Alliance Data Systems: Let’s get this Bread!*
Alliance Data Systems (ADS) is a provider of retailer loyalty solutions, most prominently through its white-label credit card program and the Air Miles rewards program in Canada. Let’s be honest – Alliance Data Systems has not been a stellar performer in the Global Equity Growth Fund. We originally purchased the shares in 2018, with our sights set on a turnaround through the streamlining of the business. However, its core business deteriorated more than we anticipated, and the pandemic-driven closure of physical retailers negatively impacted the company’s 2020 earnings. Entering 2021, we are encouraged by the improving physical retail environment as well as steps the company has taken to strengthen its strategic position. These have involved a renewed focus on growing with online retailers, hiring an outsider CEO and, most importantly, the acquisition of Buy Now, Pay Later (BNPL) company “Bread”.
BNPL is a growing consumer finance method that provides point-of-sale instalment and loan options. According to Morgan Stanley, BNPL could grow at a 44% CAGR through 2023. Unlike ADS’ store-branded credit card program that appeals to older demographics, millennials and Gen Z prefer BNPL, with options that provide merchants with opportunities to increase conversion and average order size. BNPL has also enabled fast growth in big-ticket purchases like Peloton, allowing consumers to match payments over the useful life of the purchase. Leading BNPL companies like Afterpay and Affirm are integrated as stand-alone brands at POS thus retailers lose part of the customer experience as buyers are routed through the BNPL apps. The advantage of ADS’ Bread is that it can be offered as a white label solution. The technology can be quickly integrated with existing retailers’ POS processes and rounds out ADS’s suite of consumer finance options. Success with Bread would provide ADS’ new management team with additional credibility and potentially a higher valuation. The company will provide a three-year outlook in mid-2021, which could be a catalyst for the share price.
*A phrase originally used to mean “let’s get money” as bread = dough and dough is a common slang term for money. Nowadays, the term “let’s get this bread” is more loosely defined as a sort of battle cry in a sense, calling upon the will of the person(s) to succeed, not necessarily in just gaining monetary funds.
This Focus Stock is written by our Head of Research, Jamie Murray.
The purpose of this is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.