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Morningstar | Synchrony Financial Gets Back on Track; Renews Its Sam's Club Partnership

Private-label issuer Synchrony Financial got back on track in the fourth quarter in a big way. Much to our surprise, the company was able to renew its partnership with Sam’s Club. Despite the $800 million lawsuit Walmart filed against Synchrony in November, the two parties were able to reconcile their differences. This is probably the best news Synchrony has received since it won the PayPal portfolio. Based on end-of-year balances, we estimate Sam’s Club accounts for a high-single-digit percentage of Synchrony’s credit card portfolio. For now, we’ll be maintaining our $28.50 fair value estimate as we digest today’s announcement, results, and 2019 forecast. However, as we update our model to reflect full-year results and the surprise retention of Sam’s, investors should expect some increase in our fair value estimate. Given today’s sharp increase in shares, the stock no longer trades at a discount to our fair value estimate, and we consider shares fully valued.

During the call, there was little clarity as to how Synchrony was able to renew the Sam’s Club partnership. Management mentioned that contract terms and structure were essentially the same. Though CEO Margaret Keane noted that Sam’s and Walmart have two entirely different management teams, we’d have to think Synchrony had to make some changes or assurances to preserve the partnership. It’s also possible that Synchrony's tech capabilities are less of an issue for a warehouse club that’s more focused on brick-and-mortar retail. In addition to Sam’s Club, Synchrony was able to renew PayPal, Lowe’s, JCPenney, and Amazon during the year. While this is certainly good news, shares in JCPenney are trading near penny stock territory, suggesting the market questions the beleaguered retailer’s future. This would be another headwind to Synchrony’s growth. However, given the retailer’s well-known struggles, we suspect this shouldn’t come as a surprise to the market.

Besides the Sam’s Club renewal, there were other bright spots for Synchrony. Excluding PayPal, the company’s 90-plus day delinquency rate declined by 5 basis points. In addition, management guided that receivables should grow 5%-7% in 2019 excluding the Walmart departure. However, we have to think this assumes JCPenney remains a partner and the economy continues at its current pace.

Though there was much talk of Synchrony's digital capabilities and investments in artificial intelligence and machine learning, besides management’s comments, we continue to see mixed evidence Synchrony is taking its technology investment more seriously. Information processing expense increased 19.2% from the previous year which we consider a good sign. However, this expense item still only accounts for 2.7% of this quarter’s net revenue. Furthermore, in September, we counted 556 information technology employees with LinkedIn profiles at Synchrony. Today, that number stands at 597 profiles so there does appear to have been some improvement in IT. However, our hopes that Synchrony is making a meaningful investment in technology partly faded when we visited Synchrony’s careers website. This past September, there were 203 total job openings posted on the Synchrony careers site, 76 of which were for technology. Today, there are 133 openings, only 35 of which are classified under information technology. It would appear the cost cuts are hitting hiring. However, given the company’s needs in technology, we’d hope the company would still be doing a lot of hiring in IT. We’ll continue monitoring this, but it does appear the company is torn between making the necessary investments without placing too much impact on the bottom line.