A Storied History of Adaptability
Bread Financial Holdings, Inc. (BFH) is a tech-forward financial services company that has navigated the dynamic consumer credit landscape with strategic agility. As the company continues to adapt to shifting market conditions, its commitment to responsible growth, digital innovation, and prudent risk management has positioned it as a formidable player in the industry.
Bread Financial, founded in 1996, initially focused on credit card processing and marketing services, specifically providing private label credit card programs and retail-based loyalty and marketing services to its brand partners. The company's journey has been marked by significant strategic moves and acquisitions that have shaped its current form.
In 2012, Bread Financial expanded its capabilities by acquiring Epsilon, a marketing services firm, enhancing its data-driven marketing offerings. This acquisition allowed the company to provide more comprehensive services to its partners, combining financial products with advanced marketing solutions.
A major restructuring occurred in 2016 when Bread Financial spun off its LoyaltyOne segment, which operated the AIR MILES reward program in Canada, as a separate publicly traded company. This strategic decision was aimed at streamlining the business and focusing more on core credit and lending operations. However, this move later presented challenges when LoyaltyOne filed for bankruptcy in 2023, leading to litigation and potential tax liability for Bread Financial.
In 2019, the company underwent a significant rebranding, changing its name from Alliance Data Systems to Bread Financial. This name change reflected the company's shift towards offering more personalized payment, lending, and saving solutions, moving beyond its original focus on private label credit cards.
Throughout its history, Bread Financial has demonstrated remarkable resilience in the face of various regulatory changes and macroeconomic conditions affecting the credit card and consumer lending industry. The company's ability to adapt and evolve its business model has been crucial in addressing these challenges and continuing to deliver value to its brand partners and customers.
Strengthening the Balance Sheet and Mitigating Risks
Bread Financial's commitment to responsible growth is evident in its disciplined approach to capital allocation and risk management. During the third quarter of 2024, the company strategically repurchased $262 million in convertible notes, reducing its parent-level debt and strengthening its balance sheet. This proactive move not only derisked future dilution associated with the convertible notes but also improved the company's tangible book value per share by 12% year-over-year.
Furthermore, Bread Financial has made significant strides in diversifying its funding sources, with direct-to-consumer (DTC) deposits now accounting for 41% of its average funding, up from 35% a year ago. This shift has reduced the company's reliance on more volatile wholesale funding, enhancing its financial flexibility and resilience.
Navigating Regulatory Uncertainties with Agility
One of the key challenges facing Bread Financial has been the regulatory landscape, particularly the ongoing uncertainty surrounding the Consumer Financial Protection Bureau's (CFPB) final rule on credit card late fees. The company has proactively executed a mitigation strategy in close coordination with its brand partners, including implementing pricing changes such as increased APRs and statement fees.
While the ultimate outcome of the CFPB rule remains uncertain, Bread Financial's strategic actions have positioned the company to navigate this evolving regulatory environment. The company remains confident in its ability to generate strong returns and achieve its long-term financial targets, regardless of the litigation's resolution.
Diversifying the Product Suite and Partner Base
Bread Financial's comprehensive suite of payment, lending, and saving solutions has enabled it to cater to a diverse range of customer segments, from Gen Z to Baby Boomers. The company's balanced product mix, which includes private-label, co-brand, and proprietary offerings, as well as its buy-now, pay-later (BNPL) solutions, has contributed to its resilience in the face of changing consumer spending patterns.
Moreover, Bread Financial's partner base, which encompasses large consumer-based businesses across a variety of industries, provides the company with a well-diversified revenue stream. Recent additions, such as the Saks Fifth Avenue and Hard Rock credit card programs, further expand Bread Financial's reach and growth potential.
Investing in Digital Capabilities and Operational Excellence
Bread Financial's commitment to digital transformation and operational efficiency has been a key driver of its success. The company's continuous investments in technology modernization and digital advancement have enhanced the customer experience, improved enterprise-wide efficiency, and reduced risk.
By leveraging data insights and white-label technology, Bread Financial has been able to deliver innovative solutions that meet the evolving needs of its partners and customers. This focus on digital excellence has not only strengthened the company's competitive positioning but also positioned it to capitalize on the growing demand for seamless, personalized financial services.
Financials and Liquidity
Bread Financial's financial performance reflects its strategic initiatives and adaptability in a challenging economic environment. The company's diversified revenue streams and disciplined cost management have contributed to its resilience. As of the third quarter of 2024, Bread Financial maintained a strong liquidity position, with ample cash and available credit facilities to support its operations and growth initiatives.
For the fiscal year 2023, Bread Financial reported revenue of $4.29 billion and net income of $718 million. Operating cash flow (OCF) and free cash flow (FCF) both stood at $1.99 billion for the year. In the most recent quarter (Q3 2024), the company generated revenue of $983 million, representing a 5% year-over-year decline. Net income for Q3 2024 was $2 million, with OCF of $456 million and FCF of $482 million.
The company's prudent approach to capital management is evident in its healthy capital ratios and conservative credit reserve modeling. Bread Financial's tangible book value per share growth of 15% compounded annually since the third quarter of 2021 underscores its commitment to enhancing shareholder value.
As of December 31, 2023, Bread Financial reported a debt-to-equity ratio of 1.47, indicating a balanced capital structure. The company's liquidity position remained strong, with $3.59 billion in cash and a $700 million senior unsecured revolving credit facility fully available as of September 30, 2024. The current ratio and quick ratio both stood at 1.44 as of December 31, 2023, suggesting a healthy short-term liquidity position.
Looking ahead, Bread Financial has provided guidance for the full year 2024. The company expects average loans to be down low single digits on a percentage basis relative to 2023, with total revenue (excluding gains on portfolio sales) projected to decline in the low to mid-single digits. Full-year net interest margin is anticipated to be lower than in 2023, while adjusted expenses (excluding the impact from repurchased convertible notes) are expected to decrease by mid-single digits compared to the previous year. The company forecasts a full-year net loss rate in the low 8% range, around 8.3%, and a normalized effective tax rate between 25-26%, excluding impacts from repurchased convertible notes.
For the fourth quarter of 2024, Bread Financial anticipates that net interest margin will benefit from CFPB mitigation actions and a lower cash position, offsetting normal seasonal pressures. Expenses are expected to be higher than the adjusted Q3 figure due to seasonally higher sales volumes and increased marketing expenses. The company also noted a $10 million shift of losses from Q4 2024 to Q2 2025 due to hurricane-related customer accommodations, which will slightly lower the Q4 net loss rate.
Navigating Macroeconomic Headwinds with Prudence
The macroeconomic environment, marked by persistent inflation, rising interest rates, and concerns about a potential recession, has presented challenges for Bread Financial. The company has responded with proactive credit tightening measures and a conservative approach to its credit reserve modeling, maintaining an elevated reserve rate of 12.2% as of the third quarter of 2024.
Despite these headwinds, Bread Financial remains cautiously optimistic about the future, citing signs of stabilization in consumer spending and gradual improvement in the economic outlook. The company's diversified product mix, disciplined risk management, and healthy capital position have been instrumental in navigating the current macroeconomic landscape.
Charting a Course for Sustainable Growth
As Bread Financial looks ahead, the company's strategic priorities remain centered on responsible growth, digital innovation, and operational excellence. With a strong balance sheet, ample liquidity, and a well-diversified partner and product portfolio, Bread Financial is poised to weather ongoing challenges and capitalize on emerging opportunities in the consumer credit space.
The company's commitment to enhancing shareholder value is reflected in its tangible book value per share growth of 15% compounded annually since the third quarter of 2021, as well as its disciplined approach to capital allocation, including the recent convertible note repurchases.
Bread Financial's experienced leadership team, coupled with its proven ability to adapt to industry dynamics, positions the company as a compelling investment opportunity for those seeking exposure to the evolving consumer finance landscape. The company's single reportable segment focuses on providing a comprehensive suite of payment, lending, and saving solutions to its diverse partner base and direct-to-consumer customers.
As of September 30, 2024, Bread Financial had $17.93 billion in total credit card and other loans, net of a $2.19 billion Allowance for credit losses. The credit card loans segment exhibited a Delinquency rate of 6.40% and a Net principal loss rate of 7.80% for the three months ended September 30, 2024. The company's Direct-to-Consumer (DTC) products, including the Bread Cashback American Express Credit Card, Bread Rewards American Express Credit Card, and Bread Savings products, have gained traction, with $7.48 billion in DTC retail deposits as of September 30, 2024.
Bread Financial's business model, which leverages its digital-first approach, data insights, and white-label technology, positions the company to drive growth and deliver exceptional customer experiences in the dynamic consumer credit landscape. As the company continues to navigate regulatory uncertainties and macroeconomic challenges, its focus on responsible growth and strategic agility will be crucial in maintaining its competitive edge and delivering long-term value to shareholders.