Bread Financial Holdings, Inc. Q1 FY2022 Earnings Call

Good morning, and welcome to Bread Financial's First Quarter 2022 Earnings Conference Call. My name is Victoria, and I'll be coordinating your call today. It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations and Bread Financial. Sir, the floor is yours.

Thank you. A copy of the slides we will be reviewing, and the 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 Bread Financial; and Perry Beberman, Executive Vice President and Chief Financial Officer of Bread Financial. 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. Bread Financial 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 breadfinancial.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. Starting on Slide 3. We are excited to display our new logos and company name, Bread Financial. Our rebrand reflects the company's transformation to a tech-forward financial services company providing simple, personalized payment lending and savings solutions. After a multiyear corporate transformation, Bread Financial has emerged as a more modern, nimble and streamlined company backed by technology and platform solutions that empower today's consumer. We will continue to build on our 30-year legacy of creating value for our brand partners. And as we transform, we will continue to invest in data and analytics, innovative technology and digital capabilities. The Bread Financial brand will be prominently used with our core offerings, including our private label and co-brand products with our brand partners. The Bread Cashback brand is used for our newly released direct-to-consumer Bread Cashback American Express Credit Card, which I will discuss in more detail in a moment. Bread Pay represents the payment and lending offerings on a versatile fintech platform, which includes our buy now, pay later solutions and our strategic relationships with Fiserv, RBC and Settle. The Bread Savings brand reflects the rebranding of our Comenity Direct consumer savings, providing high-yield savings accounts and consumer certificates of deposits. Our new brands and offerings underscore our focus on delivering a full spectrum of innovative payment, lending, and savings solutions that customers need at every stage of their financial journeys. Slide 4 highlights our ongoing business transformation progress. We continue to develop our suite of lending products to provide consumers with a diverse set of payment options. Our product set, including private label, co-brand and proprietary cards, installment lending, and split pay, unlocks graduation and optimization strategies that increase the lifetime value of a customer. A variety of product offerings allow us to meet the needs of a diverse consumer base in a way that increases conversion while also allowing our brand partners to manage the product mix and optimize profitability. We continue to strategically invest in our digital platform, product innovation, marketing efforts and technology modernization with our 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 and leverage new capabilities to drive both revenue opportunities and operating efficiencies. Our capital ratios continue to improve as a result of growing retained earnings, providing flexibility to continue to support our profitable growth and improve our ratios over time. 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 that is focused on supporting our ability to make disciplined financial decisions to drive long-term value for our stakeholders. At the bottom of this slide, we listed our key foundational elements: proactive risk management, prudent balance sheet management and disciplined expense management. These three elements guide our strategic decision-making as they are critical to creating sustainable long-term value for our stakeholders. Moving to Slide 5, I will highlight a few key updates from the quarter. We continue to make progress toward our long-term financial goals, driven by our focus on responsible, profitable growth. In the first quarter, consumer activity remained strong with credit sales up 14% from the first quarter of 2021 with particular strength from our beauty vertical and co-brand and proprietary travel and entertainment sales. Co-brand and proprietary sales now make up over 50% of our sales. Our loan growth balance continues to accelerate on a year-over-year basis with end-of-period loans up 8%. We remain optimistic on continued growth with a robust business development pipeline, increasing engagement with existing brand partners and the expansion of our Bread Financial direct-to-consumer offer. Looking at the business environment, we are closely monitoring macro and geographical conditions, including longer-term effects of persistent inflation, rising interest rates and recessionary risks. However, our consumers' financial health remains incredibly resilient, buoyed by historically low unemployment, robust job offerings and rising wages. We proactively scrutinize the performance of our cardholders across the credit risk spectrum with special emphasis on performance by income and within our products. As expected, coming off 20-year lows, we are seeing some normalization materialize in risk and delinquency. That said, our cardholders' performance in the first quarter and into April continues to show both strong payment rates and strong spending. Given the nature of the macro risk, we especially focus on near-prime and lower-income cardholders. Here as well, we are seeing good payment risk, lower nonpayment rates than pre-COVID, and healthier spending across discretionary and needs-based spending categories. In short, we remain optimistic that the consumer demand will remain strong into '22. And year-to-date, our results are slightly better than our expectations. While we are optimistic about the outlook in 2022, we will manage our risk strategy using real-time analytics, making adjustments as necessary in this dynamic environment. We are fortunate to have built a leadership team of industry veterans who have successfully managed through cycles and changing market conditions. As you would expect, we have a recessionary readiness playbook, and we remain proactive in our approach. As part of our transformation, we have changed the underlying credit risk profile of our portfolio. We are a more balanced company with over one-third of our loans now on co-brand or proprietary cards, which more often than not come with a better consumer credit profile. As a result of our disciplined risk management approach, and a more balanced product mix, our credit risk mix distribution has improved from where it was before the pandemic. Moving to Slide 6. I will highlight some of our business development activities and our new 2% Cashback Credit Card. Earlier this month, we successfully launched the Bread Cashback American Express Card. The Bread Cashback Card offers industry-leading benefits and complements our existing suite of financial products as we continue to ensure our customers have access to robust solutions to serve their payment and savings needs at all stages of their financial lives. Cardholders receive unlimited 2% Cashback, no annual or foreign transaction fees, and access to dining, travel, and entertainment offers, as well as comprehensive purchase identity and travel protections. In particular, this proprietary card provides additional opportunity to drive acquisition and growth with an appealing value proposition, especially within the millennial and Gen Z consumer base, while providing further product mix diversification for our overall portfolio. Our plans include increased marketing investment for the remainder of this year and into 2023 to drive profitable growth and adoption. Early feedback on this card has been positive, with consumers noting the simplicity of the Instant Mobile acquisition process and wallet provisioning. With our modernized response, prefill application experience, customers go from application to tokenized card with their digital wallet in approximately 30 seconds. Also during the quarter, we announced the early renewal of our long-term agreement with Victoria's Secret, our largest and longest tenured brand partner with nearly 1,400 stores. As part of this renewal, we launched a new co-brand credit card. The new Victoria's Secret Mastercard complements the existing Victoria's Secret private label credit card, offering compelling rewards for purchases both at Victoria's Secret and anywhere card members shop. This card uses tap-to-pay technology, is compatible with all digital wallets, and offers increased anti-fraud security. We also renewed our relationship with LendingClub, which further extends the growth of our diversified verticals. With these new renewals, over 90% of our loan balances, excluding BJs, are now secured through 2023 at nearly 75% through 2025. Building on our recent new business development success, we launched a pilot for a new Harley-Davidson private label credit card to provide promotional finance plans for general merchandise, parts and accessories, services and more through participating Harley-Davidson dealers. Additionally, we continue to add new online brand partners on our Bread Pay platform and we introduced our in-store checkout pilot with Fiserv on their Clover app. We are pleased to be awarded the Fintech Breakthrough Award for Best Consumer Payments platform for our versatile Bread Pay platform. We continue to execute on our strategy, and we are seeing the results of the team's dedicated work and focus. For example, last week, we launched our NFL card, with its tens of millions of fans just in time for today's draft. And Wayfair is now live on our Bread Pay platform. I will now turn it over to our CFO, Perry Beberman, to review the financials.

Thanks, Ralph. As a result of the loyalty ventures spinoff in late 2021, our income statement and balance sheet have been recast with the LoyaltyOne segment and spin-related items reflected in discontinued operations. As you can see on Slide 7, this impacted net income for the first quarter of 2021 by $18 million, affecting year-over-year comparisons. The remainder of the slides will focus on the continuing operation portion of the business. Slide 8 provides our first quarter highlights for continuing operations. Bread Financial credit sales were up 14% year-over-year to $6.9 billion as consumer spending remained strong with double-digit growth. Average loans were up 5%, driven by continued strong credit sales growth and the economy recovering from pandemic-related disruptions. Revenue for the quarter was $921 million, and net income from continuing operations was $211 million. Revenue increased 15% versus the first quarter of 2021, while total noninterest expenses increased by 6%. Diluted EPS from continuing operations was $4.21. Credit metrics remained strong with delinquency and net loss rates of 4.1% and 4.8%, respectively, for the quarter. Moving to Slide 9. Looking at the first quarter financials in more detail. Total interest income was up 13% from 1Q '21 attributed to higher average loan balances and improved loan yields. Total interest expense improved by 26% due to continued lower costs 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 with customer awards, declined by $35 million in the quarter, driven by higher credit sales activity. Total noninterest expenses increased by 6% from the first quarter of 2021, largely due to increased employee compensation and benefits costs as we continue to invest in digital talent and technology modernization, as well as higher volume-related staffing levels. Partially offsetting these increases, marketing expenses were down 27% year-over-year, reflecting the timing of marketing spend. Additional details on expense drivers can be found in the appendix of the slide deck. Overall, income from continuing operations was down 21% for the quarter, driven by a provision expense of $193 million this quarter versus $33 million in the first quarter of 2021, while pretax pre-provision earnings, or PPNR, improved 24% year-over-year, as you can see on the graph on the right of the page. We are pleased with the PPNR growth over the last four quarters and expect this momentum of year-over-year PPNR growth to continue through 2022 as we profitably grow our portfolio and improve our efficiency. Turning to Slide 10. The left side of the slide highlights our earning asset yields and balances. First quarter loan yield improved as consumer payment behavior gradually moves back toward pre-pandemic levels. NIM improved sequentially as a result of the higher asset yields and improved funding costs. We would expect NIM to be slightly lower in the second quarter following normal seasonal trends. On the liabilities side, we continued to benefit from the maturity of our longer-dated funding as new balances were added at 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 19% this quarter. With our assumption of continued Fed rate hikes in the second quarter, we anticipate that our cost of total interest-bearing liabilities will begin to increase from the first quarter. As noted last quarter, we expect the improvement in our variable priced loan yields will more than offset the increase in funding costs as the Fed raises rates. Moving to Slide 11. I will start on the upper left. Our delinquency rate increased approximately 20 basis points sequentially and was up approximately 30 basis points versus the first quarter of 2021, which is consistent with the gradual normalization of payment rates. On the upper right, you can see that we had a loss rate of 4.8% for the quarter, still well below historical averages and slightly better than our expected rate. Turning to the bottom left of the page, our allowance balance remained relatively flat quarter-over-quarter. The overall reserve rate increased to 10.8% as seasonality impacted our quarter and loan balances versus the end of 2021 balance. Consistent with past comments, we anticipate that the reserve rate will stay in this range until there's more clarity on economic uncertainties. Lastly, on the bottom right-hand side of the page, our revolving credit risk distribution remains in line with our expectations as the temporary impact of government stimulus abated in the quarter; improved risk mix versus pre-pandemic levels; and associated delinquency and losses are the result of our ongoing thoughtful management of our book and a more balanced product mix. Slide 12 provides our financial outlook for the full year 2022. Our outlook assumes a continued gradual moderation in consumer payments throughout 2022, and we expect Fed rate increases during the year to result in a nominal benefit to total net interest income. Our full-year average loans are now expected to grow low double digits relative to 2021, up from our previous guidance of high single to low-double digits. We expect year-end 2022 year-over-year loan growth to be stronger than our average loan growth given the success of our new business activities. This outlook includes new signings, both announced and unannounced, which are expected to add greater than $2 billion of incremental year-end loan balances. We expect revenue growth to be consistent with average loan growth in 2022, with potential upside from improved net interest margin. Note that conservatively, our 2022 guidance does not include any potential revenue from the divestiture of our interest in LVI. We expect the sale of the BJ's portfolio to occur in the middle of the first quarter of 2023. We are targeting modest full-year positive operating leverage in 2022. While the first quarter was strong at 9%, we expect increasing investment expenses throughout the remainder of the year, which will bring our full-year operating leverage down to a more modest level. As we've previously discussed, our outlook includes incremental strategic investments 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 expense 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 direct-to-consumer Bread Financial products. Information processing costs will increase as a result of our ongoing technology modernization, including the conversion of our core processing to Fiserv this year. As Ralph mentioned earlier, this conversion will result in both expense and revenue synergies in 2023 and beyond. We expect total expenses will increase sequentially each quarter throughout 2022 as our business grows and we continue to invest and add talent. We are making investments now to stay ahead from a technology perspective in today's dynamic environment. Regarding our net loss rate outlook, both loss and delinquency rates were at historical lows in 2021. We expect credit metrics to begin to gradually normalize throughout 2022. We continue to anticipate that the full-year 2022 loss rate will be 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 focused on risk-reward trade-off enables us to drive profitability and growth for us and our partners even at slightly higher loss rates. I would also reiterate our confidence in our long-term outlook of a through-the-cycle average net loss rate below our historical average of 6%. We expect our full-year effective tax rate to be in the range of 25% to 26% with quarter-over-quarter fluctuations due to the timing of various discrete items. Overall, we are pleased with our first-quarter results and are excited for the opportunities in front of us for the remainder of 2022. We're 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.

And our first question comes from Sanjay Sakhrani from KBW.

Ralph, you mentioned you and your team have been around for quite some time and through a number of cycles, and you have a playbook, if, in fact, the consensus is sort of right that there's going to be economic weakness. I'm just curious if you're going to sort of let us in on some of the data points that you and your team are looking at in terms of gauging consumer and health, and then sort of what the playbook would actually be if we're headed in that direction because you guys are seeing pretty good growth right now.

Thank you for the question, Sanjay. We examine various key data points including payment rates, the ability to pay, and whether individuals are paying in full, partially, or mid-due. These indicators help us assess the growth and overall health of the economy. We also monitor changes in Vantage or FICO scores and look at payments being made to other entities. These are the typical metrics we analyze. Given our experience, we consider if we should adjust our credit allowances or modify our underwriting criteria with partners. These are the standard actions we would take in response to an economic downturn.

And Sanjay, I'd add actually to what Ralph just said. The one thing to remember is that we've kept our buybacks actually a little tighter than where we were pre-pandemic. So what we did pre-pandemic, we tightened up a little bit, but we'll move swiftly if we see any deterioration in any of the cohorts that Ralph mentioned.

I would tell you, Sanjay, everything is looking good right now. And as I said, I think where we expect it to be is probably a bit better. Yes.

Yes. Okay. That's good to hear. I guess a follow-up question more on the regulatory side. Obviously, there's a lot more chatter on late fees and other stuff, right? And I'm just curious how you're engaging with the regulators, sort of how you guys feel about some of the conjecture out there.

Yes. Sanjay, I've been in this industry 30 years. One of the things that remains constant is there's change. So that's pretty much what you can count on. Again, I lean on the financial veterans I have here and the leadership we have that have managed through regulatory change, particularly CARD Act. We adapted to those changes in CARD Act. We have a good relationship with our regulators. We intend to lean in on any changes in regulation as we did with CARD Act as the industry has done, and we continue to diversify our portfolio. So whatever comes, we have got the team to address it and move on from it.

Our second question comes from Jeff Adelson from Morgan Stanley.

Just wanted to follow up on the reserve rate. I mean, you guys have now been talking for a few quarters about keeping this more elevated. You're now, I think, 150 bps above your day one. Your book is more prime than it's ever been. Credit seems to be exceeding your expectations. So what is it going to take before you maybe change your stance, especially in a world where geopolitical situation keeps dragging on, but maybe your credit profile is not deteriorating in the way that the macro might suggest?

Yes. So Jeff, thanks for the question. And it's a fair question. So what I'd tell you is our reserve balance was essentially flat this quarter. The rate then ticked up a little bit, but the reserve was down a few million dollars and that was largely due to the seasonal holiday balances, and it came down. There's still a lot of uncertainty out there, to your point, around geopolitical inflation. As I think about our core model, probably the rate would have come down, but then through qualitative overlays in the judgment like you mentioned, that degree of uncertainty around inflation and what that means just keeps a conservative posture for this quarter. I would expect, as more certainty becomes known, that the rate would then be able to come down. And as we said, steadily, I'd say, towards the back half of last year, it's probably what it would look like towards the back half of this year. But again, we'll assess it every quarter.

Got it. That's helpful. And then just switching gears to your rate profile. It sounds like you're talking about some modest benefit even as the Feds hiking right here, but just wanted to better understand your funding needs and how you're thinking about deposit beta. It seems like you just increased your online rate to 1% recently. And I think you had your deposit balances shrink this quarter. You're still running at around 60% of your funding coming from deposits, only like 18% coming from direct-to-consumer. Maybe just help us understand how you're thinking about your deposit needs this time around, your funding needs, whether you need to be a leader already at 1%?

Yes. I think as I mentioned in the comments, and I'll reiterate is that for us, our funding is going to be continuing more direct-to-consumer deposits, and that will be market rate driven. So as rates go up, we'll be right there moving up with them. So just to your point, that will have a higher beta. As we think about what the overall impact of Fed rate increases means to the company, we have a higher proportion of variable priced assets that go up with those increases that more than offset the increase in our funding costs. So we've modeled a whole bunch of scenarios from 6% to 10% and beyond of Fed rate increases. And I would tell you, even up to 10% or more, we are slightly accretive.

Our next question comes from Bob Napoli from William Blair.

The American Express partnership seems like a significant move towards a higher-end customer base maybe. Just any thoughts on that relationship and/or Bread moving toward a somewhat in a mix or a balanced portfolio, maybe heavier weighting on some higher-end consumers? I mean, it seems like a very competitive area as well.

Yes. Bob, it's Ralph. It is a competitive area, an area I've been competing in for a number of years. That's why I have a lot of faith in this 2% cashback card. No questions asked, 2% across the board. It's simple, it's easy to understand, and it rewards people for their spend. I see this as an opportunity to expand our consumer base to Gen Z and millennials and to be more inclusive on the American Express network. So to me, it's not about just getting the high end; it's really about casting a wider net particularly in the Gen Z and millennial populations.

Then on your buy now, pay later business, if you would, what is the confidence level that you have today in the profit model on that business? I mean that industry is still in flux, I think still being determined on how this model really works between merchant discount and credit risk and things like that. Just your thoughts on the confidence in the profit model generating attractive returns in your business?

Bob, let me start, and I'll make sure Perry has his say here. For me, you've got to look at that platform, the buy now, pay later in two distinct forms. One is that pay in four, which I think there's considerable pricing pressure and competition. And the other part is installment loans. And I think the installment loan part is where there's good profitability and how we balance those two and how we go to market is important. So on buy now, pay later the pay in four, there's some irrational behavior in terms of signing bonuses just to get volume. We're not going to do that because there's no economic value to that. But an installment loan, like we just announced with Wayfair and others that we have, we think there's real economic and long-term value there.

Great. And your competitive position in that space versus other companies?

We are proud to be an award-winning company and our product is performing well. Our partnerships with CESL, especially in the installment loan sector, provide us significant scalability with their merchant network. I believe our competitive position is quite strong. It's important to remember that successful underwriting and effective collections are crucial in this credit cycle. We have been focusing on this for several years and our team is made up of seasoned industry veterans. Therefore, not only do we have a robust platform that is operating efficiently, but we also possess a capable team that can effectively execute on that platform, which is equally important.

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

This is Daniel on for Mihir as well. So the company laid out targets before for Bread Pay to get to $10 billion of GMV by 2023. Could you talk about your confidence in that target currently and what it will take to get there? And any of the performance of Bread Pay year-to-date?

Thanks, Daniel. As I've said last quarter, we're not targeting the $10 billion of GMV. A lot has changed from the time that happened. And what Ralph just talked about irrational pricing in the marketplace, particularly around split pay, we've said we are committed to our shareholders to drive responsible, profitable growth, and we weren't going to just chase that number for the heck of it. Again, as we know we can have responsible growth in the installment loan product in that side of buy now, pay later. So that aspect of the volume, we're not chasing volume just for volume's sake.

Got it. I know Sanjay already asked about late fees, but could you remind us what percentage of revenue comes from late fees, given how your portfolio and product mix have evolved this year?

Yes, our late fees are embedded in our net interest income, and we do not disclose that amount.

Our next question comes from Bill Carcache from Wolfe Research.

I wanted to follow up. Perry, if you could please frame the pace of payment rate normalization that you saw this quarter relative to the pace of the credit normalization. I think it's crystal clear that you expect credit to certainly make noise but be better than historical levels. And so we're seeing that normalization and all that is in the context of being sort of in line with your expectations. But maybe what about the payment rate side?

Yes. So good question. So payment rates still remain elevated compared to pre-pandemic levels. So again, I think about the health of the consumer is really good right now. And I know there's a lot of noise out in the marketplace around inflation. But when you look at the level of unemployment as low as it is, over 11 million open jobs, high savings, wage growth, and if consumers want jobs, they're there to be had. And that's the important part. When I think about past economic cycles, those were largely unemployment driven. This year, we've got a very strong economy. So payments are remaining strong. But what I would say is what was important to us, and you can see it start coming through in our loans and the revolve rate and finance charges, is payment rates are starting to come down a little bit from where they were. So this is the first quarter since the pandemic that our payment rates for the quarter are below last year. And so that's the sign that some normalization is occurring in tandem with delinquency increasing. So those two things work together is what drives really good profitability. Again, up to a point. So that's why we're carefully monitoring, as Ralph talked about earlier, and we've got playbooks in case things weaken. But right now, we're not seeing that. The consumer is really strong, and normalization is happening and actually tapping a little better than what we had anticipated. So we're very encouraged right now but monitoring carefully, as you'd expect.

Yes. Yes. And I'm going to say a little bit better than you were expecting on both the credit and payment rate side?

Yes.

Okay. Okay. Got it. And then separately, given the growth that you're seeing and the partnerships that you're announcing, is it reasonable to conclude you're still on track to reach your 2023 receivables target of $20 billion?

Definitely on track. Again, that's assuming the economy holds up and nothing crazy happens. Right now, we've got a robust pipeline. You've now seen the launch of our proprietary product. And I think as we look for us to lean in on some of those opportunities that we are well on track to hit that number, all else being equal, with a friendly economic environment that we don't have any dramatic pullback, which we don't anticipate at this point.

Our next question comes from David Scharf from JPMorgan Securities.

Great. Ralph, I wanted to switch a little to just sort of the competitive and renewal environment because it looks like on the heels of the last 12, 18 months, some headlines related to some takeaways like Wayfair or Williams-Sonoma, you've managed to renew some of your biggest contracts with fast-growing Ulta. As you reflect on sort of that 25% of balances that are up, I guess, through 2025, compared to, I guess, 12 months ago, are you feeling like renewal terms have changed much? Are they going to become more competitive? Do you feel better about the outlook? Maybe just some context around what you're seeing in terms of potential renewals and takeaways?

Yes. So let me just take a step back. 2021 was the best year we ever had in terms of signings and renewals. I think if memory serves, we went 20 and 1, if you combine recent renewals and signings and obviously, the loss of BJs. But to that end, I think we've certainly demonstrated to the marketplace that we can play up and down the scale. We can play with the big guys and bring on those small and mid-size companies and grow with them. What I think has changed for us is that we now work with our partners and demonstrate to them that we have better capabilities than we have ever had that we're using data and analytics to grow the pie, not give them a bigger piece of our pie, not take a hit on our economics, but grow the pie for both our partners and ourselves. And we've done a lot in terms of building better relationships with seasoned veterans and people that know how to work with us. So for the first time in the long term, we're working with not just a marketing organization, but the technology organization to deliver technology solutions, working with the CFO team to demonstrate to them that we're driving incremental benefits by going deeper into their book. So it's been a lot. It's not just been, we're going to just throw more economics. It's been the right economics, the right team, the right capabilities and approaching them at the right time. I think all of those have really helped us renew some of our bigger partners and attract partners like the NFL to the franchise.

Got it. It seems we had an impressive track record last year. As a follow-up, particularly after last quarter's renewal with Ulta, it's been a while since we've seen an updated mix of the portfolio by verticals. Broadly speaking, how should we consider the concentration in areas like health and beauty, which tend to be more resilient during recessions and pandemics, compared to more sensitive verticals like travel and entertainment? Based on the renewal profile of the pipeline and the general-purpose component, is this looking favorable?

Yes. Over the past few years, we've made significant progress. Firstly, we've successfully diversified our portfolio. Two years ago, we didn't have a proprietary card, but now we have two: the Comenity card, which boasts over one million customers and promotes solid loan growth, and we've just launched the American Express 2% Cash Card. Additionally, we've expanded our verticals. In the beauty sector, we are currently the industry leader, partnering with companies like Ulta and Sephora. We've moved away from being heavily focused on mall-based specialty apparel, which now accounts for less than a quarter of our portfolio, and we are very pleased with this shift. Jewelry is another vertical where we hold a strong market position. We've diversified our portfolio not just in terms of products but also across various verticals, and we intend to continue this approach. As we onboard more digital partners, our verticals will keep diversifying. Overall, we are confident in our current distribution.

Our next question comes from Michael Young from Truist Financial.

Wanted to kind of follow up just on the expense outlook. I understand the commitment to positive operating leverage. But if we were to see kind of that recession scenario play out, what areas kind of would you go to, to trim expenses if revenue were a bit weaker? And then as a follow-up, just wanted to get some comments on hiring a lot of people are seeing hiring costs, particularly in the data and analytics space. So any outlook there would be helpful.

Yes. Let me take the second part of your question first, and then I'm going to turn it over to Perry to talk about the levers we have. I think hiring in data and analytics and engineers and technology, I consider those investments that are well worth it because they deliver data and information and enhancements to our platform, which enables us to do what we just talked about: diversify the platform, go after millennials and Gen Z. So to me, even though there's a demand for them, those data and analytic resources, engineering resources that are highly sought after, I consider those investments, and we'll continue to make those because we see a payback for those investments. In terms of how we manage our expenses, I'll ask Perry to kind of jump in here.

Yes, that's a good question. Your inquiry concerns our aim to achieve positive operating leverage. In the first quarter, we paced our investments to ensure strong revenue, which allows us to commit further to our plan. We expect those investments to increase throughout the year. However, if revenue doesn't meet expectations or if we need to invest more in another area, we have options to adjust and pace those investments accordingly. We always have contingency plans in place, whether that means adjusting marketing investments or altering technology projects. While we have these options, we remain committed to maintaining the stability of our company and our long-term strategic direction. If we face a situation where we cannot achieve positive operating leverage due to our careful investments, we will provide clear guidance on that matter. For now, we are focused on attaining that positive operating leverage.

Our next question comes from Meng Jiao from Deutsche Bank.

I wanted to ask about your near-term customer base, given your comments on sort of focusing on your time and low-income of shareholders. But, are you seeing any divergence on both sort of credit and spending with some that have different Vantage scores? And if there's sort of any normalization trends that are sort of sticking out?

We have not. So their payment rate continues to be strong, and their spending continues to be strong. And the non-payers or zero-payers is well below the pre-pandemic levels. So we've not seen them deteriorate at all.

Got you. Okay. And then I guess, secondly, just wanted to ask on the new Cashback card you have with Amex, but also the proprietary general-purpose Comenity Card that you guys have. I mean, do you sort of expect any cannibalization between these two products? Or is the, I guess, the Bread card with Amex sort of the aspirational card targeted to your higher income, higher FICO score customers?

Yes, we don't anticipate significant cannibalization between the two products. If someone with a Comenity card prefers the Amex product and meets the spending criteria, we will definitely move them over. However, I believe both products enhance each other. One operates on the MasterCard network, while the other is on the American Express network. I appreciate the diversity of networks we offer and the fact that we have two distinct products available for consumers to choose from.

Our next question comes from Reggie Smith from JPMorgan.

Congrats on the rebranding. For what is worth, I like the way it looks. I think it's slick. And I guess I'm kind of on the cusp of being a millennial still. So hopefully, it will work out for you guys. My question...

We appreciate that.

Yes. No. My question is related to what you covered in the last questions, but I am curious if you're planning to migrate your legacy MasterCard cardholders to the Amex card. Is that correct? It doesn't seem like there will be an automatic migration.

No. But there's certainly some targeting we would do to move people over. And the way you think about that is they have an opportunity in their wallet. They spend on the right commodities, and we'll target people as appropriate. But wholesale migration, we won't do.

Can you explain the decision-making process that led you to choose Amex over Visa or another option? What factors influenced that decision?

Sure. There are a few important factors to consider. Having competition among networks is beneficial for the issuer. Additionally, our partnership with American Express allows us to provide generous rewards to our customers regularly, which is a significant aspect. The reputation of their network and brand also plays a crucial role, along with the consumer benefits and protections offered by American Express. Therefore, the diversity of network economics and the benefits associated with the network influence our decision-making process.

Understood. That's kind of what I suspected. Last question from me, just thinking about kind of marketing two different cards. What thought went into that? And how are you thinking about kind of the marketing spend and running? I would imagine, and maybe I'm wrong here, like it's probably more leverage if you had one brand and one product, but maybe that's not the case. What is your experience in the area for you? And how are you thinking about that?

Yes. As I said, we increased marketing spend in 2022, and we expect to increase it in 2023 to drive adoption of both products: the Comenity 1.5% Cashback and the American Express 2% Cashback card. We'll target customers where we think it's appropriate to offer which product at which particular time. So we have models that tell us that, and we're very focused on working with the individual networks to also have them help us drive opportunity.

Got it. I appreciate it. Lastly, I think your disclosure has improved significantly. I also value the additional metrics that provide insights into the company's operations.

Reggie, I appreciate you saying that. That was one of our commitments to the investment community was to be more transparent in our disclosures. And I appreciate the comment.

And our final question is a follow-up from Jeff Adelson.

I really appreciate it. I've been receiving some inquiries from people trying to clarify the timing of BJ's exit mentioned in the guidance. It seems that in the earlier slides, you were considering that exit in your full year 2022 guidance. I wanted to better understand the previous impact of that guidance because it appears, Perry, that you suggested the success of new business activities is increasing your growth expectations into the double-digit range. With loan growth already exceeding 8% this quarter, and considering BJ's will not be included in that number, how substantial could this double-digit growth really be this year?

Yes. So the guidance that we have put out for this year contemplates the BJ's portfolio being sold in the first quarter of 2023, and it'll have, I'd say, kind of an immaterial impact on the 2023 guidance. And for this year, it contributed a slight bit to the improved range we've given. But honestly, it's also largely because the payment rate normalization is coming through the strong business development pipeline, everything is executing, and we feel very optimistic that we are going to finish in a good place. And as you noted, the end-of-period loans are going to finish much stronger than average loan growth for this year because of the dynamic now of BJ's being in that year-end number.

I'll now pass it back over to Ralph Andretta for closing remarks.

I just want to, again, thank everybody for being on the call today and your interest in Bread Financial. And certainly, everyone have a terrific day, and thanks again.

Thank you, everybody, for joining today's call. You may now disconnect your lines.