ADS - Alliance Data Systems

[KCLarkin]

The notion that these are "non-recourse" is a joke. the day a securitization trust fails is the day ADS fails.  they will have zero fundraising ability.

Perhaps. But if you are only retaining 10% of the risk, you clearly need less equity to support the receivables.

[frank87]

The notion that these are "non-recourse" is a joke. the day a securitization trust fails is the day ADS fails.  they will have zero fundraising ability.

Perhaps. But if you are only retaining 10% of the risk, you clearly need less equity to support the receivables.

The risk-weights on securitized credit card receivables aren't really different from those held at the bank as they don't qualify for securitization under Basel III capital rules. So there isn't much capital relief from securitizing credit card receivables.

[KCLarkin]

The risk-weights on securitized credit card receivables aren't really different from those held at the bank as they don't qualify for securitization under Basel III capital rules. So there isn't much capital relief from securitizing credit card receivables.

Thanks for the clarification.

[Okonomen]

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?

[kab60]

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?

Yes. They've got some challenged retailers in their portfolio and some they've gotten rid of. And some that are doing more than fine and are still in their early innings in regarda to growing receivables (Ikea, Sephora etc). Fact is active receivables grew 16 pct y/o/y in July (and their guidance is for that to continue). It is pulled down by all that is retail while growing double digit at high incremental ROIC. I like the business economics and that it's a diversified play on retail. Even if clients fail (like BonBon and Gander) their end clients are the shoppers, and with low gas prices, high employment and rates dropping like a rock (and consumer debt levels not very frightening) I think they'll be fine. I struggle somewhat with the terminal value, but around these levels I'm not too worried about that. Biggest risk is that it is a credit card Company/financial and they tend to surprise to the downside. Despite the huge drop I think the card biz is doing great.

[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.