Bread Financial Holdings, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Bread Financial Holdings, Inc. is a tech-enabled financial services company providing payment, lending, and saving solutions, with a focus on the white-label credit card market and point-of-sale (POS) financing.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Bread Financial is a tech-forward financial services company operating within the consumer credit space. It primarily provides white-label credit card and other loan products, primarily to retail customers and small-to-medium sized businesses. The core of their business is in the “buy now, pay later” space. In addition to their financing arms, they also have a range of saving accounts and options.

  • Revenue Distribution: Bread Financial’s revenue streams are diversified across three main areas:
    • Net interest income: This is where they earn interest from credit card and other loan receivables. Net interest income is the difference between the income the company earns from its lending activities and the expense of obtaining the funds for that lending.
    • Fee and commission income: Revenue that comes from various fees including servicing loans, transactional fees, and commission fees, such as interchange fees from credit card transactions.
    • Trading income: Income generated from the sale of financial instruments, in a similar method to market makers. This may include gains and losses from currency fluctuations.
  • Industry Trends: The consumer credit industry has been experiencing significant transformation with the growth of digital technologies, and the rise of online shopping. Key trends include:
    • The growing popularity of “buy now, pay later” (BNPL) services.
    • Increased emphasis on personalized financial solutions.
    • Continued pressure on interest rates and credit quality.
    • Greater importance on digital and mobile platforms.
  • Margins: The company’s operating margins are variable depending on the credit cycle, and can be impacted by factors such as credit quality, default rates, the cost of funding, and macroeconomic conditions.
  • Competitive Landscape: The financial services sector is highly competitive. Bread Financial competes with several established players in banking and credit and more agile fintech companies. A couple of their competitors are Synchrony Financial, and Capital One.
  • What Makes Bread Financial Different: Bread Financial differentiates itself through a focus on innovative, tech-enabled white-label solutions, with a focus on helping their merchant partners expand their customer access and their overall credit penetration.

Financial Analysis

Bread Financial’s financial health can be analysed across the income statement, balance sheet, and cash flow statement.

  • Income Statement:
    • Revenues have shown steady growth over the past years, though the recent inflationary environment and increasing interest rates are headwinds.
    • Net interest income has been variable, affected by the yield curve and the company’s ability to source funds.
    • The company has a history of fluctuating profitability.
  • Balance Sheet:
    • The company does not have a strong balance sheet, with high levels of leverage and low liquid assets.
    • Goodwill and intangible assets make up a significant portion of their book value.
    • The company’s liabilities have also grown.
  • Cash flow Statement:
    • Cash flows can fluctuate and depend on changes in credit and loan performance.

Moat Analysis

Bread Financial’s moat is relatively narrow. Here is how that conclusion is derived from:

  • Network Effects: Credit card and payment services are reliant on a network of payment processors and merchants, but these networks are easily replaceable, or replicated. It is difficult for an individual company to create an unbreachable network moat, hence BFH only has limited network effects.

  • Intangible Assets: While brands are important for attracting customers, for a financial company, it is the perception of “trust” and “dependability” that matter. Bread Financial’s business isn’t a consumer brand, but a white label company, so it doesn’t directly have strong brand power.

  • Switching Costs: Switching to another payment platform or a new financing firm is not particularly difficult for a consumer or a merchant; they are readily available and provide a similar value. While some users can become attached to a particular product in a financial ecosystem, switching costs in the payment ecosystem are relatively low, as shown by user’s willingness to switch to a new product if the offer seems more attractive.

  • Cost Advantages: BFH does not seem to have any substantial advantage on the cost side.

Moat Rating: 2 / 5 The company has limited competitive advantages and a narrow moat that relies on customer stickiness and financial prowess. However, these advantages are limited in their strength and scope, and are therefore not an extremely defensible moat.

Risks to the Moat and Business Resilience

Several factors could erode Bread Financial’s competitive advantages:

  • Technological disruption: The financial industry is being rapidly disrupted by new tech startups with very innovative payment and banking solutions. The speed of technological advances makes it more challenging for any legacy player like BFH to maintain an advantage for long.
  • Increasing competition: The white-label financial services market has increasingly attracted new competitors, so that profitability is reduced and market share can be eaten away.
  • Credit cycles: Bread Financial’s performance can be highly variable depending on the credit cycle, so a downturn could lead to high defaults and bad debts, resulting in losses and reducing the long-term profitability of the business.
  • Dependence on macro factors: A significant portion of the business’s success relies on macroeconomic factors, such as levels of employment, consumer debt, inflation, and interest rates. An increase in the unemployment rate, consumer debt, or interest rates may affect the business negatively, and therefore, harm the moat.
  • Regulatory Changes: There is a chance of the emergence of new rules and regulatory requirements that may have a material adverse effect on the business.
  • Data Breaches: An increasing number of data breaches may lead to loss of trust and reputation damage among consumers, and also subject the company to substantial fines.

Business Resilience: The company has shown resilience through periods of economic downturn and financial volatility, however, they are not immune to substantial problems. * Their recent profitability numbers show their resilience, although their ROIC has declined considerably because of their over-reliance on acquisitions.

Understandability Rating

Understandability: 3 / 5

While Bread Financial’s core business model (offering white-label credit cards and POS financing) is relatively straightforward, the complexities surrounding its valuation and accounting practices can require a deeper knowledge of the financial industry.

Balance Sheet Health Rating

Balance Sheet Health: 3 / 5

While the balance sheet does not pose an immediate risk to the company’s operations, it isn’t necessarily as sound as other similar financial companies.

  • The company carries a debt load of $10+ Billion.
  • Their ability to grow depends on their access to new debt and equity financing.
  • The current assets aren’t as much as their liabilities.