Alliance Data Systems Corporation

The Alliance Data Systems (ADS) Corporation appears to be in difficult waters because the company is plagued by high debt levels, rising operating costs, losses from the Epsilon divestment, a weak-performing Card Service segment, and others affecting the industry.

Within a year, the company had lost nearly 43% of its market capitalization, which now amounts to $ 5.1 billion. Over the years, this stock has fallen 26.9% from the value of industry growth of 44.1%. This stock price depreciation looks more serious considering the performance of other players, such as Visa Inc. V, Discover Financial Services DFS, and Mastercard Incorporated MA, which respectively jumped 40.6%, 46.6%, and 56.9%, at the same time frame.

What is Annoying Data Alliance?

After delivering solid performance in the past few years, the Card Services segment has held grim performances during the first nine months of 2019. Revenues from this segment have fallen due to high royalty payments to retailers associated with new clients. In fact, the company's Loyalty One segment has not been able to meet expectations lately due to a decrease in both the euro and the Canadian dollar relative to the US dollar and a decrease in revenue due to the outsourcing of additional prize inventory. During the first nine months of 2019, revenue from Card Services and Loyalty payments decreased by 1% and 6% from year to year.

The company has reported slow results. Adjusted net earnings per share missed Zacks Consensus Estimates in the last three quarters.

Data Alliance also faces challenges in the retail customer base, mainly because the credit card business is labeled private-dominant. The company has been serving mall-based traders for years. However, retailers are struggling because of fierce competition from online entities. Instead, the company penetrated new industries such as travel and beauty products.

This took a significant step in 2019, which unfortunately has a negative effect on its performance. For example, he sold the Epsilon business in July 2019, which is a marketing service company that provides end-to-end integrated marketing solutions. Revenue contributions from this segment represent 27% and 29% of total 2017 and 2018 revenues. This action only made the problem worse. Although this step has been taken by the company to focus on high-growth leads in the market and ROI Card-driving Services segment, it still remains a concern for the company.

In fact, Loyalty One business that has poor performance can also be divested to target business lines that are more profitable because it has provided a small synergy for the company.

For 2019, the company expects adjusted core EPS in the range of $ 16.75 - $ 17, the midpoint of showing a 3.5% decline from last year's reported figures. This projection is provided by the company after considering Epsilon divestment, anticipating Dutch tenders and reducing costs at the company's location.

The company has also experienced an increase in expenditure levels over the past few years due to higher operating costs and increased general and administrative costs. Total operating costs increased by 40.2% in the last five years. In the first nine months of 2019, operating costs rose 5.7% to $ 3.1 billion. Increased costs may weigh on company margins going forward.

Long-term debt from Alliance Data is also a concern, which has risen 43% in five years. As a result, interest expenses more than doubled in the same time period. The interest earned now stands at 2.3, far lower than the industry average of 23.3, which reflects its inefficiency to repay debt. The company has grappled with a high level of debt, which has led to greater financial risk.

With more than 60% of Canadian households collecting prize miles, the AIR MILES Prize Program strengthens its position as Canada's main coalition loyalty program. If the actual redemption by the AIR MILES Prize Program is more than expected or if there is an increase in costs associated with redeeming the AIR MILES prize miles, profitability is likely to be hit. In addition, the AIR MILES prize miles issued are directly proportional to the AIR MILES prize miles available for future redemption. This, in turn, might reduce income. AIR MILES issued fell 4.3% and 0.4% respectively in 2017 and 2018. In the first nine months of this year, the same thing dropped 0,2% year on year.

Corrective Steps Taken

The company has developed a cost reduction plan, which is expected to result in additional cost savings of more than $ 100 million for 2020.

Even though ADS has witnessed an increase in its retail base and although ADS has a big advantage over its label credit partners such as banks and the private sector, analysts are still worried. The new management team is turning the company into a technology-oriented private-enabled credit card company.

It has also formed alliances to strengthen portfolios and maintain customer loyalty. For example, it was chosen to provide a joint brand credit card service for Sony, which is likely to increase customer loyalty and increase digital engagement. In October, the company's card service business signed a long-term agreement with Lands' End to provide co-brand and private label credit card services.

Can the Stock Stage return by 2020?

The company's shares have lost 16% in the past three months, underperforming an industry increase of 3.6%.

The current year's scenario does not look encouraging for companies that currently have Zacks # 4 (Selling) Rating. Zacks Consensus estimates for 2019 revenue are likely to undergo a downward revision, showing a 25.6% decline from the figure reported the previous year. The consensus sign for revenue is expected to move 27.9% to the south in the same time period. In addition, the long-term growth rate is 11.7%, lower than the industry average of 13.7%.

Therefore, investors must wait and see how the stock prices in the coming months.

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