Bread Financial Holdings, Inc. (BFH) Q3 2021 Earnings Report, Transcript and Summary

Good morning, and welcome to Alliance Data's Third Quarter 2021 Earnings Conference Call. My name is Davie, and I will be coordinating your call today. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb from -- the Head of Investor Relations at Alliance Data. Sir, the floor is yours.

Thank you. Copy of slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; and Perry Beberman, Executive Vice President and Chief Financial Officer of Alliance Data. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at alliancedata.com. With that, I would like to turn the call over to Ralph Andretta. Ralph?

Good morning, and thank you all for joining. I will start on Slide 3 with the key takeaways for the quarter. Our performance demonstrated considerable operating progress as we continue to move forward with the transformation of the company. We are seeing the success of investments and strategic decisions we have made, and we continue working to position our company for strong, profitable long-term growth. Our business development pipeline is robust, which is evidenced by the new signings and renewals during the quarter. I will highlight a few of these names on the coming slides. We continue to win new opportunities, and we'll share our progress at the appropriate times. Earlier this week, we announced a new partnership with Sezzle. They will integrate with Bread's FinTech payments platform for installment lending on big ticket purchases. This is another example of the multiple ways we can drive new growth for Bread's versatile platform. Our investment in the Bread platform and our digital capabilities are ongoing and set the stage for sales -- scaled growth in 2022 and beyond. Our full suite of consumer lending products, coupled with our expanded total addressable market, has created new opportunities. These opportunities provide increased flexibility to optimize and balance our portfolio from a growth, margin, and responsible lending perspective. We are no longer as relying on a few large partners or a single product to drive our success. The long-term growth we outlined at our main investor event remains in our sights. Our leadership team is focused on driving net partner growth while delivering industry-leading returns. Our credit performance remained strong as a result of our disciplined risk management and the government economic stimulus program. We anticipate that payment rate will continue to slow and credit metrics will moderate in 2022 as stimulus programs expire. Consumers have returned to omnichannel shopping, and we expect credit sales improvement to continue into the holiday season. The spin-off of our LoyaltyOne segment as Loyalty Ventures, Inc. is expected to be completed on November 5, advancing our strategic transformation and furthering our ability to deliver long-term sustainable growth. This spin positions both Alliance Data and Loyalty Ventures to focus on the unique growth opportunities and is expected to strengthen Alliance Data's enterprise-level capital metrics and other key metrics. Alliance Data will retain 19% ownership interest and expects to receive a $750 million cash distribution from Loyalty Ventures, which we will use for deleveraging. We expect an approximately 300 basis point improvement in our TCE TA ratio as a result of the spin-off in November. Slide 4 provides highlights of our key financial metrics for the third quarter. Total revenue for the quarter was $1.1 billion, and net income was $224 million. Revenue increased 5% year-over-year, while total expenses, excluding provision for loan loss declined 3%. The allowance for loan loss remained nearly flat for the quarter, resulting in reported diluted earnings per share of $4.47. Credit sales were up 20% year-over-year to $7.4 billion. Our net loss rate, 3.9% for the quarter, which marks our lowest third quarter rate in the last 20 years. Slide 5 highlights select brand partner additions and renewals. We added TOURNEAU as a new retail card partner and signed renewals with GameStop and Petland. We continue to thoughtfully manage our new business and renewal opportunities to drive profitable growth and optimize our portfolio. Bread continues to successfully add new online merchants through its direct acquisition channel. A select few of the partners added to the platform are displayed on the right side of the slide. I would highlight the recent signing of our current retail card partner, El Dorado, onto Bread's payment platform. We continue to have positive dialogue with many existing and new retail card partners to enable Bread's digital offerings, and we are working to align with those partners integration time lines, which vary by merchant. Bread's platform provides quick and flexible integration options with an exceptional customer experience that sets it apart from the competition. I will cover our exciting announcement Sezzle on the next slide. Slide 6 provides more details on the progress of each of our Bread business levels. We continue to invest in Bread's modern platform as we have more than doubled the number of our digital engineers and continue to enhance our product and integration capabilities across the models. One area that we're very excited about is to roll out in-store capabilities in early 2022. This will expand our consumers' ability to use buy now, pay later products at physical locations and provide merchants the omnichannel acquisition [Audio Gap] FinTech platform to provide their consumers with more options to check out with the addition of Bread's flexible installment payment solutions. Alliance Data will underwrite, service and retain the receivable for the installment loans on our balance sheet. We continue to progress forward with our full launch across all of Fiserv's merchant acquiring platforms, including the Clover POS system in 2022. What distinguishes our relationship with Fiserv is that we are able to leverage Fiserv's vast sales force to promote and distribute our lending products across Fiserv's expansive merchant network and the offering is integrated into their merchant dashboard. Also, we expect to initiate our in-store technology capabilities with Fiserv by the end of the year. Finally, we are seeing strong momentum in our technology platform offering with RBC in Canada. RBC's pay plan, pay overtime solution powered by Bread is now live in EB Games, Best Buy and the Source, and is the exclusive way to pay for Microsoft Xbox All Access program in Canada. Additionally, there were several small to midsized merchants that launched in RBC's pay plan on Bread's platform during the quarter. The pipeline remains robust, and we expect to have additional launches with RBC in the fourth quarter prior to the holiday season. Let's turn to Slide 7. I expect this to be the last time we will review the performance for the LoyaltyOne segment, which includes the AIR MILES rewards program in Canada and Netherlands-based brand loyalty program. The spin-off of that business to Loyalty Ventures, Inc. is currently on track for completion on November 5. The business is well positioned for success with a strong management team transitioning to lead Loyalty Ventures. I wish all our departing colleagues the best and appreciate all the hard work and dedication to Alliance Data over the years. As displayed in the graph on the right, AIR MILES reward miles issued and redeemed improved in the quarter as flight bookings increased and merchandise redemptions remained strong. We remain optimistic on the long-term outlook as travel rebounds and are excited about the relaunch and rebrand AIR MILES in October with enhanced benefits, a new logo and digital properties. BrandLoyalty had a strong initial campaign launches in September with momentum continuing into the fourth quarter. Of course, we continue to closely monitor conditions throughout the world, including supply chain interruptions that have the potential to impact macroeconomic environment and our business. With that, I'll turn it over to Perry.

Thanks, Ralph. Slide 8 provides our results for the third quarter of 2021 compared to the third quarter of 2020. Revenue was up 5%, driven by higher receivables and improved card yields from last year. Total expenses, excluding provision for loan loss, were down 3% to the third quarter of 2020 as a result of lower interest expense, which currently resides in total expenses for the company. Pretax pre-provision earnings or PPNR, were up $69 million, 18% year-over-year, aligned with our focus on driving core underlying earnings growth. Finally, net income was up 68%, driven by the PPNR growth, combined with lower provision expense than last year. I will provide more details on our third quarter results in the coming slides. Slide 9 provides our segment level results for the third quarter. LoyaltyOne revenue was down 8% year-over-year, while Card Services revenue increased 7%. LoyaltyOne EBT was up 143% due to lower cost of redemptions and amortization expense. The improvement in Card Services EBT is primarily a result of higher underlying PPNR combined with a lower loan loss provision expense resulting from continued strong card member payment behavior and strong credit metrics. Looking forward, our financial statement at the end of the year will present the LoyaltyOne segment as a discontinued operation. At the same time, we expect to align the financials to be in a format more consistent with those of our peers. For example, we plan to move interest expense to be part of net interest income going forward. We will provide more details and a historic view once available later this year. Moving to Slide 10, I will review some of the key business metrics for the company. Starting on the left side of 10, we show our average receivables and our total credit sales trends. For the quarter, we saw credit sales come in at $7.4 billion or up 20% year-over-year and flat sequentially. Average receivables were up slightly sequentially. Both figures were partially impacted by the sale of the nonrenewal portfolio in the third quarter. Moving to the right. Revenue yields improved slightly from the second quarter, in line with seasonal trends and our guidance. We expect the influx of transactional balances to lower the revenue yield in the fourth quarter to be more in line with the second quarter yield of 22.5%, consistent with seasonal trends. Card Services cost of funds continue to trend lower, down approximately 30 basis points from the second quarter as we continue to shift the mix of our funding toward low-cost consumer deposits. Turning to Slide 11. I will start on the upper left. Our delinquency rate increased 50 basis points versus the previous quarter to 3.8% due to normal seasonal trends. On a year-over-year basis, the delinquency rate was down 90 basis points. On the upper right, you can see that we finished at a loss rate of 3.9%, the lowest third quarter rate we have had in the last 20 years. These low rates are the result of our disciplined risk management as well as the economic stimulus, which is driving higher consumer saving rates across the industry and a greater ability to pay. Turning to the bottom left of the page, our allowance stayed nearly flat at $1.6 billion, leading to a reserve rate of 10.5%. Outside of seasonal movements, expect a rather steady reserve rate until more economic certainty emerges. Lastly, on the bottom right-hand side of the page, our revolving credit distribution shifted slightly as we had projected last quarter, it would. The reduction in 660 plus from 64% to 62% sequentially is driven by the anticipated customer risk or migration to a more expected level. Overall, we expect to maintain a healthy portfolio from a risk mix perspective and better than pre-pandemic levels, one that allows us to get rewarded for the risk we take and drive sustainable, profitable growth at lower than average historical loss rates. Slide 12 provides our financial outlook for full year 2021. Our full year average receivables guidance remains down mid-single digits year-over-year with credit sales up double digits in 2021. While payment rates are moderating month-to-month, the elevated level continues to pressure receivables growth related to credit sales growth. Our outlook for the full year total revenue remains unchanged, including our expectation that gross -- that card gross yields will remain steady for the full year. Total expenses are expected to be flat to modestly down due to improved funding costs and efficiencies in operations, partially offset by higher investment in marketing, technology infrastructure, digital and Bread. We expect seasonally higher expenses in the fourth quarter. Looking further ahead, we plan to continue to increase our investments into 2022 to drive growth and innovation. We have the ability to flex our investments up or down as needed to align with market conditions and our outlook to achieve positive operating leverage. As both our loss and delinquency remains low, we are adjusting our full year loss rate guidance to be in the high 4% range. We anticipate that credit metrics and payment rates will moderate as stimulus programs wind down. We expect to resume high single to low double-digit receivables growth in 2022 and will provide full year 2022 guidance on our fourth quarter earnings call in January. Now I'll pass it back to Ralph to discuss progress on our business transformation on Slide 13.

Okay. Thanks, Perry. Before we move on to Q&A, I wanted to highlight some of the accomplishments we've achieved recently as part of our ongoing business transformation. We continue to make great strides in simplifying our business model, including the spin-off of our international loyalty business, which I've already discussed. We are focused on where we see the best opportunity to build value for our stakeholders. We continue to develop our full suite of products to provide consumers with choices they desire. A little less than a year ago, we acquired Bread, adding buy now, pay later and digital installment lending to our offerings, which was instrumental during a time of increasing omnichannel focus by our partners. We launched our proprietary card which continues to perform well with over 1 million cardholders and growing. We're excited about the many strategic relationships we have built in conjunction with Bread versatile mono platform, including RBC, Fiserv and Sezzle. These relationship leverages Bread's nimble and flexible platform in different ways to expand and improve their customer experience and increase their ability to provide payment choices to consumers. We are enhancing our technology infrastructure with our core processing conversion to Fiserv in 2022. We will invest over $100 million in digital advancement in 2021, and we will continue to invest in digital. We have added industry-leading talent that is driving our organization forward. We are focused on creating a collaborative and inclusive culture. We have changed the way we work. Our associates have increased flexibility, which is driving better productivity as well as cost efficiencies, including the optimization of our real estate footprint. Last but not least, we have continued to mature and prioritize our environmental, social and governance strategy. Our multiyear Board refreshment program has produced an outstanding Board of Directors, reflecting diversity of expertise and experience as well as gender, race and ethnicity. With the Board support and oversight, we've released our annual ESG report, including the results of a third-party conducted materiality assessment earlier this year. We established and empowered a new dedicated DE&I office, engaged shareholders on ESG matters and increased ESG and sustainability awareness across our business. We also look forward to rolling out a new comprehensive ESG strategy over the coming months. Although we've been busy, our efforts do not stop here. We remain dedicated to further strengthening our competitive positioning, which includes the expected improvement of our leverage and our capital metrics post spend, and investing in our strategic initiatives to continue to drive sustainable, profitable growth. Operator, with that, we are ready to open up the line for questions.

[Operator Instructions]

Yes. Before the question is started, I just want to let the participants know that I've asked Val Greer, our Chief Commercial Officer, to join us as well as Tammy McConnaughey, Head of Customer Service and our Chief Risk Officer. So they're joining Perry and I for the Q&A.

Our first question comes from Sanjay Sakhrani from KBW.

Obviously, a lot going on there. I guess I have one question for Ralph and Val and then maybe one for Perry and Tim, so I'll get everyone involved. I mean maybe you guys can talk about, and I appreciate Slide 5, but maybe just talk about this pipeline that you have that's upcoming wins and maybe other renewals that you might have? And then I know, Ralph, you kind of touched on a little bit, but Fiserv also announced a partnership with one of your peers. Maybe you could just differentiate and then flush that out a little bit what they're doing for you versus what they're doing for your peer? And then second question, I'll just ask them upfront for Perry and Tammy is we're hearing a lot from some of the subprime consumer finance companies that they're starting to see a little bit of the turn in delinquencies inside their pools. Obviously, your credit metrics look stellar. But I'm just curious, if you're seeing any subtle shifts, and I know that's to be expected given we're moving away from stimulus. So maybe you could just flesh that discussion out?

Sanjay, I think you should take the best place a lot of questions. So I think, first, let me talk about the pipeline. One of the things I think we've done since our arrival here is we put in a robust business development team. That team now is proactive instead of reactive. So they look at renewals when they may occur, what's in the marketplace, where we could grow the pipe for not only us but our partners. And we have a calendar of renewals that we go after. Our sales force now is enhanced and robust and very proactive in the marketplace, whether it's with our existing partners, new partners or digital partners with Bread. So it is -- the constant conversation about opportunities in the marketplace and how we can take advantage of them. On Fiserv, I think the distinguishing factor is what I mentioned, Sanjay, is that we are part of their offering to their merchants. We are part of their sales force. That best sales force is selling us when they're selling merchants. We are part of the dashboard. We really integrated into their sales prospect. So I feel good about that. I wasn't surprised by the signing. It makes good sense. But for us, we're beyond our current partner base with their vast merchant base. Val, anything to add to that?

No, I think that's right, Ralph. I think the integration in the Fiserv acquiring platform, which is not limited to just Clover, and that integration into the merchant dashboard really does differentiate along with the fact that Fiserv sales force is fully out there selling our products.

Yes. I guess the last thing I'll say, Sanjay, about the pipeline. We have -- we'll announce wins as appropriate with -- in conjunction with new and existing partners. So we're -- I'm excited to do that and stay tuned.

All right. Sanjay, this is Tammy. So your question in regards to credit and whether or not we seen any subtle shift? I would say not quite yet. We did announce our delinquency up from second quarter to third quarter, but that's within our seasonal trends. As Perry mentioned, we have seen payment rates as we expected, start to stabilize. So we do expect normalization over time. However, consumers were propped up quite a bit and were responsible with the actual stimulus that they received. And so we haven't seen anything quite yet, but we do some normalization and the timing will be what we continue to monitor.

Our next question come from Bob Napoli from William Blair.

So Tim, maybe just on Bread. It seems like the buy now, pay later. The business model, the profit model still seem to be in flux and certainly investors trying to figure it out and -- so can you maybe give a little color or Ralph, for your thoughts. The revenue mix between merchant discount, interest income, then the profit model long term, are you -- do you feel like it's settled? Do you -- I mean -- or is there a lot of movement yet in the industry to come up with a sustainable profit model?

I think the thing to remember with our buy now, pay later product, Bob, is that it is one of several offerings that we have. So we're not completely reliant on the buy now, pay later economic model. It's a choice we give consumers. So as we approach merchants and we approach existing partners, we approach it from a partnership perspective with a basket of pricing. So we're not relying so we can be flexible with pricing, we can respond to the market because we have the ability to do that because of the relationship we have. And again, different from other buy now, pay later organizations, we're there to help the merchant create a transaction where if you think about buy now, pay later, and they're a bit of a Trojan horse, in terms of they get the transaction, they want you to download their app. So their loyalties to themselves, all loyalty is to the merchant that we're working with. So pricing for us at this point is we feel good about it. We feel that we're -- we can compete in the marketplace as we...

Are you -- I guess, in the pipeline, the -- are there a lot of cross-sells with the current private label customers that we should expect to see? And then signing 30 new direct partners in 30 days, does that mean we're going to see 120 new clients with prompted that statement in the next 90 days?

So Bob, I pushed myself team the same way. I said, on a day that I get I guess, 365 a year at minimum. But to me, I think right now, we are -- we've signed 3 or 4 of our existing partners and we're moving forward with them. We're in constant negotiations with our other partners in terms of how do we get into their tech stack and prioritization, how we move forward with them as well. So that work continues. We've invested in a sales force to be proactive out there. So I expect that 30 partners in 30 days. I expect that they will continue to push the pedal to the metal and sign more partners on a frequent basis. So I'm pleased with their results so far, and I'm really looking forward to, as you said, the next 120 days and see how many partners we rack up on the Bread platform.

And then just last question, the 19% ownership in AIR MILES, how long would you expect to hold that? I mean I would expect that's not a long-term position?

No, no. Our expectation is to hold that probably less than a year. As an organization, we want Loyalty Ventures to get on their feet before we would consider selling that -- selling that 19% stake. But our expectation is less than a year, so we mitigate any tax leakage.

Our next question comes from John Pancari from Evercore.

Back to the credit topic, I know you kept the reserve essentially stable or you added slightly, very slightly to the reserve ratio after you had seen pretty steady releases to the reserves in the prior several quarters. Can you just talk about how you're thinking about it from here? I know you indicated in your prepared comments that you need to see more economic certainty. So I guess the way I'm thinking about it is what changed given this outlook today versus previously that's given you the -- that you expect that the reserve will be more stable here.

I'll take that. This is Perry. So I think about it as really not a lot has changed. And I think that's the way you think -- the way I'm thinking about it is that we're maintaining a cautious posture. And if you think of where we are, we're only 12% above day 1 CECL. And if you look at, I'll say, the rest of the industry, on average, about 20% above day 1. So we've actually -- we're closer to our day 1 CECL than others. And we didn't, I'll say, increase our reserve to the same extent. So we've got ourselves to a place that we feel comfortable with. As you look at your reserve rates, there's a number of factors that go into it. The economic conditions, obviously, what the outlook is for inflation, unemployment, wage growth, the government's stimulus winding down. And as Tammy spoke earlier, we haven't really yet seen the effects of that in the portfolio. So that's what we want to watch for. And as well, I'll say the third variable, all companies -- there was the model enough CECL and we're working to the next generation of modeling. So there's a number of factors. But in terms of the economic outlook, I'd say we've maintained our view of the future for right now and waiting to see how things unfold before we continue to move our reserve rate.

Okay. All right. And then on the expense front, I know you indicated that you expect some increase in the fourth quarter mainly on seasonality and then you expect to increase your investments into 2022. How should we think about expense levels then for the fourth quarter and more importantly, for 2022 as you continue with the business investments versus this year?

Yes, I think the way to think about expenses is, remember, right now, interest expense is included in there. So we're continuing to see about, I'd say, 10 basis points a quarter of improvement on that side. And we're going to see seasonal increases in the fourth quarter with a little bit of increase of investments. For next year, we'll give guidance for 2022 in January. But again, we're going to deliver positive operating leverage for next year. So I wouldn't be worried that our expenses are going to outpace our revenue growth.

Yes. I think the thing to keep in mind is when we invest in the business, we have flexibility. We can lean in on investments that we think are moving -- are paying off. In the near term, we could potentially ease off on investments that are not. So we have that flexibility to -- in the expense base to invest heavily or ease up based on the environment and the macroeconomic conditions.

Our next question comes from Bill Carcache from Wolfe Research.

I wanted to follow up on the business transformation. As you continue to look more like your peers, can you discuss how you're thinking about your bank subsidiaries, how long before you start thinking about capital at the enterprise level? Have you communicated any intention to your regulators of any potential changes in that bank subsidiary versus parent structure? And is it reasonable to expect that you'd suspend the buyback until you've rebuilt capital at the enterprise level sufficient to get your CET1 up to peer levels in that sort of 10% to 11% range?

Yes, a couple of things. So we're -- based post-spin, we're considering the banking structure and what should that be. We've not made any decision yet on that as of yet. But we are evaluating structures, and obviously, we will keep our regulators apprised as appropriate as we move forward. In terms of buybacks, our view is we'll work with the Board, and we want to ensure that we are we're well capitalized, and we have -- our balance sheet is strong enough to sustain buybacks and as we move forward, that will be a decision that we make with the Board.

Understood. Separately, can you discuss how you're thinking about the interplay between the pace of normalization not just in the net charge-off rate, but also in payment rates. At a high level, do you think that net charge-offs and payment rates would eventually both normalize back to that 2019 range at a similar pace? Or do those metrics not necessarily have to move in lockstep with one another.

Yes. I think the way to think about it and Tammy will correct me if I'm wrong, of course, but the payment rate and delinquency are intertwined, right? As payment rates start to normalize back down, delinquency will start to -- you would expect to increase some. For us, as we continue to transform our book of business through new products and risk mix, I don't -- I wouldn't expect that our payment rates will get as low as what they were in 2019 pre-pandemic because our portfolio is going to look different in the future. Is it 12 months from now? Is it 18 months? That's -- who knows where the end state is, but that's, that's what I would say on that. And then even from that point forward, the book is going to continue to look different depending upon how we lever up proprietary card or co-brand relative to private label and the new products that we're adding for installment loan and Bread.

Our next question comes from Mihir Bhatia from Bank of America.

Maybe I just wanted to start, if you could go back to the Sezzle partnership, or maybe you could just give us some more details that you'd be willing to share. Just are you going to need to sign up merchants individually? Or will that -- if anyone whose offering Sezzle will get functionality to just turn it on automatically is paying for in that relationship it to Sezzle, who owns the customer relationship? Is it you? Is it Sezzle? How is the partnership going to work in terms of just where the loans sit and who gets which loan? Just any additional details you can share like revenue sharing or anything that's going on there?

Let me -- obviously, things are confidential. Let me start. So we will be integrated in the Sezzle offering for 40,000 of their merchants. So the presentment will be a settled for Sezzle. But we'll be integrated in that presentment as a choice for installment loan on 40,000 of their merchants. We will underwrite. We will service and the receivable will be on our balance sheet for installment loan. In terms of buy now, pay later, we'll be in competition essential for lineup later. So we feel good about the opportunity to work with Sezzle across the 40,000 merchants. And again, we will service and have that loan on our balance sheet. Val, any other details that we could provide that have left out?

Yes. I think you hit it, Ralph, and one of the other things I would highlight on there is we do have the ability because we do own the receivables and it's on our books and we service it. We also have the ability to cross-sell into other products. So it's a good relationship for us. It aligns very much with our distribution model, very similar at Fiserv, and gives us an opportunity to distribute that installment lending product to a 1:1 to many basis.

Understood. And then if I can ask a question just on this quarter, you had a nice benefit on NIM really on both the gross yield side and cost of fund side. Maybe talk a little bit about what drove that this quarter? How sustainable is that going forward? And like just any expectations you could share whether for Q4 or even for 2022 would be great just on both the gross yield and cost of funds side?

Thanks for the question. So on gross yield, as I talked about in the prepared remarks, it's seasonal. So I would expect the fourth quarter to come back down to that 22.5% range similar to what it was in second quarter. And it's really not going to offer a lot more comments on that going forward, except to say that our goal is to maintain strong returns and steady gross yield. As it relates to cost of funds, we're seeing continued improvement as we become less reliant on asset-backed securities or other cost of funds that are a little bit higher and growing our retail deposit base. So as we grow our portfolio, we'll fund it more with direct consumer retail deposits that have lower cost of funds. So I would expect that will continue to come down over time.

Sorry, can I just ask one follow-up? As you add more of these RBC-type relationships and Fiserv, would it -- I guess, only RBC right now, but wouldn't that push gross yields higher? And I'll jump back in queue after that.

No, that's a fair point is that when you think about an RBC relationship where it's just a direct revenue stream, that could be slightly accretive to gross yield. At the same time, as you put other products into the mix, some may have lower gross yields. So it really depends on the product mix and streams that will end up the resulting gross revenue outlook.

Our next question comes from Jeff Adelson from Morgan Stanley.

Now that we're a couple of months away from the end 2022, just wanted to get a sense of what you're seeing or what you're thinking on the trajectory and timing of your high single-digit, low double-digit receivable growth expectation for next year? Just wondering about the cadence of that? Should we be expecting this more of an end goal for the year or more of an average goal for the year?

Yes. At this point, I think we've said receivable growth in that range. The range is a range for a reason. There's a lot of factors that go into that, including obviously customer behavior and payment rates will influence, which end of the range we're at. I think you've heard from the team, our pipeline is strong. Our business activities are robust and we feel very good about consumer health, driving top line spend, credit sales and then what it turns into will be largely dependent on payment rate.

Got it. And just on the competition out there, wondering in your conversations, how the competitive tenor feels right now? It feels like everything has kind of increased, intensified in recent months. And as part of that, just wondering, there's a pretty large portfolio out there with Amazon's relationship. Are you guys involved in the conversation? Just wondering how you're thinking about that portfolio potential.

We're always involved in the conversation. And it comes down to a couple of things. One, is, is it profitable for ADS to partner or to go after that portfolio? And second, how hard will it be to integrate and how hard it will be to service? And we take all those things to account as we move forward. Some of the larger portfolios, quite frankly, are margin crushing because there are a lot of competition out there for all of the large portfolios. The beauty about ADS is we can play in the small and midsized businesses. So if you think about a $1 billion portfolio, that's a great portfolio to have, your margins may be a little thin and you have to do a lot of -- some customization. We love those portfolios, and we are in competition with those. But that magic middle, that $100 million portfolio, you put 10 of those together, that's $1 billion. The economics are usually very good on those portfolios, and they're easy to integrate and their standardization there. So while we like to go [indiscernible] we like that mid-tier portfolio that they're very, very profitable for us, and we service those very well.

Our next question is from Meng Jiao from Deutsche Bank.

Ralph, I think intra quarter, you mentioned that installment loans might be a little impacted by supply chain management issues. I just wanted to get your thoughts on, one, do you still believe that you could sort of double installment loan receivables by year-end '21? And then two, if the supply chain management issues are still persisting or have they've begun to moderate? Any color there would be helpful.

Yes, a couple of things. So I know there's been a lot of talk about supply chains. And -- if you think about where we are, we are -- right now, we haven't seen a big impact from supply chain thus far. What our merchants have done is they've extended the Christmas season. So they've extended into October, and we're starting to see some good sales there. So I'm speaking about credit cards in particular. And some of the verticals that we're in, which were luxury, beauty, apparel, they seem to be holding up fairly well. But that said, we're working with our merchants in terms of what their constraints might be going forward. So we may be impacted by the supply chain as we move forward. In terms of installment loan and doubling our receivables, I'm very pleased with where we are with Bread. As I said, we're adding partners every day. We've got strategic relationships with Sezzle and Fiserv. We are really poised to scale in 2022. We've hit a couple -- we hit a little headwinds as the back end of the year, payment rates would be probably the headwind, I would say that slowed us down a little bit. But by and large, we're really bullish on the growth for 2022.

Got you. Okay. And then I guess my second question is probably for Tammy and Perry. I think you guided to net loss rates in the high 4% range. And I think Perry mentioned profitable growth at lower than average sole loss rates. I'm curious if you expect losses to trend back to that historical 6% to 7% level? Or if you can actually see structurally lower losses given your portfolio mix change there?

Yes. I think -- thanks for the question. I think the -- from what I said earlier, I would expect structurally a lower loss rates than what that 6% to 7% range. Again, I think we -- Tammy, our underwriting is strong. We know what we're doing in this space. And -- but with the product mix that we're going after, a little bit more mix of proprietary card co-brand and some of the partners we're bringing on, I would expect us to be able to have a lower than pre-pandemic loss rate going forward.

Yes, that's right, Perry. And I think we even discussed that in the May investor call where we talked about our future portfolio mix will drive us to a lower than normal historical loss rate. And again, our continued focus will be on profitable growth going forward. And as Perry shared, certainly our credit underwriting and account management strategies are critically important to that in the future, and we continue to focus on that.

Our next question comes from Jon Arfstrom from RBC Capital Markets.

Just kind of a simple question here, maybe for you, Perry. You beat earnings estimates by, I guess, $1, almost a $1. And when you look at your numbers, going forward, is it as simple as taking out the $45 million in earnings from LoyaltyOne in saying that, that can be a run rate for your company? Or is there anything else you would call out and say now that doesn't count. Or is that just the right way to look at it as simple as that?

Yes. I mean, you have the segment results. And I think you are pretty close to looking at it at a reasonable way, right? I mean I'm not going to suggest how you should model -- run your models going forward. There are a lot of inputs into it, obviously, but that's -- as you look at LoyaltyOne, that is the value that you would extract.

Okay. And so...

Not of seasonality and things of that nature.

Yes. Yes. Okay. So I mean it's just -- and again, it's a simple question, but you're saying on a core basis, it could be high [ 3 80s ] on a quarterly basis, and we have to make our own decisions on credit cost, but it's as simple as that from your point of view?

Credit cost -- good point. The credit cost reserves you grow, how much reserve build do you have, how much investment, seasonality, all the things that go into a bit for this quarter, that is correct.

Our next question comes from Dominick Gabriele from Oppenheimer.

I had the opportunity to speak with the Sezzle CEO in [ mid 2020 ]. And there's obviously just a lot of excitement around this partnership. Maybe you can talk about what opportunity to cross-sell into that base besides just even installment loans could be? And then maybe you could talk about the difference between white labeling your product and having your Bread product and then also having at the same time the Bread logo at an existing partner. So 2 buns, so the partners branded bun and the Bread bun, is that possible? Maybe we can just walk through a few of those.

So let me start, and I'm going to ask Val to jump in. I am as excited as Charlie is in terms of our partnership together. I think a lot of respect, an aberration for Charlie. I think he's built a great product and a great company. I'm really excited to partner with them. The white label approach, I really -- I think that is an excellent approach for buy now, pay later installment loans because we end up in the buy flow, and the customer views it as just a continuation of the purchase process. And so there's no punch out. There's no downloading of an app. It's just an extension of the process and an offering, which I think is critically important. As I said before, we're not asking the customer to download our app. We are servicing the customer right there on the merchant's website. And with data and analytics and everything we do, we want to generate that next transaction for the merchant with our buy now, pay later plastic. So that, I think, is a distinguished between the white label. [indiscernible] kind of Val was at 2020, I was not. So she'll talk a little bit about cross-sell opportunities and she has some time with Charlie as well.

Great. Thanks,. So Yes, I think to build on Ralph's point around the white label, clearly a way to ensure that we are kind of front and center at the point of sale. And with Sezzle, Sezzle will be the merchant of record for those relationship. Bread will own and service the receivables. And so the consumer will also see the Bread name and they're servicing that loan and portfolio. So a nice way on the branding side. We have an opportunity on cross-sell. If you think about today, you heard Perry talk about cost of funds and increasing our consumer deposits, we have an opportunity to cross-sell on the deposit side. We also have an opportunity to cross-sell on our proprietary credit card. So as we continue to expand on some of those direct-to-consumer opportunities, we continue to have the opportunity with Sezzle to cross-sell the customer base there.

Great. And then just maybe one more on the gross yield this quarter. Just so we don't go running off and perhaps having a really high third quarter '22 yield. Could you just talk about the benefit given the reduction probably in interest and fee net charge-offs that boosted the yield quarter-over-quarter, the yield benefit quarter-over-quarter there that may not be repeatable in '22?

Yes. I don't know if I'm going to give a lot of detail into the gross yield except to the extent that this is normal seasonality that we see in our yield. When you look back to, I'd say, last year, the delinquencies starting to tick up, so you get a little bit more late fees coming back in. But outside of that, things are looking strong with in yield, and again, we've signaled that we expect steady yield outside of normal seasonality.

Our next question comes from Michael Young from Truist Securities.

Not sure if this is better for Ralph or Perry, but it's been a long time since we've seen more material inflation in the U.S. And just wanted to get your maybe high-level thoughts on impact to sales volume and average receivables versus impact to the expense base, and if that would be a net positive for ADS or not?

Yes. This is Perry. I'll take that. There's a lot of debate on inflation that we're all reading the different points of views out there, and they range the gamut. I think -- so the point of view is around inflation, the consumer's basket of goods increases. It doesn't change the credit lines and the lines that customers have available. So -- and with wage growth, perhaps that will increase lines as they demonstrate their ability to pay. So as I think about it, it can help and aid our overall sales growth as it factors into the next year so long as the customers' wage is increased to afford it. And if you look at the base of who our customers are, and Tammy can probably expand more on it, when you think about minimum wages going up and the wage growth that's happening overall and the incentives that are out there for companies to rehire, I think that's a positive for us and gives people more the ability to buy and provide more discretion in it. And these things cost a little more, that doesn't hurt our overall sales growth. The question is, does wage growth keep up with that, so that doesn't create a strain on the customer.

Yes. I mean the only thing I'd say about -- if you think about inflation, you also think about wage inflation and there is a war on talent out there. And that may impact as we move our expense base as we move forward. But I think it's environment wide, but that's where I see us getting impacted from an expense perspective.

Okay. Great. Appreciate it. And as a follow-up, I apologize it's a little different question. But just on the stores and physical store locations being opened. Do you guys have a perspective on kind of what percentage of your partners have their stores fully open? And what remaining tailwind there could be as more stores open up post kind of Delta variant?

Yes. I think all our partners have their stores open. I haven't heard of any of our partners not opening their stores. And as I go to the bricks and mortar, I think there's good traffic. I think we expect good traffic during the holiday season. People are cautious. I mean, there's mask wearing. I think everybody is obeying the rules, which I think is a good thing. As vaccinations become more prominent, I think you'll see more, more influx into the mall. So I've not seen anything that would give me a concern that the malls are not functioning as we expect -- as we've expected in this year.

Our next question comes from Reginald Smith from JPMorgan.

I wanted to talk a little bit about the Sezzle deal. It was somewhat surprising that you guys announced that. I certainly hadn't expected and it feels like an endorsement of your Bread platform. I guess the question I have is what are the advantages in your mind, the Sezzle get by using your platform rather than developing it in-house? And then my second question, a follow-up to that is, have you considered something greater than a partnership? So I'm looking at the valuation of Sezzle, I look at what you pay for Bread. I think about the dividend that you're going to receive from the loyalty spend. As you consider anything more substantial in talking to Sezzle?

So I think what Sezzle gets is a top-quality product and customer experience and it's the shortest distance between 2 points, right? It's about execution, not about [indiscernible]. So we're -- I think for both companies, that's a great advantage. We get the access to their 40,000 merchants, they get a top-quality product that they can implement faster than when they would have been in terms of development. So there's no capital outlay. It's just we're in market. So I think that's the -- for both of us, that's a win-win for both organizations. In terms of other relationships, we're strict in our balance sheet right now, and we're really focused on executing everything that's on our plate, and rather than looking for something new to put on our plate at this point.

And I'll add one point to what Ralph just said, with the proceeds from the spin or covenants of our current debt, we're required to pay down the debt. So we wouldn't the proceeds and invested somewhere else.

Understood. And if I can get one more in. My call dropped early, so I'm not sure if it was covered. But did you guys provide any color on, I guess, in-store sales versus digital sales, and anything of that nature to kind of help us understand what's going on within your mix of your business?

So if you look in the presentation, we actually provide in-store versus digital sales. And so you'll find that on the last page. And I really don't have -- we're not going to provide an outlook for that, but you can see how things are trending. And it's basically, as consumers resume as Ralph said earlier, people go back to the malls and resuming in-store, I think you're seeing that become a little bit of an increasing mix for us given our merchant partners, but still maintaining a strong digital presence. And we are impacted by a little bit of a nonrenewal in this quarter that was more digital than in store.

I think the thing to remember is 2 years ago, we were pretty much very much brick-and-mortar focus and digital sales was not a big part of our portfolio. We leaned heavily over the last 2 years in digital, and we're seeing some -- the benefits of that in the mix. So we are -- every place our customers want to transact, whether it's at the mall or online, where we're able to transact with them more now than we ever have before.

Our final question comes from David Scharf from JMP Securities.

One follow-up question, Ralph, on Bread. I know they continue to be, obviously, a lot of questions about sort of longer term, the economic model of buy now, pay later, how it may evolve. But I think one of the most difficult things maybe to get visibility into is that in contrast to private label, which historically is an exclusive arrangement. This is sort of the first product ADS is involved in, in which there's not client exclusivity. And I'm wondering, can you give us a sense, for example, when we get metrics like 30 new direct signings in the last 30 days, whether those were all exclusive arrangements or whether you were added as an additional provider to those merchants? And maybe the same thing with Sezzle to give us some sort of context about just what the current footprint already is with these merchants in terms of other providers?

Yes. So I can't speak for the 30 very merchant sign in 30 days, but I'm sure some of them may be exclusive, some of them may not be exclusive. But I think the key for us is competitive pricing and ease of use. That's going to put us at the top of the league table. Whether we are -- obviously, if we're exclusive, exclusive or not, that's going to put us to the top of the table. We have good rates. We're fair with the consumer, and we are able to -- they're able to transact with us seamlessly. I think that's the most important. Val, anything to add in terms of Sezzle, in terms of how we're approaching it?

Yes. And I would just add, I think one of the other big differentiators for us is our model. And Ralph mentioned it earlier, we do go to market as driving loyalty and sales and increasing average order value for our brand partners. Many of our competition is really more trying to disintermediate the customer in that shopping experience and positioning themselves as the start of the shopping journey through an app. And so that type of model resonates well with our partners. And so I think that's a key differentiator. And the other thing I would say on the Sezzle side, again, predominantly those relationships, there is a single party providing buy now, pay later. And so while many of them are not exclusive, most of the SMB mid-market merchants have a singular a provider that they do leverage in the point purchase.

Got it. No, that's very helpful. One follow-up, completely different topic on cost of funding, it's been a while since the topic of deposit funding was kind of broached in much detail. Any updates on the plans there? And kind of long term how that might factor in, in terms of the overall mix of your funding profile?

No, I think as I mentioned, we're expecting to come down, I'd say, at least 10 basis points per quarter for a period of time as we grow the portfolio and we increase the mix of retail deposits. So just by that mix alone, we're going to -- we'll get the benefit of that from a lower funding cost. And as Val mentioned, and Ralph mentioned, we'll cross-sell that into existing customers as well as offer direct.

So Perry, Val and Tim, we thank you for joining me today. Thank you all for joining us for the call and your interest in Alliance Data. Just to be clear, we remain focused on executing our strategy and our transformation plan and building the future. So everyone, have a terrific day, and thank you all again.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.