ADS - Alliance Data Systems

[vinod1]

ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

I think your concerns are valid but isn't a better explanation that mall-based retailers are in secular decline? ADS is trying to grow receivables at 15% per year and to do that, they can't be signing up new retailers that are shrinking.

Just think about the sentence highlighted above.

How can it be good business to turn away customers who are a good fit for your service, just because they cannot grow?

It is like if Microsoft refuses to license HP its Windows 10 OS because HP is had a declining PC sales or say Visa declined to work with Citigroup when they are ramping down their credit card portfolio during the financial crisis. I know the marginal costs are quite different from these examples, but you get my drift.

They can price the product accordingly, but to me at least it does not make much sense.

Vinod

[vinod1]

vinod1,

You realize that they have digital loyalty cards right?
Go to wafair.com and put something in your cart & try to check out. You'll see an option to save x % by signing up for their loyalty card ( that's ADS ).

Still buying ADS today!

Yes. You need to look at their competitive advantage and why it works. It does not translate well for digital/online sales.

Sears had eCommerce too

Vinod

[flesh]

 I don't believe we'd see downside here with 5% growth in card, ceteris paribus. There are many moving parts under the rev line that will become clear cy 19.

[abitofvalue]

Businesses that are not retail are not a good market fit for ADS. They signed up Wyndham this year. I just cannot imagine how a hotel chain could be a good fit. It assumes that people would fly out to a distant city, make a hotel reservation by providing an existing credit card and then apply for the hotel card after they get there. It goes against the grain of how consumers behave. This applies equally well to Digital/eCommerce only businesses.


Vinod

Hotel loyalty credit cards are actually a great business - chase / axp wanted to stay with Marriott and Starwood they agreed to split portfolio post hotel merger.  Why Wyndham chose ADS over the larger guys is an interesting question but I think hotels are well served for loyalty based cards as there is an easy value proposition by way of room upgrades, discount on meals etc..

The historical focus in specialty retail is likely just a function of the history - ADS came out of the limited's credit card business. Over time they grew to add more retailers. Now specialty mall based retail is more challenged so they have changed focus to other segments. Success remains to be seen but early signs suggest clients/consumers are interested in their cards - if anything ADS has said these new programs tend to scale much faster than old mall based concepts - receivable files of $200M in 3 yrs vs $50m under the old system. Not surprising given the retailer is likely also growing much faster than a mall based retailer could open stores and grow.

[glorysk87]

Just think about the sentence highlighted above.

How can it be good business to turn away customers who are a good fit for your service, just because they cannot grow?

It is like if Microsoft refuses to license HP its Windows 10 OS because HP is had a declining PC sales or say Visa declined to work with Citigroup when they are ramping down their credit card portfolio during the financial crisis. I know the marginal costs are quite different from these examples, but you get my drift.

They can price the product accordingly, but to me at least it does not make much sense.

Vinod

This makes absolutely no sense. In fact much of what you've said about the company makes absolutely no sense. Microsoft isn't taking on credit risk for each Windows license it sells. If Microsoft sells Windows into a declining PC vendor, they're not at risk of having a large receivables portfolio get hit with a wave of defaults.

It absolutely makes sense for ADS to turn away retailers that are in secular decline. I went through a bunch of your responses in this thread and much of what you've said about this company is at best misguided and at worst just flat out wrong.

[vinod1]

Just think about the sentence highlighted above.

How can it be good business to turn away customers who are a good fit for your service, just because they cannot grow?

It is like if Microsoft refuses to license HP its Windows 10 OS because HP is had a declining PC sales or say Visa declined to work with Citigroup when they are ramping down their credit card portfolio during the financial crisis. I know the marginal costs are quite different from these examples, but you get my drift.

They can price the product accordingly, but to me at least it does not make much sense.

Vinod

This makes absolutely no sense. In fact much of what you've said about the company makes absolutely no sense. Microsoft isn't taking on credit risk for each Windows license it sells. If Microsoft sells Windows into a declining PC vendor, they're not at risk of having a large receivables portfolio get hit with a wave of defaults.

It absolutely makes sense for ADS to turn away retailers that are in secular decline. I went through a bunch of your responses in this thread and much of what you've said about this company is at best misguided and at worst just flat out wrong.

The company has very little credit exposure to its clients. It does not lend money to its clients (retailers). It lends money to its clients customers.

I can see why it makes no sense to you when you have fundamentally misunderstood how the company works.

Vinod

[vince]

My concern is that the recent problems might be symptoms of the fact that it is running out of businesses that are a close market fit for its services.

Why did they target specialty retailers and not some other segment? I would argue it has to do with consumer behavior. Store cards benefit customers (invariably women) who shop frequently at their favorite stores which adds up to significant savings. The cards also benefit retailers who can target these same frequent shoppers to buy more vis targeted marketing.

ADS essentially followed a niche strategy that is based on serving specialty retailers. This is a market they served better than the Citigroup’s and Capital One’s of the world.

The retailers ADS targets have only a transactional relationship with their consumers and hence need ADS to help them with marketing. Online only and digital businesses have a relationship (via an online account) that makes ADS much less useful to them.

Businesses that are not retail are not a good market fit for ADS. They signed up Wyndham this year. I just cannot imagine how a hotel chain could be a good fit. It assumes that people would fly out to a distant city, make a hotel reservation by providing an existing credit card and then apply for the hotel card after they get there. It goes against the grain of how consumers behave. This applies equally well to Digital/eCommerce only businesses.

ADS attempt to move away from “mall-based specialty apparel” only reinforces the suspicion that it might be close to hitting the limits of its addressable market. As it signs up larger retailers, the economics would be much less favorable to ADS.

If you look at their growth strategy and management has laid this out pretty well. When they onboard a retailer, the 3-4% same store sales growth for the retailer, translates into a 3-4% growth for ADS as well. Now, they typically are starting from zero at the retailer, since the retailer does not have a store card in place. ADS would get this to say 10-20-30% of their customer base and this translated into another 3-4% growth. New retailers who they sign up then generated a further 5-6% growth on top.

The growth math above stops working at some point and the problems facing their end customers (retailers) could mean they are getting closer to that point.

The concern is around management ability to recognize when their business turned into a cash cow and allocate capital appropriately. Management believes they still have a long runaway to growth. So this could be an issue.

Anyway, ADS reminded me of a mistake I made a couple of years ago and the similarities are striking. So I decided to pass up unless I am able to address my concerns mentioned above.

Vinod

Vinod, a couple points....your statement around digital clients sounds like a sensible argument but the fact is every quarter they highlight that their online penetration is higher (roughly 30% if I remember correctly) than the overall online retail penetration rate (15-20% if I remember correctly).  So, at least according to management increasing online sales is a positive to the business model.  Secondly mgmt has emphasized multiple times their addressable market, they call it their "sandbox" and they claim that they can at least double their sales because of it ( Don't recall specific numbers but I do remember it was more than a double).  Thirdly, and this assumes you believe mgmt which isn't the easiest thing to do, their recent sign-ups make it very likely they will grow receivables by more than 15% over next 3 years, including customers lost over same time.  Lastly, KCLarkin is absolutely right when he says it is a rational business decision to shed customers in this case, no question!

[glorysk87]

The company has very little credit exposure to its clients. It does not lend money to its clients (retailers). It lends money to its clients customers.

I can see why it makes no sense to you when you have fundamentally misunderstood how the company works.

Vinod

Not even sure how to respond to this profoundly misguided comment. GL.

[BeerBBQ]

My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.
The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.
So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt.   

Is a transcript available somewhere?

[kab60]

My take from reading the conf call: ValueAct sold because of the 10% treshhold which is very annoying.  They told the CEO they were happy at the actual level and would not sell more.
The CEO gave a 'profit warning', saying that results would be disappointing (flat) until the second half of 2019.  From then on +15% and 2020 +20%.  So, what should have happened in the second half of 2018 is delayed by one year.  It is clear that they have retailers that are really suffering and they have decided to get rid of them. There are many new signings which should replace the old clients.  Epsilon, chances are high something will be done during the first quarter. BrandLoyalty is also for sale at the right price.
So, all in all a very nice cash machine at a very nice price.  But business has evolved and they have to adapt.   

Is a transcript available somewhere?

Yep, via Thomson Reuthers (can get it through Interactive Brokers for free - PM if you want it).