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Bread Financial Holdings, Inc. (BFH)

Fair Value – 49 USD    Market cap. – 1.4 USD Bil

Business strategy and prospects

After the sale of Epsilon in 2019 and the spin-off of LoyaltyOne in 2021, Bread Financial is now exclusively a consumer credit company, issuing credit cards under its own brand and buy now/pay later businesses are the only two product lines. However, Bread’s retail credit card business is under pressure as it continues to lose major partners, losing to Wayfair and Meijer in 2020, and BJ’s wholesale club to Capital One in early 2022. It is worth considering the loss of a retail partner as a constant threat to Bread, since the company does not have a competitive advantage that would give it an advantage in maintaining partnerships during contract extension negotiations. 

Bread also has to contend with competitive threats from BNPL firms that target the U.S. retail market and seek to sign agreements with Bread partners. These firms still make up a relatively small portion of U.S. retail, but Bread takes the threat seriously. The company’s acquisition of the original BNPL Bread company, as well as its decision to adopt the name as its own, were made with the intention of accelerating the introduction of its own competing offering.

As part of the LoyaltyOne allocation, Bread used the proceeds from the transaction to reduce its significant debt burden. This strategy is evaluated positively, as Bread uses significant borrowed funds, especially given the low credit quality of its portfolio of receivables, which historically has seen net write-offs well above the industry average. Experts still believe that more needs to be done to put Bread in a good financial position, but the additional income and associated debt reduction are a significant improvement in Bread’s balance sheet. The timing behind these steps was well chosen; the cost of lending will rise as economic growth slows and credit card debt increases, leading to an increase in net write-offs across the industry, with Bread’s credit losses being the highest in our coverage. 

On a more positive note, the company has made significant progress in expanding its retail deposit base, which currently accounts for more than a quarter of its total funding. This trend provides the company with a significant increase in net interest margin, which reduces its dependence on external financing.

Bulls opinion: 

– Bread Financial’s restructuring efforts have been very successful in reducing the company’s costs.This allowed it to effectively adapt to its smaller size and maintain profitability.

– Many Bread Financial partners rely on IT for data collection and loyalty programs. Switching costs protect these partnerships from competitive threats.

– The company’s credit card business is well capitalized, which will help protect Bread in the event of a deterioration in credit results.

Bears opinion:

– The cost of lending in Bread’s portfolio is significantly higher than that of similar companies, which exposes the firm to risk as economic conditions worsen.

– Bread Financial has a concentrated partner base, which makes it vulnerable to the loss of one or more larger partnerships.

– The company faces competitive threats from both promising firms offering BNPL services and large traditional banks, which often seek to poach its retail partners.

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