Retail industry upheaval poses challenges for Alliance Data

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The last year has been rather tumultuous for Alliance Data Systems, the Columbus, Ohio-based credit card issuer that specializes in the mall-based retail sector.

Two large retail partners, Forever 21 and Pier 1 Imports, have declared bankruptcy, and a third affiliate, Victoria’s Secret, has been closing stores amid changing shopping trends.

Alliance Data is also facing pressure from shareholders to reduce its heavy debt load. The company has had three different CEOs since June. Its stock price has declined by about 55% in the last 11 months.

mall retailers
Forever 21 and Pier 1 Imports, two retail partners of Alliance Data, have declared bankruptcy in the last year.

New CEO Ralph Andretta announced on Feb. 20 that he would spend the next 100 days on a listening tour, and that he would work to develop a strategic plan for the firm by late spring.

So the company’s chief financial officer, Tim King, was in a tough spot Wednesday during remarks at an investor conference held by Keefe, Bruyette & Woods in New York. King urged patience regarding the path forward while speaking in blunt terms about the firm’s problems.

“Obviously for the last nine months we have been in a state of flux,” he said. “The stock is trading down because, you know, folks don’t believe us. We’ve had about three, four quarters in a row where folks have felt like we faded, and we’ve missed on our numbers. We need to produce long-term, steady growth. And Ralph and I certainly understand that.”

Alliance Data, which was born from the 1996 merger of The Limited’s credit card business with a J.C. Penney transaction processing operation, has been hit hard by the rise in online shopping. In the short term, that trend could be magnified as U.S. shoppers who are spooked by the coronavirus outbreak make more purchases from their phones and laptops.

But even back in January, analysts at Compass Point Research & Trading said that the slowdown in the traditional retail sector was having a negative effect on Alliance Data’s business. “These struggling retailers also weigh on the company’s credit quality,” the analysts stated in a Jan. 14 research note.

When retail chains close certain locations or shut down entirely, consumers who have credit cards from those stores may become less likely to make their monthly payments. The percentage of loans that get charged off may also rise as a result of a decline in the total sales volume.

In late January, Alliance Data, which makes loans through its Comenity Bank subsidiary, announced that it expected its charge-off rate to rise this year by 20-30 basis points from its 6.1% rate in 2019.

Andretta is a longtime credit card industry executive whose career has included stints at American Express, Bank of America and Citigroup. He does not have much experience in the private-label card business, which is the niche where Alliance Data specializes.

Private-label credit cards, a product that many retailers use to drive sales, are often issued to consumers with marred credit.

At the investor conference Wednesday, King shared some recent comments by Andretta that reflected the new CEO's learning curve about the company’s core business.

Andretta said, “Oh my goodness, I would have been shot if I’d been at Citibank with 6% losses,” according to King, who added: “But then he quickly turned that into, ‘And I get the fact that … we’re getting paid for that risk.’ ”

King did offer a few clues Wednesday about Alliance Data’s likely path forward, saying that the company needs to develop better technology in certain areas.

For example, King said that approximately 40%-50% of the firm’s lost sales occur when customers at the cash register do not have their credit cards with them. In some instances, sales clerks have to make a phone call in order to identify the credit card account, which can lead the customer to opt for another payment method, he said.

King also acknowledged that Alliance Data has fallen behind certain fintech lenders that offer consumer installment loans in partnership with retailers at the point of sale. “We need to have that technology,” he said.

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Credit cards Consumer banking Private-label Retail industry Credit quality
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