Business context and reporting period
Alliance Data Systems Corporation (ADS), not an entity identified in this filing as Bread Financial Holdings, Inc., filed this unaudited Form 10-Q for the quarter ended March 31, 2021. Its segments were LoyaltyOne, including AIR MILES and BrandLoyalty, and Card Services, which included digital payments company Bread, acquired in December 2020.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1,084.9 million | $1,381.8 million | Down 21% |
| Operating income | $503.1 million | $164.0 million | Up 207% |
| Net income | $286.2 million | $30.0 million | Up 854% |
| Diluted EPS | $5.74 | $0.63 | — |
| Operating cash flow | $517.2 million | $572.5 million | Down $55.3 million |
| Cash, cash equivalents and restricted cash, quarter-end | $3,246.9 million | $4,765.9 million | Down $1,519.0 million |
Operating margin was approximately 46.4% versus 11.9% in the prior-year quarter; net margin was approximately 26.4% versus 2.2%. The improvement in profit largely reflected a $622.5 million reduction in loan-loss provision, rather than revenue growth. Revenue fell primarily because finance charges declined 23%, reflecting a smaller receivables balance and lower finance-charge yield.
At March 31, 2021, total assets were $21.2 billion, total liabilities $19.4 billion and stockholders’ equity $1.8 billion. Net credit card and loan receivables were $13.7 billion, down from $14.8 billion at year-end. Deposits were $10.0 billion; non-recourse securitization borrowings were $3.9 billion; and long-term and other debt was $2.8 billion. The company reported $1.459 billion of term loans outstanding, no revolver borrowings and $750 million of revolver availability. Its total leverage ratio was 1.9x against a 4.5x maximum covenant, and it reported compliance with financial covenants.
Material changes versus the prior comparable period
- Loan-loss provision fell to $33.4 million from $655.9 million. Management attributed the decrease to improved credit performance, lower charge-offs and a better macroeconomic outlook; the 2020 quarter included a substantial pandemic-related reserve build.
- Average credit card and loan receivables declined 14% to $15.8 billion. Credit sales were down 1% to $6.0 billion, while higher customer payment rates contributed to receivables paydown.
- Credit quality improved: delinquency rate was 3.8% versus 4.4% at December 31, 2020, and the quarterly net charge-off rate was 5.0% versus 7.0% in Q1 2020.
- LoyaltyOne revenue fell 11% and segment pretax income fell 32%. AIR MILES miles issued declined 16% and miles redeemed declined 26%; short-term loyalty activity was also affected by the pandemic.
- Card Services revenue fell 23%, but pretax income rose to $409.9 million from $32.1 million, principally due to the lower loan-loss provision.
- Cash from investing activities was $1.0 billion, mainly from seasonal credit-receivables paydown, versus $1.7 billion in Q1 2020, which included proceeds from business and card-portfolio sales. Financing used $1.7 billion, largely reflecting net repayments and maturities of securitization borrowings.
Outlook, commentary, risks and unusual items
Management described sequential improvement in business conditions and credit metrics, but said COVID-19 continued to affect results. The filing provides no quantified earnings or revenue guidance and states that the future effects of the pandemic on results and cash flows could not then be reasonably estimated. Management said liquidity sources were expected to meet working-capital, capital-expenditure and other business needs for at least 12 months, while warning that market volatility could restrict or raise the cost of funding.
Travel restrictions weighed on AIR MILES redemptions; the program was expanding non-travel rewards and management expressed optimism about travel recovery in the second half of 2021. BrandLoyalty continued to face uncertainty from European lockdowns. The filing also identifies risks involving client demand, credit losses and CECL estimates, deposit and securitization funding access, consumer regulation and privacy, foreign exchange, cyber disruption, and COVID-19-related demand and supply effects.
ADS had paid $75 million under its indemnity to Publicis related to the former Epsilon business’s DOJ deferred prosecution agreement; a further $75 million remained accrued at March 31, 2021, with payment expected in January 2022. The company’s banks withdrew applications to merge Comenity Bank into Comenity Capital Bank after quarter-end. The 2020 comparison included an $8 million net gain on the sale of Precima. ADS declared a $0.21-per-share quarterly dividend in April, payable in June. Its CFO resigned April 13; a successor was announced to take office July 6, 2021.
Investor verification priorities
- Confirm the reporting entity: the supplied filing is for Alliance Data Systems Corporation, despite the request metadata naming Bread Financial Holdings, Inc.
- Assess whether the sharp profit increase is sustainable, given the unusually large year-over-year reduction in loan-loss provision and continuing declines in revenue and receivables.
- Monitor credit performance, including charge-offs, delinquencies, forbearance balances and the assumptions used in the CECL allowance.
- Review upcoming securitization maturities, conduit availability, deposit funding stability and the company’s access to capital markets.
- Track AIR MILES and BrandLoyalty recovery, including travel-related redemptions and the pace of new loyalty programs.
- Verify settlement and payment of the remaining $75 million Epsilon-related indemnity, and review other disclosed commitments and contingencies.