 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 efforts. So I'm excited to be part of this group.

Bob, I would say, Perry's first protocol is actually finance. But aside from being a trusted financial adviser, 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. I have a question about Bread and its momentum. I found Wayfair to be a really interesting addition, especially since they were previously a partner with Affirm. They still are, and Wayfair was a private label customer with ADS that is transitioning away or may have already transitioned. Is this an exclusive relationship? Additionally, was Blue Nile a private label customer? Is there a pipeline of ADS private label customers that are expected to become Bread customers?

Yes. Let me first start with Wayfair, and I am happy to be associated again with Wayfair. Upon my arrival here, Wayfair was exiting their relationship with ADS. And I was disappointed about that because it's 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 equitable for us because I think it's great to be associated with such an innovative brand. I’m excited to welcome them back. Blue Nile is one of our private label customers, and we’ve previously sold to them. By October, 1.7 million of their customers will be on the Bread platform, allowing us to offer them additional financing options. I’m really looking forward to this partnership, and there will be more developments in the second half of the year. We plan to sign several other private label and co-brand partners to the Bread platform. It takes some time, but we have a consistent pipeline with our existing brand partners. Bread is not just a one-dimensional solution. There are three key components to Bread: direct acquisition, focusing on Fiserv and scaling up this year, and enhancing our relationship with RBC to ensure partners by the fourth quarter. We’ve made significant progress across all aspects of Bread.

And just if I can 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?

Yes, it is. It will fluctuate a little, but it is the right mix, which includes both product mix and risk mix. This combination will moderate back and forth, but that's about where we want to be.

Your next question comes from the line of Sanjay Sakhrani with KBW.

Congratulations, Perry. My first question is about the yield. While I understand the gross revenue yield has stabilized, do you anticipate that it will begin to increase as loan growth picks up? Could you provide some insight into the trends in yield?

Yes. 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 in the second quarter. But because payment rates are elevated, that yield is going to be steady. So I don't see it picking up quite a bit for the rest of the year. As payment rates moderate, you'll see that yield improve as we go into 2022.

And am I correct, you guys think it will migrate back to the highs that we've seen in the past or some intermediate point?

I believe it will reach an intermediate point due to our product and risk mix. The yield will improve, but our loss rate will not deteriorate as that yield improves. You will see a nice balance between yield improvement and loss rate, which is exactly what we are aiming for.

Okay. Great. I have a follow-up question about the Fiserv onboarding. Ralph, you mentioned that onboarding these merchants will take some time. When we consider your targets for 2023, can you discuss the pace of the onboarding process? Do you anticipate being fully ramped up by a specific time to achieve those targets? How should we think about this?

Yes, Sanjay. Our focus is on doing things the right way rather than quickly, as this is a long-term relationship. We aim to ensure that integration and ramp-up are straightforward. Since we went live on June 30, we will gain insights from the partners we onboard this year. Our goal is to ramp up quickly in 2022 to set the stage for 2023. Fiserv contributes positively to our receivables growth, but it is only one element. We also see growth from deeper engagement with existing partners and new product offerings. Additionally, growth in co-brands is contributing to our overall performance. I believe our team will capture its fair share, if not more, of the opportunities available in the market. This combination gives me confidence that we will achieve our metrics for 2023.

Great. And 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.

Well, my strategic priorities are the same as the leadership team's strategic priorities, to make sure we execute spin, 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, 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.

It's really good to be aligned with your CFO. I'm really happy about that.

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

Congratulations, Perry. I wanted to maybe just ask about the receivables guidance. Just trying to understand like some of the dynamics going on there because, I mean, you've increased your credit sales guidance. Receivables, if you look at the monthly data, seem to have troughed in May. And then you have good momentum in terms of Bread coming online this year. So with government programs expiring, I'm just trying to understand what's keeping the receivable guidance 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 expected?

I believe payment rates are a key focus. Currently, we are experiencing elevated payment rates, and while we anticipate that this will decrease in the second half of the year, they remain high at the moment. If I had to identify one main factor, this would be it. We are witnessing strong sales growth, which continues to exceed the moderation in payment rates, although those rates are still elevated.

Okay. So there's nothing else like a portfolio loss or anything related to that.

No, we've already discussed that we factored in the portfolio loss in the third quarter. While that is affecting us, the main issue is payment rates, which are not impacting our receivables.

Got it. And then just one quick one for me. You mentioned the acquisition of proprietary cardholders being an opportunity in 2022. Maybe talk a little bit more about that. Is it Bread? Is it something else?

In 2020, after losing the Wayfair partnership, our subsequent partner, Citi, opted not to continue with the portfolio. We found ourselves with a portfolio that had faced a few bankruptcies, and since this was a new experience for us, Val, the team, and I suggested introducing a proprietary card to enhance the receivables instead of letting them decline. We identified strong prospects within that portfolio and launched a general-purpose card with an attractive cash-back program and incentives. The response has been positive, particularly among millennials, who are using this card more than any other demographic we have. We believe this presents a significant opportunity, starting as a low-risk product but evolving into a direct market offering. This initiative diversifies our portfolio and reduces our reliance on traditional retail, private labels, and partnerships. It is one of several new products we are excited about, and we've successfully reached over 1 million customers, which is a milestone I take great pride in.

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

Just wanted to follow back up on the Wayfair point in 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?

Yes. We have a fantastic sales team, and I've empowered them to pursue valuable and profitable business opportunities. While we acknowledge the partners we've lost, I'm open to offering buy now, pay later installment loans to them, although their card relationships are long-standing. When they are ready again, we may consider re-engaging. However, our current focus is on collaborating with partners like Wayfair on different lending models, which I am very open to. This approach isn't a strict strategy; instead, our primary aim is to secure profitable partnerships for ADS and Bread.

And just regarding the payment rates, are you noticing any signs that they might be starting to decrease from their current elevated levels? Additionally, when considering the high single-digit to low double-digit growth for next year, I am curious about your thoughts on the payment rates. Do they need to return to pre-pandemic levels, or can they stay somewhat elevated while still achieving that growth target?

Yes. As of July 29, the payment rates are elevated. We monitor them daily, and they remain high. However, they don't need to decrease to pre-pandemic levels for us to achieve the high single-digit to low double-digit growth in 2022 that we projected, as our sales growth is outpacing the moderation in payment rates. Payment rates are still high, but our sales growth is in double digits, and we anticipate this trend to continue, even with the Delta variant present. We are keeping an eye on the situation in the marketplace. Currently, our sales are surpassing the moderation in high payment rates.

And then just one last housekeeping for me. On the $0.5 billion portfolio, I know that's coming out, can you just remind us of the timing of when that actually happens or when it could happen?

That will be at the end of the third quarter.

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

On Bread, can you perhaps help us out with the updated loan balance for Bread as of June 30? 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 '21?

Yes. We expect the loan balance to double as we exit 2021. I think the loan balance is in the 10-Q. Take a look at it there. But we expect to be 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 '23? And how should we think about the loan balance by year-end '23, if that's achievable?

We anticipate reaching $10 billion in 2023. The loan balance will consist of various components, with ADS remaining within the Card Services division. This forms part of a larger loan balance, but we see it as a significant contributor moving forward, especially as we aim for that $10 billion in GMV in 2023.

Okay. Lastly, regarding your receivables growth in 2022, which is projected to be in the high single to low double-digit range, can you clarify if the payment rates are coming in that much better than expected? I mean, is the better-than-expected sales volume offsetting the elevated payment rates for a longer period? Is that why you remain confident in that high single to low double-digit expectation? I would have thought you might have adjusted that somewhat given the trends in payment rates for the industry.

Yes. Well, I would say the sales are coming in better than expected, and it's slightly offsetting the high payment rates. They remain elevated, but sales growth is keeping pace. This gives us enough confidence to believe that our target for 2022 in the high single to low double-digit range is achievable.

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

I wanted to ask quickly on the in-store versus digital sales. It looks like the percentage of in-store versus digital new account growth has sort of moderated to prepandemic levels. I guess is there an expectation for that to trend higher with Bread coming online? And as you mentioned, the focus on the proprietary card next year, just your general thoughts there.

Yes, I believe our digital sales will increase as we onboard more partners to Bread and enhance our digital offerings. As more partners adopt our solutions and we expand sales of our digital and omnichannel products to them, I expect to see a significant growth in that area.

Got you. Great. And then separately, I guess do you guys sort of disclose the exclusivity of partnerships coming online with Bread?

No. Here's what I will say. Some of those partnerships are exclusive while others are not. They are competitive, and we are very happy to compete in the marketplace. Obviously, exclusive partnerships are desirable; those are the best kind. However, if a partnership is not exclusive, we are fully capable of competing on price, product, and quality.

Got it. And then just lastly for me. On the payment rates, is there an expectation that as government stimulus sort of ends in September/October that you're going to start to see more, I guess, a gradual acceleration of payment rates coming down? Just your expectation in terms of when the decline in payment rates happen and if it does happen.

I wish I had a magic 8 ball, but we believe that as government stimulus ends, payment rates will moderate in the fourth quarter. I don't expect payment rates to return to pre-pandemic levels because we have intentionally changed our product mix and score mix. As a result, while payment rates will decrease due to the end of stimulus, I don’t anticipate them returning to the levels we saw in 2019.

Your next question comes from the line of David Scharf with JMP Securities.

Two things. First, Ralph, seeing all the jewelry brands listed under the renewals made me want to ask for an update on vertical concentration. I'm assuming that beauty and health remains the fastest-growing or best-performing vertical. Can you update us on Ulta, Sephora, and Sally's in terms of their maturity, renewal schedule, and whether growth expectations for that vertical are crucial for meeting receivables targets?

Yes. I'll discuss our entire portfolio. We have 160 brand partners, with renewals scheduled over 5 to 7 years. A one-year non-renewal significantly affects our financials. Losing partners is something we want to avoid. We've structured our partnerships to span a period of time and have been focusing on encouraging early renewals. We are leading in the beauty sector, which has been very healthy for us. We've collaborated closely with the partners mentioned and continue to do so, introducing new products to the market, making acquisition easier, offering product options, and further engaging with their loyal customer bases. We plan to keep diversifying, with pet products, beauty, jewelry, and plus sizes being notable areas of interest for us. We're actively working in various sectors, helping us move away from traditional brick-and-mortar retail. We're enthusiastic about these partnerships and sectors, ensuring we grow collaboratively through new products, data, analytics, and quality service.

I appreciate the details. Just to follow up on yield, I have a longer-term question. The elevated payment rate you mentioned is similar to what other lenders are experiencing during this transitional year of stimulus. Looking ahead, there was a previous question about where yields will ultimately stabilize. Referring to the current credit profile presented in one of the slides, and considering the portfolio composition that will arise from buy now, pay later by 2023, can you share what percentage of gross yield you expect to come from late fees once things normalize compared to a few years ago when it was possibly a third? I'm trying to grasp how this might provide insight into the long-term gross yield outlook.

Yes. As I mentioned, we've adjusted our product mix and risk profile, reducing our reliance on late fees compared to how ADS operated previously. We aim to focus our efforts on generating returns from high-quality products and reliable payers. While late fees will still have some impact, they won't play as significant a role in our future yields as they did in the past. When considering yield and looking at Bread, the yields from Bread are beneficial for us due to their low acquisition and service costs. These yields will positively contribute to our overall performance going forward. I am confident that our yields will remain steady, and with our revised product and risk approach, late fees will not be the primary driver.

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

I just want to say welcome, Perry, and Wayfair returning really is a testament to the strategic transformation here, for sure.

Yes. I got two gifts this quarter.

Seriously, and it came at a discount, right?

Exactly.

As we consider the situation, people have been emphasizing how the Fiserv relationship is not entirely exclusive. I would like to turn that around and ask if there's a possibility of bringing on another partner like Fiserv within that channel to potentially reach different partners or merchants. Fiserv has a broad network, but could we explore ways to diversify those partnerships similar to how lenders diversify their sub banks?

Yes. Let me first discuss the Fiserv relationship. Although it is not exclusive, we are integrated into their dashboard. When a merchant activates a Fiserv relationship, we are present and integrated into their dashboard, which ensures ease of use. This integration is very important to us and makes Fiserv a key partner. We are collaborating with them on several initiatives. Regarding your second question, we are certainly open to working with another third party as well. Personally, I see significant potential, especially internationally, with our technology platform in partnership with RBC. We provide a white label solution to RBC for buy now, pay later installment lending, allowing us to earn transaction fees without taking on receivables. This model could be quickly rolled out globally, presenting a genuine opportunity for us to establish RBC-like relationships in various regions.

Great. This is definitely a significant opportunity. Although it might be a bit early for this question, could you revisit the APA? If we consider the additional liquidity among consumers, one of the major banks mentioned that 50% of stimulus funds remain in their accounts. As we look ahead to the upcoming holiday season, could you discuss how your new partnerships may help diversify the expected increase in fourth quarter receivables and your strategies for the holiday season with your partners, particularly regarding how spending may translate into balances?

Yes. If you examine the baseline forecast, you will begin to notice savings in the fourth quarter, though these savings may lessen as stimulus payments decrease and the holiday season approaches. We are currently experiencing high double-digit sales, positioning ourselves well for the holiday season. I consider three key areas: first, as Perry mentioned, we are increasing our marketing expenditure focused on driving additional spending from our existing partners and attracting new customers during the third and fourth quarters, which will support us throughout the holiday season. We are also adding more partners to the Bread portfolio, which will be beneficial for the holiday season. I earlier noted some promising opportunities with RBC that will be ready for the holiday season. While RBC is not associated with receivables, it does contribute to revenue. All these factors will contribute to driving growth as we enter 2022. With payment rates stabilizing and sales continuing to increase, we will likely see growth in receivables as we close out the year.

Your next question comes from the line of Reggie Smith with JPMorgan.

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 curious like how does that compare to the stand-alone buy now, pay later companies? So specifically, like does it take you longer to integrate given the nature of the integration? Or are you on par with how quickly they can be up and running with a client?

Yes. We are likely running as fast as we can. The key differences between us and standalone companies are a couple of points. First, we are on the merchant side, integrating into their purchase process and allowing customers to choose various payment options at the merchant. Our focus is not on taking transactions from the merchant but rather on facilitating additional transactions, as merchants are our partners. This means we don't require them to download an app; instead, we execute transactions within the merchant's purchase path. This sets us apart from standalone firms. Secondly, for our existing partners, we can provide relationship pricing since they are more than just a single transaction to us. We have a strong balance sheet, better funding, and established relationships, allowing us to be very competitive on pricing, which is another distinction from third parties. In terms of speed to market, we can launch as quickly as they can.

Got it. If I could ask one more follow-up, you mentioned the early success you're seeing with millennials on your proprietary card. I'm curious if that success comes from attracting former Wayfair customers or if there are specific features of the card that appeal to millennials. What I'm really asking is whether you have considered or are planning to integrate buy now, pay later or installment functionality into your proprietary card, or possibly rebranding it to be more consumer-facing.

Great question. Yes, I mean, I think we're seeing early success from millennials because it's a cash-back card, so millennials are rational and they like cash flow. So they see it as an opportunity to get something back for their spending. Also, we're skewing towards digital like a product as well, and we'll continue to make that product digital as well. So in terms of making it a bigger part of our portfolio, we're certainly bullish on this product, and you'll see us lean into this product next year. I'm sorry if I didn't answer your question fully. Yes, we're going to bring all 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.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Ralph Andretta.

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.

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