Is Alliance Data (ADS) Doomed to Have a Terrible 2020 Too?

Alliance Data Systems Corporation ADS seems to be in rough waters as the company is plagued by high debt level, rise in operating expenses, loss from its Epsilon divestiture, weak performing Card Service segment, et al is affecting the industry.

In a year’s time, the company has lost nearly 43% of its market capital, which now stands at $5.1 billion. Year to date, the stock has shed 26.9% of value against its industry’s growth of 44.1%. This share price depreciation looks more grave in the light of other players’ performances, such as Visa Inc. V, Discover Financial Services DFS and Mastercard Incorporated MA, which have surged 40.6%, 46.6% and 56.9%, respectively, over the same time frame.

What is Bothering Alliance Data?

After delivering solid performances in the past few years, the Card Service segment has been putting up a dismal show over the first nine months of 2019. Revenues from this segment dropped due to high royalty payments made to retailers associated with new clients. In fact, the company’s Loyalty One segment is unable to meet expectations lately due to decline in both the euro and the Canadian dollar relative to the U.S. dollar and decreased revenues on account of outsourcing of additional rewards inventory. During the first nine months of 2019, revenues from Card Services and Loyalty payments dipped 1% and 6% year over year.

The company has been reporting sluggish results. Its adjusted earnings per share missed the Zacks Consensus Estimate in the last three quarters.

Alliance Data has also been facing challenges in the retailer customer base, mainly because of the dominant private-label credit card business. The company has catered to mall-based merchants over the years. However, the retailers struggled due to stiff competition from online entities. Instead, the company penetrated new industries like travel and beauty products.

It took significant measures in 2019, which sadly had a negative effect on its performance. For example, it sold its Epsilon business in July 2019, which was a marketing services firm providing end-to-end, integrated marketing solutions. Revenue contribution from this segment represented 27% and 29% of total 2017 and 2018 revenues. This action only aggravated its problems. Although the move has been taken by the company to focus on its market-leading high-growth and an ROI-driving Card Service segment, it still remains a concern for the company.

In fact, its underperforming LoyaltyOne business can also be divested to target more profitable lines of business as that has been providing little synergy to the company.

For 2019, the company expects its adjusted core EPS in the range of $16.75-$17, the mid-point indicating a 3.5% dip from the year-ago reported figure. This projection was provided by the company after it considered its Epsilon divestment, anticipated Dutch tender and cost reductions at the corporate location.

The company has also been enduring an elevated expense level over the past few years due to higher cost of operations and an increased general and administrative expense. Total operating expenses escalated 40.2% in the last five years. In the first nine months of 2019, operating expenses rose 5.7% to $3.1 billion. Escalating expenses might weigh down the company’s margins going forward.

Alliance Data’s ballooning long-term debt has also been a concern, which has increased 43% in five years’ time. Consequently, interest expenses have more than doubled over the same time frame. Its times interest earned stands at 2.3, much lower than the industry average of 23.3, reflecting its inefficiency to pay back debt. The company has been grappling with high debt level, which exposes it to greater financial risk.

With more than 60% of the Canadian households collecting reward miles, the AIR MILES Reward Program cemented its position as Canada’s premier coalition loyalty program. In the event of actual redemptions by AIR MILES Reward Program being more than expected or if there is an increase in costs related to the redemption of AIR MILES reward miles, profitability will likely take a beating. In addition, AIR MILES reward miles issued is directly proportional to AIR MILES reward miles available for redemption in the future. This, in turn, might dent revenues. AIR MILES issued slipped 4.3% and 0.4% in 2017 and 2018, respectively. In the first nine months of this year, the same dipped 0.2% year over year.

Remedial Steps Taken

The company has devising an expense reduction plan, which is expected to result in more than $100 million incremental cost savings for 2020.

Though ADS has been witnessing its retailer base upgrade and although it has a major advantage over its bank-like and private label credit peers, analysts are still worried. The new management team is revamping the company into a tech-enabled, marketing-services-oriented, private-label credit card company.

It has also been forging alliances to strengthen its portfolio and retain customer loyalty. For instance, it is selected to provide co-brand credit card services for Sony, which would likely boost customer loyalty and improve digital engagement. In October, the company's card services business inked a long-term deal with Lands’ End to provide co-brand and private label credit card services.

Can the Stock Stage a Comeback in 2020?

Shares of the company have lost 16% in the past three months, underperforming the industry’s rise of 3.6%.

The current-year scenario does not appear encouraging for the company that currently has a Zacks Rank #4 (Sell). The Zacks Consensus Estimate for 2019 earnings is likely to suffer a downward revision, suggesting a 25.6% fall from the prior-year reported number. The consensus mark for revenues is expected to move 27.9% south over the same time frame. Moreover, its long-term growth rate stands at 11.7%, lower than the industry average of 13.7%.

Hence, investors should wait and see how the stock fares in the months ahead.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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