Morningstar | It Will Take Time for Alliance Data Systems to Regroup and Return to Its Recent Growth Trajectory
We believe that Alliance Data Systems growth is slowing and the company has few avenues to accelerate its growth. We believe the company is starting to experience headwinds from retailer bankruptcies. Bon Ton Stores, one of the company's larger retail partners, filed for bankruptcy. Another significant partner, Ascena Retail Group, hasn't produced a GAAP profit in its last three fiscal years. We believe Alliance's recent heady growth is behind the company, growing receivables will be substantially more challenging, and efforts to improve growth could come with higher credit risk. Investors holding out hope that the company will unlock value through a divestiture should be cautious. Management has a history of overpromising and underdelivering. Though ADS' impressive growth may be behind the company, we do find bright spots in the company's business model. Retailers benefit in multiple ways from providing a private-label credit card financed by Alliance Data Systems. When consumers use a private-label card, the merchant bypasses all interchange fees. Most important, it gives retailers the ability to track their best customers’ purchases and target those customers, a service provided by Alliance’s Epsilon segment. This enables Alliance Data Systems to send highly targeted emails and display ads to a shopper’s mobile device, driving incremental sales. For ADS to continue to be successful, the company will have to expand its capabilities in technology and data and offer partners something beyond an additional revenue stream. We do not understand the logic of divesting parts of its digital marketing business at a time this is becoming more critical to retail partners. The company’s LoyaltyOne segment is driven by Air Miles, a Canadian consumer rewards program that has historically accounted for 15% of operating income. Given management's missteps in rolling out changes to its miles redemption program and the resulting scrutiny and regulation from Canadian parliament, we do not anticipate a revitalization of growth anytime soon.Alliance Data Systems is a provider of data-driven marketing and loyalty solutions. The company operates in two segments: LoyaltyOne? and Card Services. LoyaltyOne provides coalition and short-term loyalty programs through the Canadian AIR MILES? Reward Program and BrandLoyalty Group B.V. Card Services encompasses credit card processing, billing and payment processing, customer care and collections services for private label retailers as well as private label and co-brand retail credit card and loan receivables financing, including securitization and other funding of certain credit card and loan receivables that it underwrites from its private label and co-brand retail credit card programs.
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