Morningstar | Synchrony Has Work to Do to Rebound From the Loss of Walmart
We anticipate Synchrony will be able to maintain excess returns in the short run while the company works to address the issues surrounding Walmart's departure. Synchrony Financial provides the store-branded credit cards of many of the country's largest retailers and benefits from these long-term mutually beneficial relationships. Synchrony's partnerships include Amazon, Sam's Club, Gap, and J.C. Penney. Since 2008, Synchrony has routinely generated returns on equity exceeding 15%. In the coming years, we believe Synchrony will be able to sustain returns on equity in the midteens while returning a substantial amount of cash to shareholders. We believe Synchrony's balance can increase leverage without putting shareholder returns at risk.The loss of Synchrony's partnership with Walmart is a significant blow to the company. Despite comments that losing the partnership will be earnings-accretive as opposed to retaining it, it signals to us that Synchrony will struggle to realize the growth achieved after being liberated from General Electric. Furthermore, we have to conclude that Synchrony has an inferior technology platform to rivals, which seems to be of increasing importance to retailers. As a result of this disparity in technology, we believe it leaves Synchrony competing on price, which we expect will dampen margins. In addition, Synchrony can only prosper so long as its partners remain in business. In 2018, Synchrony partner Toys R Us filed for bankruptcy, while beleaguered retailer J.C. Penney is one of its biggest partnerships. Our biggest concern is that Synchrony's performance will improve as pain increases for retailers, which could give a skewed picture of the company's prospects. Once retailers file for bankruptcy, it will provide a significant headwind to Synchrony's growth.Synchrony surprised us by re-signing Sam's Club as a partner. It does appear that technology is less of a concern for retailers that rely more on a physical presence, retailers like Lowe's, a partner of Synchrony.Synchrony Financial is a savings and loan holding company and financial holding company. Through its subsidiaries, the company delivers a range of financing programs, as well as consumer banking products, across key industries including digital, retail, home, auto, travel, health and pet. The company provides a range of credit products through its financing programs which it has established with a group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which it refers to as its partners. Through its partners, the company provides their customers a variety of credit products to finance the purchase of goods and services.
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