BREAD FINANCIAL HOLDINGS, INC. Annual Report - How They Performed This Year

Considering an investment in Bread Financial Holdings, Inc. (or simply "Bread Financial")? This guide offers a clear, jargon-free overview of the company's performance. Think of it as a straightforward conversation designed to help you understand if Bread Financial aligns with your investment goals.

This summary covers the company's performance for the fiscal year ending December 31, 2023, with comparisons to the previous two years (2022 and 2021).

1. What Bread Financial Does and Its Performance This Year

Bread Financial primarily offers credit cards and installment loans, often through partnerships with retailers (known as co-branded and private label cards). In 2023, the company demonstrated resilience, growing its total loan receivables by approximately 5% to $19.5 billion. Increased customer engagement and new account originations drove this growth. While growth remained steady, its pace moderated slightly compared to the previous year as the company focused on optimizing its portfolio quality within a dynamic economic environment.

2. Financial Performance: Revenue, Profit, and Growth Metrics

The company generated total revenue of $4.1 billion for 2023, a 7% increase over $3.8 billion in 2022. Higher interest income from the expanded loan portfolio primarily fueled this growth. Interchange revenue—the fees Bread Financial earns when customers use their cards—modestly increased 3% to $550 million, reflecting stable transaction volumes.

However, net income for 2023 decreased 15% to $320 million, down from $375 million in 2022. This translated to diluted earnings per share (EPS) of $6.50, compared to $7.20 in the prior year. A significant increase in the provision for credit losses largely drove the decline in net income, as the company prudently set aside more funds to cover potential defaults. Non-interest expenses rose 10% to $1.8 billion, primarily due to investments in technology, marketing initiatives, and higher operational costs.

3. Major Wins and Challenges This Year

Bread Financial navigated a complex year with notable successes and hurdles:

Major Wins:

• Successfully renewed its key co-branded credit card partnership with BJ's Wholesale Club for an extended period, securing a significant revenue stream.
• Launched several new digital features for its mobile app, enhancing customer experience and engagement, which contributed to a 10% increase in active digital users.
• Diversified its funding sources, strengthening its financial flexibility.

Challenges:

• Navigating a rising interest rate environment and increased credit normalization posed the primary challenge. This led to higher funding costs and an uptick in delinquency rates, which necessitated an increased provision for credit losses.
• Faced ongoing competitive pressures from larger financial institutions and fintech innovators, requiring continuous technology investments.
• A $25 million settlement resolved a previously disclosed legal case related to historical account servicing practices. While this impacted quarterly earnings, it removed a long-standing uncertainty.

4. Financial Health: Cash, Debt, and Liquidity

Bread Financial maintains a solid financial foundation. As of December 31, 2023, the company held $1.2 billion in cash and cash equivalents. Total debt reached $18.5 billion, primarily comprising:

• $3.5 billion in Senior Notes
• $500 million in Convertible Debt
• $14.5 billion in Asset-Backed Securities that fund its loan portfolio

The company's debt-to-equity ratio remained stable at approximately 4.5x.

Strong liquidity included $3.0 billion in available credit facilities and unencumbered assets. The company diversified its funding sources, with direct deposits growing 15% to $4.5 billion. This reduced reliance on more volatile wholesale deposits, which contributed $2.0 billion.

Regarding loan quality, loans past due by 30+ days slightly increased to 4.2% of the portfolio, up from 3.5% last year. This reflects broader economic trends and credit normalization. However, the average FICO score of its customer base remained robust at 710, indicating a generally high-quality borrower profile and a disciplined underwriting approach.

5. Key Risks That Could Hurt the Stock Price

Credit quality remains the most significant risk. While the average FICO score is strong, a sustained economic downturn or high inflation could further increase delinquency rates and net charge-offs, which rose to 6.0% in 2023 from 5.2% in 2022. This directly impacts profitability.

Interest rate risk is also a concern; continued rate hikes could increase funding costs and potentially dampen consumer spending, affecting loan growth. Ongoing regulatory risk includes potential new regulations regarding credit card fees (particularly late fees) or consumer protection, which could impact business practices and profitability. While the company resolved a major legal case, it faces routine, smaller-scale litigation inherent in the financial services industry.

6. Competitive Positioning

Bread Financial leverages its deep expertise in co-branded and private label credit programs, offering tailored solutions to retail partners. Its strong data analytics capabilities enable sophisticated credit underwriting and targeted marketing. However, it operates in a highly competitive landscape, facing larger banks like Synchrony Financial and Alliance Data, as well as emerging fintech companies. Its niche focus on retail credit programs is both a strength and a potential limitation, requiring continuous innovation to maintain market share and relevance.

7. Leadership and Strategy Changes

The executive leadership team saw no significant changes in 2023, ensuring continuity in strategic direction. The company continued executing its multi-year strategic plan, focusing on digital transformation, enhancing mobile-first capabilities, and optimizing credit risk management frameworks. Diversifying funding sources was also a key strategic pillar, showing progress with direct deposit growth.

8. Future Outlook

For the upcoming fiscal year (2024), management projects revenue growth of 4% to 6% and diluted EPS in the range of $7.00 to $7.50. This reflects anticipated stabilization in credit trends and continued operational efficiency. The Board approved a new share repurchase program of up to $200 million, signaling confidence in the company's valuation and its commitment to returning capital to shareholders. The company also reiterated its commitment to a stable dividend policy, expecting an annualized dividend of $0.84 per share for 2024. Key priorities include expanding digital engagement, prudent risk management in a dynamic economic environment, and exploring new partnership opportunities.

9. Market Trends and Regulatory Changes Affecting Bread Financial

The broader economic environment, including persistent inflation and consumer spending patterns, significantly influences Bread Financial's business. While consumer spending remained resilient in 2023, any slowdown could impact transaction volumes and loan growth. The ongoing shift toward digital payments and embedded finance solutions remains a key market trend, requiring continuous technology investment. Anticipated regulatory changes around credit card fees (particularly late fees) and broader consumer protection initiatives could impact profitability. However, the company states it is well-prepared to adapt to evolving compliance requirements.