ADS - Alliance Data Systems

[Peregrine]

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?

 

I don't think CECL should have a significant effect given that credit card loans are completely written off once they're 180 days past due.

 

Edit: ADS is expecting some build in reserves, mainly due to hard goods and jewelry receivables since they have longer lives

[chompsterama]

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?

July Call only mentioned some build up from their prior no effect.  No dollar or % value:  "As we adopt the CECL into 2020, we've been very successful in hardgoods and jewelry. Those assets generally have longer lives, so we would expect to have some build as we go into 2020 as we adopt CECL. We're going to have to look at the end-of-period balance sheet to see how much we have of the longer-lived assets versus short-lived assets. But we do expect some build."

[kab60]

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.

Lots of good point. Just a few comments;

 

Some retailers will obviously go under. Others will restructure, and if they wan't to have a fighting chance they'll probably need a solution ala ADS'.

 

L Brands is interesting, because while Victorias Secret is struggling, they have a gem in bath and body works.

 

Thus L Brands can probably do okay in a slimmed down version (they've been slow to close down locations), and their debt load is high, so possibly they could restructure, and thus still be a client, albeit smaller.

 

While Amazon and the death of many malls are hurting many of their traditionel clients, I could see their service becoming increasingly necessary for those that wan't to have a fighting chance. Whether 30 pct. ROE is here to stay is to be seen, but I haven't seen anything to suggest otherwise (apart from price action).

 

That anecdote from Floor & Decor can be read very differently whether one is a bull or bear, but it obviously adds value to the retailer.

 

Management has obviously been too optimistic before, but they've been guiding double digit receivables grow recently (grew 16 pct. in July), while it probably trades as if it's no growth/melting icecube type of thingy.

 

Boy I have taken a beating, but while I was definatley early I haven't seen anything that suggests the company is broken.

 

Agree that Valueact and Greenberg selling is a negative (while Valueact swapped some of its stake to preferred they did sell a large chunk large fall which spooked the market). Those guys are obviously way smarter than I, and I might be a patsy for relying too much on management (even though I think they were actually quiet right on some of the longer term drivers - like losses falling after insourcing collections etc. etc.).

[adhital]

https://www.bloomberg.com/news/articles/2019-08-27/jpmorgan-weighs-sale-of-1-billion-aarp-credit-card-portfolio?srnd=premium

 

[abitofvalue]

https://www.bloomberg.com/news/articles/2019-08-27/jpmorgan-weighs-sale-of-1-billion-aarp-credit-card-portfolio?srnd=premium

 

isnt this a cobrand card? How many cobrand deals does ADS have...  to be clear - not talking of private label, just co-brand.  iirc, a vast vast majority of the deals are private label but maybe i am missing something. 

 

my worry is SYF and ADS are increasingly relying on / doing co-brand deals where the economics likely aren't as juicy as pure private label.  Atleast SYF has dual-card so its quasi private-label. 

 

anyway - i agree its cheap just not sure how cheap..

[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?

 

I don't think CECL should have a significant effect given that credit card loans are completely written off once they're 180 days past due.

 

Edit: ADS is expecting some build in reserves, mainly due to hard goods and jewelry receivables since they have longer lives

 

frank87 - this may be a dumb question but how can SYF be guiding to 50-60% increase in card reserves and ADS to minor..  something seems off right? I get JPM @100% increase in card reserves may be too high given GPCC vs PLCC but ADS and SYF shouldnt be that far off.. 

 

 

[Peregrine]

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?

 

I don't think CECL should have a significant effect given that credit card loans are completely written off once they're 180 days past due.

 

Edit: ADS is expecting some build in reserves, mainly due to hard goods and jewelry receivables since they have longer lives

 

frank87 - this may be a dumb question but how can SYF be guiding to 50-60% increase in card reserves and ADS to minor..  something seems off right? I get JPM @100% increase in card reserves may be too high given GPCC vs PLCC but ADS and SYF shouldnt be that far off..

 

This is just my take on it: Even credit card loans can differ quite a bit, particularly in terms of their estimated lives, $ amount per balance, etc. Higher dollar items and higher balances have relatively longer lives and would be more sensitive to the CECL change. ADS credit card balances are the lowest among the bunch but even then they acknowledge that there's going to be reserve build. Also, CECL requires the company to take a view on the macroeconomic environment, which can vary across different banks.

 

Obviously, loan categories such as mortgages would be affected a lot more.

[ander]

Post the recent tender, what's the latest estimate as to how much more ADS has in terms of capacity for repurchasing shares - with and without CECL adjustment and sale of Loyalty?

[Peregrine]

Post the recent tender, what's the latest estimate as to how much more ADS has in terms of capacity for repurchasing shares - with and without CECL adjustment and sale of Loyalty?

 

I think they planned to use $1.1 billion of the Epsilon sale to buy back shares. $750 million was spent in the tender, so that means there's still $350 million left.

[KCLarkin]

Sees Forever 21 is mulling bankruptcy. Checks to see if they are a client.

Of course they are.

[glorysk87]

Sees Forever 21 is mulling bankruptcy. Checks to see if they are a client.

Of course they are.

 

On the flip side, BURL reported sales up 11% today

[kab60]

Signet is also in the gutter, Gamestop not exactly doing stellar either. Some of their clients are really struggling, but they've got 150 plus and some high fliers as well. Not exactly getting a lot of love at the moment though. Glad they didn't blow the full buyback at once. :)

 

From last CC:

 

Daniel Perlin

 

Melisa, now that you've taken over, and I'm sure you guys have done another deep dive in terms of looking over the core portfolio, are there any retailers that are on your watch list that could surprise in the card business that we should be at least mindful of as we think through this transition right now?

 

Melisa Miller

 

Yes. Dan, that's a good question. There are some brands within our core portfolio that have struggled certainly with their top line growth. We are in constant contact with the senior level individuals within these brands, meet often to understand what their plans are. The great news is there are none that are of size, that if some sort of event were to occur, that we would expect there would be any impact to us.

 

I might just be drinking the management kool-aid, but wouldn't a new CEO usually use the opportunity to downplay expectations/kitchen sink somewhat instead of surprising negatively a couple of quarters down the road? Unless ValueAct have told her to be really agressive (so they can dump their position - but that hasn't really worked out either).

 

 

 

 

[Peregrine]

Signet is also in the gutter, Gamestop not exactly doing stellar either. Some of their clients are really struggling, but they've got 150 plus and some high fliers as well. Not exactly getting a lot of love at the moment though. Glad they didn't blow the full buyback at once. :)

 

From last CC:

 

Daniel Perlin

 

Melisa, now that you've taken over, and I'm sure you guys have done another deep dive in terms of looking over the core portfolio, are there any retailers that are on your watch list that could surprise in the card business that we should be at least mindful of as we think through this transition right now?

 

Melisa Miller

 

Yes. Dan, that's a good question. There are some brands within our core portfolio that have struggled certainly with their top line growth. We are in constant contact with the senior level individuals within these brands, meet often to understand what their plans are. The great news is there are none that are of size, that if some sort of event were to occur, that we would expect there would be any impact to us.

 

I might just be drinking the management kool-aid, but wouldn't a new CEO usually use the opportunity to downplay expectations/kitchen sink somewhat instead of surprising negatively a couple of quarters down the road? Unless ValueAct have told her to be really agressive (so they can dump their position - but that hasn't really worked out either).

 

We really have to stop mistaking the stock price of these retailers for its impact on Alliance Data. As long as the retailer stays in business, revenues are all that matters. People think L Brands is a goner because of where its stock price has gone, yet their revenues have been flat to up slightly and they're still profitable.

[abitofvalue]

I might just be drinking the management kool-aid, but wouldn't a new CEO usually use the opportunity to downplay expectations/kitchen sink somewhat instead of surprising negatively a couple of quarters down the road? Unless ValueAct have told her to be really agressive (so they can dump their position - but that hasn't really worked out either).

 

she's hardly new management.. she ran the card division before being made CEO....  but hey today's underperforming retailers are tomorrows discontinued programs..  thye'll just say - active receivables will be 'spooling' higher.. 

 

it's cheap and not in terminal decline but doesnt have much else going for it imo...  i could see this bouncing to trade in-line with COF, DFS.  dont think it can achieve its historical multiple (rightly so). 

[kab60]

I might just be drinking the management kool-aid, but wouldn't a new CEO usually use the opportunity to downplay expectations/kitchen sink somewhat instead of surprising negatively a couple of quarters down the road? Unless ValueAct have told her to be really agressive (so they can dump their position - but that hasn't really worked out either).

 

she's hardly new management.. she ran the card division before being made CEO....  but hey today's underperforming retailers are tomorrows discontinued programs..  thye'll just say - active receivables will be 'spooling' higher.. 

 

it's cheap and not in terminal decline but doesnt have much else going for it imo...  i could see this bouncing to trade in-line with COF, DFS.  dont think it can achieve its historical multiple (rightly so).

She was running the business and seems to have done a good job. She wasn't responsible for the messed up communication - and probably didn't decide on their discontinued programs. That smells more like an invesetment banker-move to dress up the apperance, aka the former CEO, or a hedgefund who's been drawn to Cash EPS metrics before, aka ValueAct. As I said, I might be drinking the management kool-aid. I agree discontinued ops looks disingenious, so does guiding for 20B receivables when it's unclear how much will be from organic growth or portfolio buys. Dont think anyone is banking for a historical multiple.

[adhital]

Searching for their potential new clients, I found these examples to help offset and/or increase ADS's future receivables. I remember a while back they were saying $50Billion potential portfolio is out there and only 40% is captured by ADS so far. Looking at the revenue trend of ULTA, Wayfair and Williams sonoma's, I tend to agree with them. There are other structural issues for sure but at this price, and if my math is accurate assuming 15% of client's revenue flows though their receivables,  even with 10% receivable decline yoy (i.e. average 3 to 4 clients bankruptcy/year)  for the next 5 years and sale of this company at 8 to 10 times 2024 EBIDTA is a close to  15% IRR for stockholders. Remember, even  Cintron's short report was assigning card business $100/share with 2015 $12.5 Billion receivable numbers.

 

Bloomin Brands Inc

Boyd Gaming Corp

Burberry Group

Lululemon

Sally Beauty Holdings Inc

Tiffany & Co

Urban Outfitters

and many others..

 

[decko]

Q3 $5.05 misses the average analyst estimate of $5.25 and falls from $5.37 in the year-ago quarter.

 

ADS now sees 2019 core EPS of $16.75-$17.00, assuming no further rate cuts by the Fed; compares with consensus of $19.30.

 

Cites recent prime rate changes, an adjustment to the value of certain held-for-sale credit card receivable portfolios, and lower average receivables.

 

thoughts ??

[KCLarkin]

Q3 $5.05 misses the average analyst estimate of $5.25 and falls from $5.37 in the year-ago quarter.

 

ADS now sees 2019 core EPS of $16.75-$17.00, assuming no further rate cuts by the Fed; compares with consensus of $19.30.

 

Cites recent prime rate changes, an adjustment to the value of certain held-for-sale credit card receivable portfolios, and lower average receivables.

 

thoughts ??

 

I haven't listened to the call yet but this seems like the kind of situation you want to sit out and wait until there is some business or stock price momentum. Every quarter, it looks like they have finally reached rock bottom...

[kab60]

New CFO basically said he was proud of the tender. Bah.

 

Their guidance doesn't include rate drops (though market expects two), so setup for another bad surprise. Bah.

 

What matters longterm is whether or not they bring value to their clients, and judging by wins in recent years and commentary from their customers it seems like they do.

 

We're basically at around 4x2020guidance, but it's such a bummer that these guys didn't reset expectations at the last quarterly call. Ed had a huge credibility problem, and these guys aren't exactly having a great start.

 

I really don't give a shit about whether EPS hits 15 or 20 or 25, I need to know their model works longterm, and who'd really take what they say at face value now? (I did and have sit on a large loss).

 

Hate to reiterate what they say, but 4x2020 earnings plus growth and plus 30 pct ROE is silly. Would probably be valued higher if they shed 40 pct of biz (like old Apparel vintages), but nobody believes these people, and CC didn't give much confidence. Probably time to looking at liquidation value to find a floor. :)

 

Oh Yeah, and ValueAct jumped ship.

 

 

 

[AzCactus]

New CFO basically said he was proud of the tender. Bah.

 

Their guidance doesn't include rate drops (though market expects two), so setup for another bad surprise. Bah.

 

What matters longterm is whether or not they bring value to their clients, and judging by wins in recent years and commentary from their customers it seems like they do.

 

We're basically at around 4x2020guidance, but it's such a bummer that these guys didn't reset expectations at the last quarterly call. Ed had a huge credibility problem, and these guys aren't exactly having a great start.

 

I really don't give a shit about whether EPS hits 15 or 20 or 25, I need to know their model works longterm, and who'd really take what they say at face value now? (I did and have sit on a large loss).

 

Hate to reiterate what they say, but 4x2020 earnings plus growth and plus 30 pct ROE is silly. Would probably be valued higher if they shed 40 pct of biz (like old Apparel vintages), but nobody believes these people, and CC didn't give much confidence. Probably time to looking at liquidation value to find a floor. :)

 

Oh Yeah, and ValueAct jumped ship.

 

Will be interesting to see what Arlington did here.  They've been in the position for a few years and are certainly in the red. 

[vince]

New CFO basically said he was proud of the tender. Bah.

 

Their guidance doesn't include rate drops (though market expects two), so setup for another bad surprise. Bah.

 

What matters longterm is whether or not they bring value to their clients, and judging by wins in recent years and commentary from their customers it seems like they do.

 

We're basically at around 4x2020guidance, but it's such a bummer that these guys didn't reset expectations at the last quarterly call. Ed had a huge credibility problem, and these guys aren't exactly having a great start.

 

I really don't give a shit about whether EPS hits 15 or 20 or 25, I need to know their model works longterm, and who'd really take what they say at face value now? (I did and have sit on a large loss).

 

Hate to reiterate what they say, but 4x2020 earnings plus growth and plus 30 pct ROE is silly. Would probably be valued higher if they shed 40 pct of biz (like old Apparel vintages), but nobody believes these people, and CC didn't give much confidence. Probably time to looking at liquidation value to find a floor. :)

 

Oh Yeah, and ValueAct jumped ship.

 

Haven't had a chance to look yet, how do you know valueact sold out?

[Peregrine]

New CFO basically said he was proud of the tender. Bah.

 

Their guidance doesn't include rate drops (though market expects two), so setup for another bad surprise. Bah.

 

What matters longterm is whether or not they bring value to their clients, and judging by wins in recent years and commentary from their customers it seems like they do.

 

We're basically at around 4x2020guidance, but it's such a bummer that these guys didn't reset expectations at the last quarterly call. Ed had a huge credibility problem, and these guys aren't exactly having a great start.

 

I really don't give a shit about whether EPS hits 15 or 20 or 25, I need to know their model works longterm, and who'd really take what they say at face value now? (I did and have sit on a large loss).

 

Hate to reiterate what they say, but 4x2020 earnings plus growth and plus 30 pct ROE is silly. Would probably be valued higher if they shed 40 pct of biz (like old Apparel vintages), but nobody believes these people, and CC didn't give much confidence. Probably time to looking at liquidation value to find a floor. :)

 

Oh Yeah, and ValueAct jumped ship.

 

Haven't had a chance to look yet, how do you know valueact sold out?

 

They didn't. One of their PMs stepped down from the board. They converted a portion of their shares to convertible prefs some time ago, whose only value comes from their convertibility back into common shares.

[vince]

New CFO basically said he was proud of the tender. Bah.

 

Their guidance doesn't include rate drops (though market expects two), so setup for another bad surprise. Bah.

 

What matters longterm is whether or not they bring value to their clients, and judging by wins in recent years and commentary from their customers it seems like they do.

 

We're basically at around 4x2020guidance, but it's such a bummer that these guys didn't reset expectations at the last quarterly call. Ed had a huge credibility problem, and these guys aren't exactly having a great start.

 

I really don't give a shit about whether EPS hits 15 or 20 or 25, I need to know their model works longterm, and who'd really take what they say at face value now? (I did and have sit on a large loss).

 

Hate to reiterate what they say, but 4x2020 earnings plus growth and plus 30 pct ROE is silly. Would probably be valued higher if they shed 40 pct of biz (like old Apparel vintages), but nobody believes these people, and CC didn't give much confidence. Probably time to looking at liquidation value to find a floor. :)

 

Oh Yeah, and ValueAct jumped ship.

 

Haven't had a chance to look yet, how do you know valueact sold out?

 

They didn't. One of their PMs stepped down from the board. They converted a portion of their shares to convertible prefs some time ago, whose only value comes from their convertibility back into common shares.

 

yes I remember the conversion, thank you

[kab60]

They didn't, but they quit the board. And management gave a BS explanation. Another hit at their credibility. Wonder if Eds overoptimisn in part stemmed from Melissa or they just have poor visibility which is somewhat worrying considering their emphasis on data.

 

Now, negativity aside, I actually didn't think results were bad. And nothing so far indicates their value proposition has worsened. They recently signed Lands End (laugh if you want) who finally seems to be on the right track, and apparently they expect a big signing next year as well.

 

[deseretalts]

Arlington has increased their position 30+% since beginning of the year. Its was their second biggest position before today.