ADS - Alliance Data Systems

[glorysk87]

Aren't many f ADS' customers in various challenged retail environments such as furniture, apparel etc? Isnt that a threat that their customer base is experiencing declining SSS and sales?

 

L Brands and Ascena are the main concentration risks (Particularly L Brands Victoria's Secret), though they've brought both of those clients down quite a bit as a percent of revenue. They do have other troubled retailers, but have been doing a decent job signing new brands that have higher and more robust growth profiles - Houzz, Sephora, Burlington, Carter's, etc have all been signed in the last 6 months or so and will spin up over the next few years.

 

They also have options when a distressed retailer does end up going bankrupt. Coldwater Creek for example - the day the cards program went live with that client they declared bankruptcy. ADS ended up re-purposing the card as a co-branded card and the program actually grew.

 

Keep in mind the loyalty programs offered are mutually beneficial even for a distressed retailer. ADS can target shoppers with discounts and deals to drive traffic to the brand, particularly since they collect SKU level data.

[cmlber]

but have been doing a decent job signing new brands that have higher and more robust growth profiles - Houzz, Sephora, Burlington, Carter's, etc have all been signed in the last 6 months or so and will spin up over the next few years.

 

I wonder if they’ve been overly aggressive in what they offer these new brands to offset the declining brands.  This from a Floor and Decor investor conference about a year ago certainly sounds like that may be the case:

 

Our credit sales, since I've been here, have grown at a much faster rate than our overall sales. We had a great partner. We actually just recently changed partners in May. That's been a huge benefit for us. The cost is about 1/4 of what we were paying before, so there's a slightly lower tender cost, and they're a really good marketing company. We switched to a company called Alliance Data Systems, or ADS, and they've been a great partner with us so far. So on the consumer side, we've had great success, and we think we've selected a partner now that's going to make us even better. And we've seen early signs of our average ticket, average credit line approvals, average spend, and again, it's only been a couple of months now, but we've seen those all tick up nicely relative to how it was going with our previous partner.

[glorysk87]

 

I wonder if they’ve been overly aggressive in what they offer these new brands to offset the declining brands.  This from a Floor and Decor investor conference about a year ago certainly sounds like that may be the case:

 

Our credit sales, since I've been here, have grown at a much faster rate than our overall sales. We had a great partner. We actually just recently changed partners in May. That's been a huge benefit for us. The cost is about 1/4 of what we were paying before, so there's a slightly lower tender cost, and they're a really good marketing company. We switched to a company called Alliance Data Systems, or ADS, and they've been a great partner with us so far. So on the consumer side, we've had great success, and we think we've selected a partner now that's going to make us even better. And we've seen early signs of our average ticket, average credit line approvals, average spend, and again, it's only been a couple of months now, but we've seen those all tick up nicely relative to how it was going with our previous partner.

 

Not sure what you really mean - typically when ADS signs a new retailer, they offer them a full marketing package as part of the deal which is likely the source of cost savings that they're talking about. That, or Floor & Decor could have had a cobranded card program before ADS which is typically much more expensive due to the network fees.

 

I'm not really sure what you mean when you say you wonder if they're being overly aggressive in what they're offering?

[cmlber]

 

I wonder if they’ve been overly aggressive in what they offer these new brands to offset the declining brands.  This from a Floor and Decor investor conference about a year ago certainly sounds like that may be the case:

 

Our credit sales, since I've been here, have grown at a much faster rate than our overall sales. We had a great partner. We actually just recently changed partners in May. That's been a huge benefit for us. The cost is about 1/4 of what we were paying before, so there's a slightly lower tender cost, and they're a really good marketing company. We switched to a company called Alliance Data Systems, or ADS, and they've been a great partner with us so far. So on the consumer side, we've had great success, and we think we've selected a partner now that's going to make us even better. And we've seen early signs of our average ticket, average credit line approvals, average spend, and again, it's only been a couple of months now, but we've seen those all tick up nicely relative to how it was going with our previous partner.

 

Not sure what you really mean - typically when ADS signs a new retailer, they offer them a full marketing package as part of the deal which is likely the source of cost savings that they're talking about. That, or Floor & Decor could have had a cobranded card program before ADS which is typically much more expensive due to the network fees.

 

I'm not really sure what you mean when you say you wonder if they're being overly aggressive in what they're offering?

 

Well I recall one of Walmarts issues with Synchrony was that they weren’t approving enough cards and not issuing enough credit.  The retailer obviously wants very loose credit policies since they get paid for store purchases up front and the credit risk is on the credit provider.  So I view it as a potential red flag when your new credit provider sees a big tick up in their average credit line approvals.  Could be an indication that they are lending more than another informed party thought was prudent. 

[glorysk87]

Ok I get what you're saying. I'm not overly concerned. They've been around for a long time, made it through the recession, etc. Not sure of any way to put that concern to rest other than trusting that the company isn't going to put their business at existential risk simply to generate a little bit of incremental growth.

 

I think it's more likely that floor & decor is saving money by getting ADS's marketing & loyalty programs as part of the program and that + the fact that their advertising is driving improvements in avg ticket and spend is why they signed with ADS.

[abitofvalue]

 

I wonder if they’ve been overly aggressive in what they offer these new brands to offset the declining brands.  This from a Floor and Decor investor conference about a year ago certainly sounds like that may be the case:

 

Our credit sales, since I've been here, have grown at a much faster rate than our overall sales. We had a great partner. We actually just recently changed partners in May. That's been a huge benefit for us. The cost is about 1/4 of what we were paying before, so there's a slightly lower tender cost, and they're a really good marketing company. We switched to a company called Alliance Data Systems, or ADS, and they've been a great partner with us so far. So on the consumer side, we've had great success, and we think we've selected a partner now that's going to make us even better. And we've seen early signs of our average ticket, average credit line approvals, average spend, and again, it's only been a couple of months now, but we've seen those all tick up nicely relative to how it was going with our previous partner.

 

Not sure what you really mean - typically when ADS signs a new retailer, they offer them a full marketing package as part of the deal which is likely the source of cost savings that they're talking about. That, or Floor & Decor could have had a cobranded card program before ADS which is typically much more expensive due to the network fees.

 

I'm not really sure what you mean when you say you wonder if they're being overly aggressive in what they're offering?

 

Well I recall one of Walmarts issues with Synchrony was that they weren’t approving enough cards and not issuing enough credit.  The retailer obviously wants very loose credit policies since they get paid for store purchases up front and the credit risk is on the credit provider.  So I view it as a potential red flag when your new credit provider sees a big tick up in their average credit line approvals.  Could be an indication that they are lending more than another informed party thought was prudent.

 

yup.  Think Children's Place also has made comments about how ADS pays them a higher amount.  ADS also makes analyzing credit challenging by not following industry standard disclosure on the credit side (no FICO breakdown as an example). Maybe the leadership switch will prompt better disclosure too.

 

One thing i notice is more of ADS' new deals are co-brand deals. IIRC, they used to have a 100% private label portfolio but some of the newer deals are true co-brands. Does anyone know if they have the same dual-card features as SYF? If not, why? 

 

[Peregrine]

 

I wonder if they’ve been overly aggressive in what they offer these new brands to offset the declining brands.  This from a Floor and Decor investor conference about a year ago certainly sounds like that may be the case:

 

Our credit sales, since I've been here, have grown at a much faster rate than our overall sales. We had a great partner. We actually just recently changed partners in May. That's been a huge benefit for us. The cost is about 1/4 of what we were paying before, so there's a slightly lower tender cost, and they're a really good marketing company. We switched to a company called Alliance Data Systems, or ADS, and they've been a great partner with us so far. So on the consumer side, we've had great success, and we think we've selected a partner now that's going to make us even better. And we've seen early signs of our average ticket, average credit line approvals, average spend, and again, it's only been a couple of months now, but we've seen those all tick up nicely relative to how it was going with our previous partner.

 

Not sure what you really mean - typically when ADS signs a new retailer, they offer them a full marketing package as part of the deal which is likely the source of cost savings that they're talking about. That, or Floor & Decor could have had a cobranded card program before ADS which is typically much more expensive due to the network fees.

 

I'm not really sure what you mean when you say you wonder if they're being overly aggressive in what they're offering?

 

Well I recall one of Walmarts issues with Synchrony was that they weren’t approving enough cards and not issuing enough credit.  The retailer obviously wants very loose credit policies since they get paid for store purchases up front and the credit risk is on the credit provider.  So I view it as a potential red flag when your new credit provider sees a big tick up in their average credit line approvals.  Could be an indication that they are lending more than another informed party thought was prudent.

 

Pretty much all the private label card companies approve nearly all who apply. They manage credit risk by limiting card balances.

[vince]

but have been doing a decent job signing new brands that have higher and more robust growth profiles - Houzz, Sephora, Burlington, Carter's, etc have all been signed in the last 6 months or so and will spin up over the next few years.

 

I wonder if they’ve been overly aggressive in what they offer these new brands to offset the declining brands.  This from a Floor and Decor investor conference about a year ago certainly sounds like that may be the case:

 

Our credit sales, since I've been here, have grown at a much faster rate than our overall sales. We had a great partner. We actually just recently changed partners in May. That's been a huge benefit for us. The cost is about 1/4 of what we were paying before, so there's a slightly lower tender cost, and they're a really good marketing company. We switched to a company called Alliance Data Systems, or ADS, and they've been a great partner with us so far. So on the consumer side, we've had great success, and we think we've selected a partner now that's going to make us even better. And we've seen early signs of our average ticket, average credit line approvals, average spend, and again, it's only been a couple of months now, but we've seen those all tick up nicely relative to how it was going with our previous partner.

 

I can see your concern here but I actually like this disclosure.  What could be better than having a recent signing publicly disclose that there is an IMMEDIATE improvement to their sales and attribute that to ADS.  I think everyone knows that these signings boost sales for the retailer but getting those incrementally positive results from a retailer that previously had a similar relationship with another entity is a much stronger indicator of the quality of ADS's services. 

[decko]

From what I've read it is difficult to pinpoint the exact success of the new signups, so im curious to hear some opinion on future net income numbers( i understand they would be guesses, so keep it conservative if you venture this question).  Outstanding shares will be 47 million or less, after the dutch buyback.  If they are able to bounce back this fall (revenue/NI) and 2020, is it fair to say they'll reach the 900 million to 1 billion in net income?  If so, we are looking at 19.1 to 21.2 EPS at a 8 mulitple thats 152$ and 169$. Not exactly  what I've had in the mind the past year and a half, but it seems at the current price ADS is cheap.  However, melting ice cycles always look cheap as they dwindle.  I think the recent sell-off has a lot to do with the fear of a reccesion, but what is the worse case scenario for this company going forward?  Maybe im just trying to gauge the possibility of permanent capital loss.

[KCLarkin]

I haven’t run the numbers but as a worse case, do SOTP with card business set to 1X tangible book value and other businesses set at a reasonable (low) multiple. Stock is only cheap if company can maintain current level of receivables at very high ROE. This won’t be easy as legacy retailers suffer and new ones ramp up.

 

The high ROE means this stock has significant downside.

[Peregrine]

 

The high ROE means this stock has significant downside.

 

Not sure whether this makes any sense. Visa has infinite ROEs on a negative tangible book value, but I don't think anyone really questions its future.

 

What matters is the company's moat and its ability to sustain high levels of returns.

[adhital]

Back in 2007, Blackstone offered to pay 20 times, then EPS of ~$4, for this business and now we’re in doubt if it’s worth ~6 times 2019 EPS or if it’s even a going concern? All while, they are projecting, 2019 EOY target $20B receivable. Buying back share aggressively. Close to 25% receivable yield, net adjusted Q2 2019 EBIDTA margin of over 20%, mid teen growth guidance on these new verticals receivables and market is offering it for ~5 times Net Adj EBITDA margin and 16% earning yield. Very interesting…

[KCLarkin]

Back in 2007, Blackstone offered to pay 20 times, then EPS of ~$4, for this business and now we’re in doubt if it’s worth ~6 times 2019 EPS or if it’s even a going concern? All while, they are projecting, 2019 EOY target $20B receivable. Buying back share aggressively. Close to 25% receivable yield, net adjusted Q2 2019 EBIDTA margin of over 20%, mid teen growth guidance on these new verticals receivables and market is offering it for ~5 times Net Adj EBITDA margin and 16% earning yield. Very interesting…

 

The fact that it is trading at these levels (and continues to drop), suggests that the Market doubts that current earnings are sustainable. And the narrative is going to fit the current market price. Sometimes the market is right. Sometimes it is not (see AXP circa 2016).

 

It still seems like a no-brainer to me, but the situation is pretty dynamic. ADS needs to ramp up new vintages faster than its legacy retailers die. Right now, it is treading water. Those who have a large allocation need to acknowledge the risk that this is a value trap.

 

Valueact and Greenberg dumping at these levels does not inspire confidence.

[undervalued]

Back in 2007, Blackstone offered to pay 20 times, then EPS of ~$4, for this business and now we’re in doubt if it’s worth ~6 times 2019 EPS or if it’s even a going concern? All while, they are projecting, 2019 EOY target $20B receivable. Buying back share aggressively. Close to 25% receivable yield, net adjusted Q2 2019 EBIDTA margin of over 20%, mid teen growth guidance on these new verticals receivables and market is offering it for ~5 times Net Adj EBITDA margin and 16% earning yield. Very interesting…

 

The fact that it is trading at these levels (and continues to drop), suggests that the Market doubts that current earnings are sustainable. And the narrative is going to fit the current market price. Sometimes the market is right. Sometimes it is not (see AXP circa 2016).

 

It still seems like a no-brainer to me, but the situation is pretty dynamic. ADS needs to ramp up new vintages faster than its legacy retailers die. Right now, it is treading water. Those who have a large allocation need to acknowledge the risk that this is a value trap.

 

Valueact and Greenberg dumping at these levels does not inspire confidence.

 

I think Valueact converted their shares to Preferred.

[Peregrine]

I think the real question that needs to be asked is whether this company adds value to the retailer in ways that the retailer cannot otherwise achieve cost-effectively on its own. If it does, then the company will continue to grow. To me, the value proposition boils down to a few things:

 

1) Credit availability - just having a credit card gets consumers spending more and retailers can't offer that. Other banks can, of course, but apparently many of these accounts aren't large enough to really matter for the larger peers.

 

2) Detailed data drawn from a closed-loop private card network - this is about all the SKU level data that ADS gets via a closed loop network of a private-label credit card. It has proven to drive incremental sales but I wonder whether the retailer can achieve the same thing by issuing a loyalty card that gets routinely replenished via a general purpose credit card (ala Starbucks).

 

3) Building out a loyalty program specific to the retailer that rewards repeat consumption. This kind of goes back to point #2 ... perhaps most of these smaller retailers find ADS's solution to be more cost effective than developing one themselves. Why invest heavily yourself into a program when you can outsource it to a proven vendor with scale?

 

 

[Peregrine]

Back in 2007, Blackstone offered to pay 20 times, then EPS of ~$4, for this business and now we’re in doubt if it’s worth ~6 times 2019 EPS or if it’s even a going concern? All while, they are projecting, 2019 EOY target $20B receivable. Buying back share aggressively. Close to 25% receivable yield, net adjusted Q2 2019 EBIDTA margin of over 20%, mid teen growth guidance on these new verticals receivables and market is offering it for ~5 times Net Adj EBITDA margin and 16% earning yield. Very interesting…

 

The fact that it is trading at these levels (and continues to drop), suggests that the Market doubts that current earnings are sustainable. And the narrative is going to fit the current market price. Sometimes the market is right. Sometimes it is not (see AXP circa 2016).

 

It still seems like a no-brainer to me, but the situation is pretty dynamic. ADS needs to ramp up new vintages faster than its legacy retailers die. Right now, it is treading water. Those who have a large allocation need to acknowledge the risk that this is a value trap.

 

Valueact and Greenberg dumping at these levels does not inspire confidence.

 

I think Valueact converted their shares to Preferred.

 

The preferred that Valueact got doesn't pay dividends either so its chief value comes in the conversion privilege into common stock.

[KCLarkin]

I think the real question that needs to be asked is whether this company adds value to the retailer in ways that the retailer cannot otherwise achieve cost-effectively on its own. If it does, then the company will continue to grow.

 

The general consensus is that ADS does provide significant value. But if mall-based retailers continue to shutter, this might not matter. L Brands recent stock price is not encouraging. A secondary issue is whether 30% ROEs are sustainable, even if the company can maintain growth.

[KCLarkin]

I think Valueact converted their shares to Preferred.

 

Yes, you are correct. That makes me feel much better. What else could account for current price action? L Brands sure isn't helping. I wish I knew this company better because it does seem like a no-brainer here.

[glorysk87]

I think there are a few things at play, but I could be wrong. The tender offer created some technical pressure/forced sellers around August 15th. On top of that, you have elevated fears of a cyclical downturn - considering at its core, ADS is a levered subprime credit company, it's going to be one of the first positions that managers sell on cycle fears. The market doesn't want to touch anything that's economically sensitive or has leverage, and ADS has both. So we're seeing the multiple drastically compress. Then finally, you have some pressure from ASNA and LB which are two of the top retailers in ADS' portfolio both spiraling downwards. The combo has crushed the company. Personally, I think for those with the ability to hold a name long-term, if you think the domestic economy is going to hold up, there is reasonable value here.

[Peregrine]

I think the real question that needs to be asked is whether this company adds value to the retailer in ways that the retailer cannot otherwise achieve cost-effectively on its own. If it does, then the company will continue to grow.

 

The general consensus is that ADS does provide significant value. But if mall-based retailers continue to shutter, this might not matter. L Brands recent stock price is not encouraging. A secondary issue is whether 30% ROEs are sustainable, even if the company can maintain growth.

 

It wouldn't matter if ADS is just beholden to mall-based retailer. But its recent signings include plenty of non-mall-based retailers, some of which have pretty strong growth (Burlington, Sephora, Ulta).

 

As for the ROEs, all credit card banks earn high returns on tangible equity - a quality attained from high NIMs. Even Capital One, whose credit card portfolio comprises just 1/2 of total loans, earns a mid-teens return on tangible equity. Despite high losses, you can argue that credit card interest rates really aren't being appropriately market-priced.

[adhital]

I think there are a few things at play, but I could be wrong. The tender offer created some technical pressure/forced sellers around August 15th. On top of that, you have elevated fears of a cyclical downturn - considering at its core, ADS is a levered subprime credit company, it's going to be one of the first positions that managers sell on cycle fears. The market doesn't want to touch anything that's economically sensitive or has leverage, and ADS has both. So we're seeing the multiple drastically compress. Then finally, you have some pressure from ASNA and LB which are two of the top retailers in ADS' portfolio both spiraling downwards. The combo has crushed the company. Personally, I think for those with the ability to hold a name long-term, if you think the domestic economy is going to hold up, there is reasonable value here.

 

I think  you're right.

 

(1) Forced seller post tender

(2) Negative yield spread and it's impact on almost all of the bank names. Its a fear that NIM will compress etc. etc.. which is not entirely accurate

(3) Recent analyst downgrade (Dutche bank) - "potential headwinds includes reserve build, winding down portfolio held for sale"..

(4) market pessimism in general..

 

On the other hand, 2018 10K and earning ppt states -

 

" Our client base of more than 2,200 companies consists primarily of large consumer-based businesses, including well-known brands such as Bank of Montreal, Sobeys Inc., Shell Canada Products, Albert Heijn, Bank of America, General Motors, FedEx, Walgreens, Kellogg’s, Citibank, Victoria’s Secret, Wayfair, Signet, IKEA and Ulta..."

"160 private label and co-brand credit card programs generating $16.9 billion in principal receivables from 41.7 million active accounts i.e. $762/account holder."

"2015 to 2019 signings now $5.6 billion in average receivables"

"2015 to 2018 signings grew credit sales at +25 percent year-over-year and +31 percent in average receivables"

 

I don't think these 160 card program goes to $0 tomorrow..or replace them with DIS, COF, SYF etc. but again who knows..

 

Even if the new credit sales growth is neutralized by the decline on legacy Porfirio, i.e. no growth or even decline in growth, this is still a massively profitable business. Loyalty one itself is a $20+/share (after tax) business most likely to be sold this year... so card business, which generates close to $25 net adj ebidta, is selling for less then $100/share at this price.... This will be very good learning experience for me if I lose money on this investment..

 

[adhital]

I think Valueact converted their shares to Preferred.

 

Yes, you are correct. That makes me feel much better. What else could account for current price action? L Brands sure isn't helping. I wish I knew this company better because it does seem like a no-brainer here.

 

2018 report: "L Brands and its retail affiliates accounted for approximately 10% of our average credit card and loan receivable".

If L Brands goes under, I think the impact is close to $2.5/share in reduced GAAP EPS

[Spekulatius]

Why to buy this vs DFS or COF? Both are cheap, but gave lower ROA, but also less risk. I do think the market is pricing in lower ROI ( from increased competition) and higher loan losses from a weakening economy.

[chompsterama]

I do think the market is pricing in lower ROI ( from increased competition) and higher loan losses from a weakening economy.

Nah, get out of town.

 

They're all cheap.  If there is no recession coming, take your pick.  ADS might have a greater upside (read more risk) as they have a motivated board and much more likely an acquisition candidate than DFS or COF. 

[abitofvalue]

Curious if ADS has updated their CECL guidance. Even SYF is now out saying 50-60% increase in reserves.  Is ADS sticking to its no material impact line?