Bread Financial Holdings, Inc. Q4 FY2021 Earnings Call

Good morning, and welcome to Alliance Data's Fourth Quarter Full Year 2021 Earnings Conference Call. My name is Charlie and I will be coordinating your call today. It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Alliance Data. Sir, the floor is yours.

Thank you. Copies of the slides we'll be reviewing and the earnings release can be found on the Investor Relations section of our website. Today on the call, 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 that 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. Before I begin with the slides, I would like to address the news last week regarding our contract with BJ's Wholesale Club. As you may be aware, a lawsuit was filed noting the nonrenewal of the contract. While we cannot speak further about this matter on the call today, we firmly believe we are in compliance with the terms of our contractual agreement. What I can comment on is our steadfast commitment and track record of delivering the highest level of service and support to our value brand partners, including operating responsibly and with the utmost integrity. Our leadership team has decades of industry experience and understands the importance of building trusted relationships with our partners and working together to drive long-term success for all of the parties involved. We will be highlighting our achievements on this call this morning as we look back over 2021, a record year for new brand partner signings, successful renewals, and continued significant progress on our transformation. Regarding the BJ's nonrenewal impact on our receivables growth and financial outlook. Our forecast contemplates business activities, including new brand partner wins not yet at announcement stage, thoughtful assumptions around our ongoing new business development pipeline and renewal probabilities, and expected but not yet announced nonrenewal and portfolio optimization decisions like BJ's. We will maintain financial discipline in both signing new partners and renewing existing ones. As I said before, we will not chase unprofitable deals simply for the sake of growth. We remain committed to delivering responsible economics. With these factors and assumptions, we have clear visibility across our portfolio activity through 2023, underscoring our confidence in our outlook for continued growth. More importantly, we remain committed to our long-term financial target of $20 billion in average receivables for the full year of 2023. As the year progresses, I look forward to sharing updates regarding the ongoing success of new brand partner wins supporting the achievement of our goal. Now moving to the slide deck. I will start on Slide 3. Slide 3 highlights just a few of the major accomplishments we achieved in 2021 as part of our business transformation. We made great strides in simplifying our business model, including completing the spin-off of Loyalty Ventures in the fourth quarter. The spin-off allowed us to strengthen our balance sheet by improving our capital ratios and reducing our leverage ratio, as well as enabling a sharper focus on our investments and future growth plans. The spin-off marks the culmination of a 3-year strategy implemented by our Board to simplify and streamline the company, the outcome of which is a stronger, more focused business profile with increased flexibility and sustainable growth potential. We continue to develop our full suite of lending products to provide consumers with a diverse set of payment options. For example, we had great success introducing our new proprietary card as it grew to 1 million cardholders at nearly $650 million in outstanding balances at the end of 2021. We project continued success with this product, which provides a diversified growth driver and helps balance our portfolio risks. Our diverse product set, including private label and co-brands, installment lending, and split pay, unlocks graduation and optimization strategies that increase the lifetime value of a customer for us and our brand partners. Product choice allows us to meet the needs of a wide variety of consumers in a way that increases conversion while allowing brands to manage the product mix and optimization profitability. We recently celebrated the 1-year anniversary of the Bread acquisition, which added buy now, pay later offerings, including digital installment lending and split pay products. These additions to our product set were instrumental at the time of increasing omnichannel focus by our partners and consumers, increasing digital payment preferences. Our versatile payments platform provides new opportunities to deepen our relationships, expand our total addressable market, and have provided a new strategic relationship with RBC, Fiserv, Wayfair, and Sezzle. These partners leverage our nimble and flexible fintech platform to expand and improve their customer experience while also offering greater payment choices to consumers. We will continue to strategically invest in our digital platform, product innovation, marketing efforts, and technology monetization with a planned incremental investment of over $125 million in 2022. Also in 2022, we are scheduled to complete the conversion of our core processing system to Fiserv, which will allow us to be more nimble, manage risk effectively, and leverage new capabilities to drive both revenue opportunities and operating efficiencies. Last, but not least, as highlighted in our environmental, social and governance report, we have continued to refine and prioritize our ESG strategy with Board level oversight. We have an outstanding Board of Directors, which is aligned with and confident in the strategic direction of the company and is supportive of our ability to make disciplined financial decisions to drive long-term value for our stakeholders. Moving to Slide 4, I will highlight a few key updates for the quarter and full year. I am happy to announce that we exceeded our 2021 financial guidance, driven by stronger-than-expected revenue growth, thoughtful expense management, and positive credit performance. We are well-positioned to build on this momentum in 2022. Consumer activity remained strong with credit sales up 15% in the fourth quarter from the prior year period. Our beauty and jewelry verticals remain the front runners with holiday sales up more than 30% in each category. We saw a particular improvement among millennials and Gen Z, with spending and transaction activity during the holiday season exceeding prepandemic levels. While diverse purchasing options across all channels are important to our brand partners, we did see a notable year-over-year increase in in-store transactions in the fourth quarter. As previously discussed, our business development pipeline remains robust, and you are seeing the results in our announced new signings and renewals during the quarter. Moving to Slide 5, I will highlight a few of these names. We signed several large partners in the fourth quarter, including the National Football League with tens of millions of fans and their 32 affiliated club shops located at their stadium, Michaels, the nation's largest retailer of arts and craft materials with over 1,000 stores across 49 states, B&H Photo, which went live last week and is one of the world's largest independent retailers of photo, video, audio, computer, and creative technology equipment with nearly 50 years in the business, and finally, TBC Corporation, one of North America's largest marketers of tire repair and automotive services delivered to a multichannel strategy for over 65 years. TBC has more than 3,000 franchising company-operated tire and automotive service centers under brands like National Tire & Battery, Big O, and Midas. We look forward to working with these new partners to drive incremental sales growth and customer loyalty through our comprehensive product suite and exceptional customer service. These new partners are prime examples of our ongoing vertical diversification efforts. We continue to actively add new brand partners, which we will announce in the coming months. This morning, we announced the early renewal of a long-term agreement with Ulta Beauty, a top millennial brand and one of our largest and fastest-growing brand partners selling over 25,000 products at more than 1,300 stores and on ulta.com. The Ultimate Rewards credit card is designed to enhance the benefits of Ulta's loyalty program and increase engagement and spend among the 36 million loyalty members. Importantly, this renewal reinforces our industry-leading position in the beauty vertical. We have a demonstrated track record of growth that was important to Ulta for our continued relationship. Our breadth of lending products provides customer choice, increases top of the funnel conversion while allowing Ulta to optimize the product mix for lifetime customer value. We have also renewed our relationship with Toyota, a preferred Gen Z brand; and Lexus, which further extends the growth of our diversified portfolios. With these renewals, nearly 90% of our year-end receivable balances, excluding BJ's, are now under contract through 2023. This clarity should provide additional confidence in our long-term receivables outlook and overall growth potential. Additionally, we continue to successfully add new online merchants through our direct acquisition platform channels, doubling new merchant additions in the fourth quarter compared to the third quarter. This success provides additional merchant diversification and is another source of our ongoing growth. A select few of the partners added to the platform are displayed on the right side of the slide. Also, our strategic partnerships continue to progress with new merchant additions to the RBC platform as well as to the Fiserv platform pilot in the fourth quarter. We will be better positioned to provide additional details on the platform activities for Fiserv as we move from pilot stage to a full rollout, and for Central and Wayfair following our expected launch in the first half of 2022. We are closely observing the evolving buy now, pay later market, especially regarding split payments. The consumer, economic, competitive, and regulatory environments are always in flux. Nevertheless, most of our businesses and potential opportunities are aligned with our digital installment lending product, which continues to show strong returns and growth potential. We will remain careful and strategic in adding new partners to ensure we achieve acceptable long-term customer returns. We are the only provider focused on deeply integrating with merchants, allowing customers to stay on the merchant's site throughout the shopping process rather than being redirected to a third-party site or application. This is significant since many third-party sites present various merchant offers with the primary goal of getting users to download their app, which ultimately disintermediates the merchant. Our top priority is driving sales conversions for our brand partners. We have introduced bank-compliant products that adhere to regulatory standards, utilize strong underwriting practices, and leverage lower-cost funding, providing us with the confidence to make responsible decisions for long-term growth for our shareholders. I am confident that with our comprehensive range of lending products, we can compete effectively with any size partner or merchant, ranging from well-known brands like Victoria's Secret, Signet, and Ulta to smaller merchants. Delivering strong results for our brand partners has been and will continue to be crucial to our success. I'll now hand it over to our CFO, Perry Beberman, to go over the financials and our outlook for 2022. Perry?

Thanks, Ralph. As a result of the Loyalty Ventures spin-off, our income statement and balance sheet have been recast with the LoyaltyOne segment and spin-related items reflected as discontinued operations. As you can see on Slide 6, this impacted net income for the quarter by $44 million, which was primarily comprised of related transaction costs, the release of a net investment hedge, and allocated interest expense. The remainder of the slides will focus on the continuing operation portion of the business. Slide 7 provides our fourth quarter highlights. Credit sales were up 15% year-over-year to $8.8 billion as consumer spending continued to recover. Average receivables were up 2%, driven by strong credit sales and the recovering economy providing for year-over-year momentum as we enter 2022. Revenue for the quarter was $855 million and income from continuing operations was $61 million. Revenue increased 11% year-over-year, while total noninterest expenses declined 12%. Diluted EPS from continuing operations of $1.21 was impacted by a higher provision for credit losses, primarily due to provision build of $187 million for continued portfolio growth and the seasonal increase in year-end receivables. Credit metrics remained strong with net loss and delinquency rates of 4.4% and 3.9%, respectively, for the quarter. Moving to Slide 8. Slide 8 highlights the key financial metrics for the full year. Credit sales were up 20% year-over-year to $29.6 billion. Revenue for the year was $3.3 billion and income from continuing operations was $797 million. Revenue was nearly flat year-over-year, while total noninterest expenses declined 3%. Diluted EPS from continuing operations of $15.95 improved, driven by a lower provision for credit losses due to lower credit losses and a lower reserve rate at year-end. Our net loss rate was 4.6% for the year, remaining well below our historical average. Turning to Slide 9. As part of our ongoing efforts to provide additional transparency and comparability in our reporting, we have transitioned our financial reporting to more closely align with the presentation of traditional bank holding companies. Looking at the fourth quarter financials. Total interest income was up 7% from the previous year attributed to higher average receivable balances and improved loan yields. Total interest expense improved 24% due to continued improvement in our cost of funds, which you can see on the following slide. Noninterest income, which primarily includes merchant discount fees and interchange revenue, net of the impact from our share agreements and customer awards, declined slightly in the quarter driven by higher credit sales activity. Total noninterest expenses declined 12% year-over-year in the fourth quarter, largely due to one-time $48 million real estate optimization activities in the fourth quarter of 2020, partially offset by 15% increase in employee compensation and benefits costs in 2021. The increase in employee costs was driven primarily by continued digital and technology modernization-related hiring as well as higher volume-related staffing levels. We have provided additional details on the new expense driver slide in the appendix of the slide deck. Overall income from continuing operations was down 18% for the quarter, driven by a provision build of $187 million this quarter versus a relief of $82 million in the fourth quarter of 2020, while pretax pre-provision earnings, or PPNR improved 52% year-over-year, as you can see on the graph to the right of the page. We are pleased with the PPNR growth over the last three quarters and expect this momentum of year-over-year PPNR growth to continue into 2022 as we profitably grow our portfolio and improve our efficiency. Turning to Slide 10. As part of our updated financial presentation and quarterly disclosures, we are providing increased transparency into the components of our net interest margin or NIM. The left side of the slide highlights our earning asset yields and balances. Fourth quarter loan yields came in stronger than we had expected in October as consumer payment behavior begins to gradually move back towards prepandemic levels. Excluding the impact of Fed rate increases, we expect loan yield to remain fairly steady this year as the benefit from payment normalization is offset by continued growth of our co-brand and proprietary products. On the liability side, we continue to benefit from the maturity of our longer-dated funding as new balances are added at current lower rates. As you can see from the stacked bars on the bottom right, our direct-to-consumer deposits have grown from 6% of our average interest-bearing liabilities in the first quarter of 2020 to 15% this last quarter. As this growth continues, we anticipate our cost of funds continuing to improve in the first quarter. However, once interest rates begin to rise, the benefits from lower cost of funds will reduce. Overall, rate increases will be nominally accretive to the net interest margin as variable priced assets slightly offset increases in funding costs. Moving to Slide 11. I will start in the upper left. Our delinquency rate increased 10 basis points versus the previous quarter due to normal seasonal trends. On a year-over-year basis, the delinquency rate was down 50 basis points. On the upper right, you can see that we had a loss rate of 4.4% for the quarter, still well below historical averages. Turning to the bottom left of the page. Our allowance increased sequentially due to seasonal balances. The overall reserve rate remained steady at 10.5%. We anticipate that the reserve rate will stay in this range until greater economic certainty emerges. Lastly, on the bottom right-hand side of the page. Our revolving credit risk distribution was consistent with the third quarter. Our risk mix and associated delinquency and losses are the result of our ongoing thoughtful management of our book, as well as the strong payment rates indicative of the general health of the consumer. We expect these rates will begin to trend back towards historical averages in 2022 as COVID-related federal stimulus programs wind down. Slide 12 provides our financial outlook for the full year 2022. We remain optimistic for a steady normalization of both economic activity and consumer behavior, and we remain vigilant in monitoring COVID conditions and the impact on consumers and our brand partners. Our outlook assumes a moderation in consumer payments throughout 2022 with payment rate volatility leading to the ranges provided. Four Fed rate increases are included in our 2022 outlook with our models indicating that these rate hikes would result in a nominal benefit to total net interest income in 2022. Our full year average receivables are expected to grow high single to low double digits as continued sales momentum, net brand partner addition, and direct-to-consumer products will drive strong growth. We expect year-end 2022 year-over-year receivables growth to be slightly stronger than our average receivables growth. As Ralph said, our previously provided outlook contemplated the BJ's nonrenewal. Timing of the BJ's relationship wind-down will likely cause some quarterly volatility within our forecast, but that does not have an impact on our long-term outlook of $20 billion in average receivables for the full year of 2023. We expect revenue growth to be aligned with average receivables growth in 2022. Net interest income growth is expected to be slightly favorable to average receivables growth as our NIM benefits from lower funding costs earlier in the year. This change in year-over-year noninterest income is anticipated to offset the slight favorability in net interest income. Note that conservatively, our guidance does not include any potential impact from the monetization of our 19% equity stake in Loyalty Ventures or any potential gains from portfolio sales. We are targeting modest full-year positive operating leverage in 2022. As Ralph already mentioned, we plan for incremental strategic investment of over $125 million in technology modernization, digital advancement, marketing, and product innovation to fuel growth opportunities and future operating efficiencies. A large portion of the investment is expected in employee expenses as we continue to hire digital engineers and data scientists to drive our continued business transformation. We also plan for higher marketing expenses in 2022 as a result of portfolio growth, new partnerships, and new products. Information processing costs will increase as a result of our ongoing technology modernization, including the conversion of our core processes to Fiserv this year. Our strategic investments will be thoughtfully balanced with our revenue growth outlook. We are making investments now to stay ahead from a technology perspective in today's dynamic environment. Regarding our net loss rate. Both loss and delinquency rates were at historical lows in 2021. We expect credit metrics to begin to gradually normalize throughout 2022. We anticipate that the full year 2020 loss rate will remain in the low to mid-5% range, still well below historical averages. As we discussed at our investor event last year, our disciplined portfolio and partner management focus on risk-reward trade-off enables us to drive profitability and growth even at slightly higher loss rates. I would also reiterate our confidence in our long-term outlook on average through the cycle net loss rate below our historical average of 6%. Overall, we are excited for the opportunities in front of us for 2022. We are making thoughtful investments and decisions to ensure we are driving long-term value creation for our shareholders. Operator, we are now ready to open up the lines for questions.

Our first question comes from Sanjay Sakhrani of KBW.

I have a couple of questions about the marketplace. It's clearly very competitive and you have experienced both wins and losses. While we don't know the specifics of one of the wins, Ralph, could you discuss what this means? Some of the losses involve good customers and merchants who were performing well. We don't have insight into your current gains, but could you talk about the competitive dynamics and your expectations for winning in the future?

Of course, Sanjay. So the nature of our business is you have wins and losses. That's the business we're in. And what makes me confident and successful is we have far more wins and renewals than losses. So if you think about 2021, it was a better year for us. Double-digit renewals, double-digit wins. When you lose something, you put it behind you. You plan for it and you move on, and we did that. But if you look at the wins, we just talked about today, Michaels, NFL, B&H, and Ulta as a renewal. Thousands of locations, national brands with literally tens of millions of customers and loyalists, that's our sweet spot. We're going to grow that with our existing and new partners. That's what we focus on. And the flexibility of our business enables us to compete with the big guys. And some of the things we talk about are takeaways from the big guys, and also small and mid-size to grow those partners as well. So you never like to lose a partner, but we move forward with new partners and renewals. And we have a broad product set that really appeals to new partners. And as we renew, we just demonstrate to our partners like Ulta that we're going to grow the pie and lean in hard on digital and omnichannel servicing.

Okay. And then just a follow-up, Ralph, you mentioned the regulatory pressures on buy now, pay later and some of the merchants actually viewing them as disintermediators. I'm just curious how you think this shakes out? I know you guys have a little bit of a hedged model, but do the merchants get it? And how are they responding to that?

Yes, I think the merchants are starting to get it. Last year, there was a little desperation in the marketplace. They wanted volume. And I think buy now, pay later gives them the volume. But it's that second to next transaction that the merchants aren't seeing. And I think that's causing them some pause. As I mentioned, the buy now, pay later space is very competitive, that was under regulatory scrutiny, and it's all about wanting to be the entry point. We're very different. We have partnerships. We want to drive that next transaction with our partners. And we've been in this business for a long time. We've built a regulatory product. We know what the regulations are. We know how to underwrite. And I think for us, that gives us a really good hedge and a really good advantage going forward because we're ready to go with a compliance thought, and others are going to have to pay a little bit to catch up as they run into scrutiny. The other thing, Sanjay, before we get off this question. If you think about our product, it's split pay and installment lending. So installment lending is where there's real profitability for us. We'll be in split pay business, but installment lending is where there's real profitability and growth.

Our next question comes from Bob Napoli of William Blair.

So just on your long-term ROE targets. How are you going to have an ROE target? Or what should be the return on equity for this company? And I mean, are you going to give EPS? Do you plan to give EPS guidance? I know you gave all the pieces, but I just wanted if you're going to take that a step further.

I don't think we will be setting an EPS target in the near future. However, we have previously indicated that our long-term plan targets mid- to high-20s. That is our focus for building the business. As Ralph mentioned, we are committed to profitability, which applies to our partner renewals, new product launches, and partnerships. It's important to note that while rapid growth can lead to a bit of a CECL growth tax, this effect will diminish as growth moderates over the long term. Therefore, you may see a slightly lower return on equity during periods of high growth, but it will stabilize. Our long-term targets remain aligned with the mid to high point we are aiming for.

Congratulations on the Ulta renewal. Can you share any details on the economics? How did they differ with Ulta? The mid- to high-20s return on equity indicates your perspective on the industry's economics. Has there been any change in how economics were managed in the past regarding total addressable market? How do you feel about the Ulta renewal and are the economics for the overall industry moderating?

We feel the Ulta economics were fair for both stocks. And when you enter a partnership, a renewal partnership, that's exactly what you want. We demonstrated to Ulta that we've been growing that portfolio, and we will continue to grow that portfolio. And our enhanced product suite again was confirmation for that. So we are thrilled. It is a high-growth vertical for us. And we will grow the overall pie, so there'll be benefits for both Ulta and us. And so we feel very comfortable about that new relationship and the renewal.

Just to sneak in one last one and following up on buy now, pay later. Ralph, do you feel like the model that is settled for ADS or for the industry, the profit model? I mean, there are some big players out there that I think are still moving around on the discount rate versus the interest income and other fee income. But how confident are you in the profit model around buy now, pay later?

If I break down buy now, pay later, it can be divided into two parts: installment loans and the four-payment model. Our installment loan is established, showing profitability and growth. In contrast, the buy now, pay later model, which includes four payments, still requires considerable work. This market remains unsettled, especially regarding compliance issues. While we are accustomed to regulatory pressure and have managed it well for years, I believe the split pay model shows some signs of stabilization. However, installment loans have been around for a long time, and given our digital and flexible platform, we are seeing growth in that area.

Yes. And I would add to what Ralph said, the installment loan product has a bigger ticket, and we know how to underwrite that, whereas your split pay tends to be lower. And so when you think about where we're going to lean in and grow, we're going to do it responsibly and we'll be advantageous at the right time. So if split pay looks like it's not providing any economics, we're not going to lean in as much there. So we'll try to dial them down, but we're ready to pounce when the market settles out on split pay.

Our next question comes from Bill Carcache of Wolfe Research.

So Ralph and Perry, thanks for the additional disclosures in the deck. I guess, what would you view as your steady state reserve rate given your risk appetite and expectation of sub 6% through the cycle NCOs? You said, Perry, I believe it should hold at 10.5% until there's greater clarity. So does that suggest that you'd expect it to eventually move lower once we move beyond the pandemic? It seems like you have lower loss content in your book than you did on Day 1, but not due to be running with higher reserves. Maybe if you could just frame for us how you're thinking about that.

Thank you for the question, Bill. As we discussed last quarter, we were cautious due to the uncertainty at that time. Since then, COVID cases have surged fivefold, particularly with the onset of the Omicron variant, making it wise for us to maintain a careful approach. Now, as we progress, we are adopting a wait-and-see strategy while remaining prudent. It's important to note that we are currently only 12% to 13% above our initial CECL reserve rate, while others are still exceeding 20%. There are varied positions across the board, leading to multiple potential outcomes. Our customers have benefitted significantly from government stimulus, which suggests that we might see an earlier normalization. The developments in the coming three to six months will influence this. However, as mentioned, I anticipate that our through-the-cycle loss rate will remain below the average of 6%, indicating that we should eventually start reducing the reserve rate, assuming everything else remains constant.

That's very helpful. Can you talk about the relative importance of restarting the buyback while also focusing on increasing capital to peer levels, specifically aiming for a CET1 ratio in the 10% to 11% range at the enterprise level? Also, could you clarify how this relates to the ROTCE in connection with the question Bob asked earlier about ROE?

Yes. Let me comment on the buyback. Ralph has discussed it before. Our priority regarding capital is to grow this business. We will allocate capital for growth and ensure we're achieving the right returns. Over time, we definitely need to align our capital ratios with peer levels. Once we reach that point, we can present options for a buyback program to the Board. Currently, the only guidance we are providing is regarding total return on equity, which is consistent with what we've communicated.

Yes, the mid-20s ROE, and it's consistent. And we said that our view is we'll get there in 2023 when we get there responsibly. And buybacks and Board to us, use of capital continue to grow the business, pay down our remaining debt and then obviously, return to shareholders, whether it's dividend or buyback. And we'll put that in front of the Board when appropriate. Our balance sheet is strengthening. It just got a shot of adrenaline with the spin-off. We'll continue to do that. And when we believe our ratios are appropriate, we'll confront the Board.

The next question comes from Mihir Bhatia of Bank of America.

First, I want to thank you for the additional disclosures in the presentation. I hope you will keep providing those consistently moving forward. I understand you cannot discuss specific renewals or make announcements right now, but since BJ's makes up about 9% to 10% of your receivables, if the press reports are accurate, I can see why investors might be concerned. Could you discuss this more generally? Should we expect BJ's to be replaced with one of your major portfolio announcements, or will it be through a series of smaller announcements? Additionally, regarding your pipeline for 2022, are there certain sectors or products you're focusing on? Lastly, concerning future nonrenewals mentioned in the guidance, are there any additional nonrenewals we should be aware of that might occur in 2022 or 2023?

That's a long question. Let me address all the parts. This will likely be my final comment regarding BJ's. Losing a partner is never easy, but they are now behind us. We will handle the separation appropriately, but our main focus is on growth. We have exciting new partners, including the NFL, Michaels, B&H, TPC, and the Ulta renewal. We will discuss these and other announcements when the time is right. However, we will not disclose anything prematurely. Our guidance remains unchanged; it already factors in losing a partner while also bringing in new ones. Our growth strategy includes both organic and inorganic opportunities, and we are confident in our guidance for 2022 as well as in our forecast of $20 billion in average receivables for 2023. As I mentioned, we are focused on the future and on the partners we've discussed today and those we will announce throughout 2022.

Yes. And then to add on to what Ralph said, you asked a question around additional products. We've talked about this before, diversifying our product set, growing installment lending, proprietary card products. So that combined, again, those strategies all in and we're sticking to the strict strategy we've laid out and executing against those, and that's what will drive us to the targets around receivables growth.

Got it. And then, I guess, just to confirm, maybe you don't want to answer, but are there any other nonrenewals contemplated for 2022 because I think you also...

Your question had so many parts I forgot them. My Apologies. No worries. Listen, all I would say is 90% of our A&R through 2023 is secure. So you could do the math from that. You could make differences from that.

Got it. And then just the last...

But it doesn't mean 10% are not renewing. It just means that those are still yet to be worked on and are being worked on for our continued renewal.

Got it. No, that's helpful. The last point I wanted to switch topics to is credit. Are you noticing a different pace of normalization across various FICO buckets? Just to clarify, there's nothing to be concerned about, but we are observing some differences. Are you experiencing the same thing? Is there anything worth noting there? I'll leave it at that.

Yes, I've mentioned this before. In the private label space, our consumers who are near-prime are experiencing a quicker normalization compared to those with high-risk scores who are more stable and have consistent transactional behaviors. There's still about $2 trillion to $2.5 trillion in savings available, which isn't primarily held by low-income or near-prime individuals; it's sitting in savings accounts. People who need to spend or have already used their stimulus funds are beginning to feel the impact as it unwinds. This is contributing to the uptick in our delinquency rates slightly earlier than expected. However, we remain optimistic about our outlook, as we have a balanced portfolio that allows us to observe trends across all customer segments.

The next question is from Jeffrey Adelson of Morgan Stanley.

Just as we think about the loan growth target for this year, I know you guys have spoken in the past about your long-term loan growth or receivables growth being roughly 2/3 coming from organic growth, 1/3 from inorganic growth. Are you thinking about a similar mix of growth this year? And then I know we're basically done with the BJ questions, but is there anything you can do to help us with the timing of that portfolio? I think that there's some speculation that's more of an obvious state. If anything you can help us think through the timing and growth math there would be helpful.

Yes, as you consider our growth, it definitely involves both organic and inorganic elements, and this will change from year to year and quarter to quarter depending on our business development activities. I can't provide specific details at this time, but this year we are seeing net positive growth overall. The outcomes from our partners will likely lean more toward organic growth when we assess wins and losses. Regarding the timing of nonrenewals, that's under active discussion, and I can't provide details on that either. However, it's important to note that it may introduce some volatility depending on which quarter it occurs. We have a central perspective in the guidance we've laid out.

Understood. And then just maybe switching to expenses. I know you've given the guide for modest full-year operating leverage in '22. Are you guys thinking about targeting potentially inefficiency ratio over the medium and long term as you continue along this path? I think you're at 50% right now and your peers are more in the 40% or so range.

Yes. I think if we deliver positive operating leverage, and that's the goal that Ralph and I talked about is we want to give the team flexibility to invest in our future. And if revenues come a lot stronger this year, we may lean in harder to be opportunistic on those investments. But the investments that we're making will provide continued long-term revenue growth, and at the same time, we have a big portion of investments driving efficiencies in our cost to serve. So our expectation is over the long haul, we expect an improvement in our efficiency ratio.

The next question comes from John Hecht from Jefferies.

Your yield increased significantly in the second half of 2021. I'm curious to know how much of that was due to mix or fees, and whether there were enhancements from certain fees, possibly including contributions from Bread. Additionally, aside from rate hikes, what factors might affect that yield in 2022?

Sure. One of the biggest things that's happening is some of the payment behavior is starting to normalize. And when you think about payment rates normalizing, the rollover behavior, and some additional delinquency drive some fees. So that starts to normalize in. And that will happen, say, in the near term, driving throughout 2022. But the same, your product mix shifts occurring. And so when you put on higher credit quality, co-brands, and proprietary cards, often comes with lower yields but also lower losses. So when you think about the interplay between revenue yield and credit losses, they have to be.

That's helpful. Your comments about Bread are interesting. While the installment component is profitable, you seem to think that split pay may not be. Can you elaborate on why split pay is perceived as unprofitable? Is it due to missed payments, customer acquisition costs, or the expenses involved in managing the process? I'm curious because this perspective on the product contrasts with what we've previously heard.

Yes, let me clarify that it can be profitable if executed properly. Our focus is to ensure we do it right and remain compliant. We are not pursuing just transactors; rather, we aim to enhance our relationships with customers through cross-selling. This approach contributes to stickiness and longevity. I believe we have the right product for merchants, focusing on driving the next transaction rather than just providing an app that bypasses the merchant. We are aligned with the merchant side. I expect profitability to develop and mature in this evolving market. A market begins to stabilize when it attracts regulatory attention, and we anticipated this by investing the necessary time to create a compliant bank product that can withstand scrutiny. This gives us a competitive advantage, and that’s how we plan to succeed.

The next question comes from Mengxian Jiao of Deutsche Bank.

Ralph and Perry, I wanted to sort of get your thoughts on in-store versus digital. I mean clearly, we've seen that said quarter of last year was a benefit to online but that's sort of fallen back down to roughly historical levels or even below. I guess my question is, why do you think that percentage of digital sales hasn't really been sticky? Do you guys feel necessary to sort of increase in these current levels? And if so, how would you accomplish that?

Yes, it's interesting. There is definitely a social aspect to shopping. People enjoy visiting stores to feel products and try them on. Personally, I find it challenging to purchase soft goods online; I prefer to physically experience the items. This social element is important. While digital shopping will always hold significance, consumers have become accustomed to a hybrid approach that combines both in-store and online experiences, adjusting based on circumstances. The key point is that whenever they switch between these modes, we are ready to support them. As long as they continue to shop with us, whether online or in-store, we are satisfied and capable of meeting their needs.

Got you. Great. Perry, I wanted to ask you about your comments on deposit costs, particularly the lower funding costs in 2022. Can you provide more insight into the cost of deposits and how those trends might change from current levels, especially as you mentioned later this year?

Yes. Regarding deposits, we have previously mentioned that much of the anticipated loan growth and accounts receivable growth over the next year or two will be supported by increased direct-to-consumer deposits. When analyzing our deposit rates and the funding from various instruments, we are moving toward a lower-cost funding option rather than replacing existing ones. The impact will depend on how much rates increase, for which we've factored in four rate hikes. This means we can expect some initial benefits as we fund our growth with deposits. However, it's important to note that most of our assets are variable rate. Therefore, while the cost of deposits may rise, it will be balanced by the increase in the variable portion of our portfolio.

Got you. Great. And then just one quick one. Sorry about that split. But have you sort of seen any impact from Omicron recently and how sales have trended relative to that in January?

Yes, sales were strong in the fourth quarter with a 15% year-over-year growth. We did experience some sales growth in January, but it's important to note that Omicron is having some impact on growth.

Yes, I would add that we are very confident moving forward. The spike in Omicron will pass and should start to settle down. We were surprised that it didn't significantly slow people down during the holiday season and recently. However, if it continues to impact people's ability to work as they wish to shop, we remain confident. Now that we've experienced it with two different variants, we believe this will pass.

I think the last thing I'll say is people are now shopping with a purpose. When they go, they're not browsing. They're shopping. And so that gives us confidence in our sales projections.

The next question comes from John Pancari of Evercore ISI.

I know you had indicated that your guidance assumes the nonrenewal on BJ's. Just one clarification. Does that mean that you do assume that the back book is sold as well, not just the discontinuation of the relationship for the new purchases?

Well, we can't specifically talk about anything within about the contract with BJ's. But typical in these transactions, the back book is often considered for sale.

Got it. Okay. All right. Thanks for clarifying. And then separately, on the revenue share agreements. Can you possibly help size up where your RSA stands now from a ratio perspective? And then maybe give us thought on the trajectory, how we should think about that, if we are able to begin modeling that out here?

Yes. So right now, the RSA is included in our noninterest income. And you should think about that as largely growing in line with credit sales. Again, there's a lot of different unique relationships. But if I was looking to give you a proxy, I would give that as a proxy.

Okay. All right. And then lastly, in terms of the rate assumptions, I know you indicated you have four rate hikes dialed in. Could you just maybe help us with the sensitivity to your net interest income from a 25 basis point increase in rates?

Yes, it will change over time. The sensitivity we've mentioned indicates a nominal impact, which is slightly positive. However, if rates were to increase significantly, our perspective might shift. But for the short term, considering the four rate hikes expected in 2022, you can view it as nominally positive.

The next question comes from Bill Ryan of Seaport Global.

A couple of questions. One, in the guidance you talk about noninterest income. Year-over-year change expected to offset the favorability in net interest income. I was wondering if you can elaborate on that a little bit more, kind of follows along the last question? Is that anticipation of a little bit higher RSAs or rewards on your new proprietary cards, credit sales? If you could just kind of provide some color on that.

And then second, has there been any geography change in the revenue recognition associated with Bread in the new presentation format? Because I believe you were fitting it all in the effective yield under the prior presentation format.

MDF is included in the noninterest income for Bread. I will address the Bread aspect first. This setting is what we have in place. Regarding your question about the RSA, it is expected to increase with sales, and the proprietary card is another area of growth. If we offer incentives to promote growth through the proprietary card or customer rewards, these are typical examples of what you can expect. This will be offset by the interchange income we receive. Additionally, the yield component of Bread products falls under net interest income.

The next question comes from Dominick Gabriele of Oppenheimer.

So if we just think about the year-over-year that you would need that would reach you to your roughly $20 billion average balance in 2023, how should we think about that growth rate? And then I just have a follow-up.

Yes, I view it in terms of the general rule of thumb, which indicates that it will grow in alignment with average receivables growth. This can vary based on product mix and revolving balances. If we onboard more transactors, then clearly, the receivables and spending would need to increase at a faster pace to support that. However, if we add more private label credit cards that generally have a high revolve, those balances will tend to grow consistently. Overall, I believe it's reasonable to estimate growth in line with average receivables guidance.

If we consider that Mastercard just reported a 33% year-over-year increase in U.S. credit sales, we should examine this figure in relation to the growth of general credit cards compared to private label cards and the changing consumer spending habits. Could you discuss how this trend has evolved and how it might impact your business moving forward, particularly regarding the shift in spending between experiences and in-store sales? Any insights on your overall positioning would be appreciated.

I noticed the data and believe some of it reflects pent-up travel demand, contributing to the spending. Travel demand is significant, and I feel comfortable with the 20% year-over-year growth in our portfolio, which includes both private label and general purpose cards. Achieving an average of 20% is quite strong, especially without travel being a major influence. Notably, two of our expanding sectors, jewelry and beauty, experienced a 30% year-over-year increase in the fourth quarter. While I'm optimistic about growth, I recognize that part of that 30% increase may stem from pent-up travel demand.

The next question comes from Reggie Smith of JPMorgan.

I don't want to dwell on this too much, but I know people have inquired about BJ's. My question doesn't need to focus solely on BJ's, but I'm curious about retail relationships where the card has significant reward features and cash back. If I'm correct, the APR is likely below your average yield for the company. Is it accurate to say that the economic impact will probably be less than what's reflected in the reported portfolio? Am I understanding this correctly, or am I off base?

Yes, I believe that traditionally co-brands have thinner margins, which tend to decrease further upon renewal. Your assumptions seem to be generally accurate; although they reported a sizable portfolio, the profitability did not match the portfolio's size in my view. We would suggest that the transactors within that portfolio and their impact on the bottom line—while we plan for it—were not as significant as the loss would suggest.

Yes. I would like to add to what Ralph mentioned. These deals are extremely competitive, and there are instances when the team decides to walk away from a deal because it’s better for the company to do so. While I won’t provide specifics about this partner, sometimes the right decision is to not pursue a deal at any cost.

If I could ask two quick questions. You mentioned that payment rates are expected to begin normalizing next year. Are you noticing anything positive in the portfolio that supports this trend, aside from what has already been mentioned about the payment rate?

And then my last question, I'll bundle them together. With the new wins that were announced, what impact did great capability have on those wins? Was it a priority for those new partners, or will they at times resemble legacy partners? So let me answer the last question first, and I'll turn it over to Perry for the payment rate question. So when we talk to new partners in renewals, we lead with a basket of products and capabilities. We give the partner a choice. So as we sign these partners, it's primarily a cards deal because we're good at that and we demonstrated how we can grow the pie. But with each of these partners, certainly, the brand capabilities, particularly around installment loans are under negotiation and we'll work with them to implement that. One of the things that is we do when we get a new partner, we install that digital suite. So all of our products become ease of integration. And that's the important part. So we offer the partner choice. We offer the customer choice. And the ease of integration of that choice is what makes it easier for us to bring more products to the consumer and to the partner.

Yes. And I'll answer your question on payment rate. And we spoke about that earlier, you may have missed it. We believe payment rates are going to normalize. We're starting to see some of that from where they peaked out midway this past year. So that is starting to occur. I wish we had a crystal ball where we could see what that was going to be and exactly when, but that's what we gave our guidance on our AR range. If payment rates remain really high, it could be on the lower side. If they come in better, it'll be on the high side. So I think we're all across the industry, trying to figure that out. And we're all watching it.

The final question comes from Vince Caintic of Stephens.

I have a quick question regarding the receivables guidance. The 10% year-over-year growth that excludes BJ's suggests that, based on news reports about the size of the BJ's portfolio, the rest of your portfolio is growing at a rate of 20% year-over-year for 2022. Could you discuss whether this calculation is directionally accurate? Additionally, could you address the sustainability of that growth rate heading into 2023? It seems that the estimate of at least $20 billion might be conservative if that growth is indeed sustainable.

Yes, we'll reiterate. We’ve provided guidance for high-single to low-double-digit growth in our receivables. We won’t comment on the size of the nonrenewables or when that might happen. However, we have good visibility into our pipeline, we understand our product strategy, and I'm very confident in achieving the arrangement we laid out. Looking ahead to the following year, we can rely on that pipeline. We have plans in place to reach $20 billion.

Good. I want to thank you all for joining today and your continued interest in Alliance Data. I must say 2021 was a transformational year for Alliance Data. We look forward to building our success in 2022 and beyond. Thank you all, and everybody, have a terrific day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.