Why Bread Financial is brushing off softer credit sales

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UPDATE: This article includes comments from the bank's earnings call.

Financial services company Bread Financial is confident consumer spending will stay strong, even as there are signs that credit sales are weakening.  

"We've not seen a change in consumer behavior from the second quarter to third quarter, and I really don't expect a change in consumer behavior in the fourth quarter," said Ralph Andretta, CEO of Bread, during Thursday's third-quarter earnings call. "I think you'll see consumers self-regulating. It'll be a moderate sales season." 

Credit sales softened in the quarter ending Sept. 20, falling 3% to $6.5 billion, according to the earnings release. Co-branded credit cards through more than 100 partners made up over half of credit sales in the third quarter, according to the company's earnings presentation. 

Average loans ticked up 1% to $17.8 billion, according to the company. 

Andretta said he wasn't concerned about slowing credit sales, and noted that the company was starting to see "signs of stabilization" in consumer spending. 

The Columbus, Ohio-based Bread's portfolio renewals remained strong in the long term, according to Andretta. "Ninety percent of our book is good through 2025; 80% is good through the end of 2026, and an overwhelming number of our top 10 programs are good through the end of the decade. So we feel really good about it," he said.  

The company touted progress in its co-brand card relationships. It completed its acquisition and launch of its Saks Fifth Avenue co-branded credit card in the third quarter, and launched a Hard Rock Cafe co-branded credit card in October. The company also added "several" other partners in travel, electronics and entertainment, Chief Financial Officer Perry Beberman said on the call. "As a result, travel and entertainment is now our largest vertical from a sales perspective, at 32% of total credit sales," Beberman said.

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All in, Bread Financial beat analysts' estimates on revenue but fell short of earnings expectations in the third quarter due to repurchase agreements for $262 million of convertible notes. 

Revenue hit $983 million, down 4.7% year over year and ahead of analysts' estimates of $977.06 million, according to S&P Capital IQ.  

Revenue fell "primarily due to lower late fees resulting from our gradual shift in product mix leading to a lower proportion of private label accounts and reduced merchant discount fees resulting from lower big ticket credit sales," Bread said in a press release Thursday.

Net income came in at $2 million, below analysts' estimates of $90.4 million. Diluted earnings per share was 5 cents, under analysts' expectations of $1.85, according to S&P Capital IQ.

Net income and diluted earnings per share fell due to a $96 million impact from two privately negotiated agreements to buy back a portion of Bread's outstanding convertible senior notes due in 2028, according to the earnings release. 

Like other credit card companies this quarter, Bread logged an increase in delinquencies and net losses, with delinquencies rising 10 basis points to 6.4%, and net losses jumping 89 bps to 7.8%.

The company froze delinquency buckets in FEMA-identified zones due to the impact of recent hurricanes, which represents about 5% of the company's credit portfolio. These actions will result in a modest shift of approximately 10 million in losses from the fourth quarter of 2024 to the second quarter of 2025, Beberman said. 

Allowance for credit losses coverage ratio landed at 12.2% of the portfolio in Q3, flat from Q2 and a 10 bps increase from the same period a year ago. 

2024 guidance was unchanged in the third quarter, assuming no impact from the Consumer Financial Protection Bureau's late fee rule. 

"Our 2024 outlook reflects slower sales growth as a result of continued moderation in consumer spending and our proactive strategic credit tightening, both of which are pressuring loan and revenue growth and the net loss rate," according to the earnings release. "In addition, our outlook assumes ongoing interest rate decreases by the Federal Reserve, which will pressure total net interest income."

In the second quarter, Bread increased its full-year revenue guidance on the assumption that the Biden administration's hotly contested credit card late fee rule — which would cap credit card late fees at $8 — wouldn't take effect until 2025. In its July earnings call, Bread said it would increase its APRs and institute fees for customers who opted for paper statements as a way to offset lost revenue from late fees. 

The credit card company has been preparing for the CFPB's late fee rule since at least the first quarter of the year, when the lender's earnings continued to be weighed down by slowing consumer spending and an increase in charge-offs. 

Other credit card issuers have been battling slower consumer spending and an increase in charge-offs in the third quarter. Synchrony Financial, one of Bread's main competitors in the co-branded credit card space, said in the third quarter that 30-plus-day credit card delinquencies rose 38 bps year over year to 4.78%, and its purchase volumes fell 4% to $45 million. 

Discover Financial also logged a decline in credit performance in the third quarter, with net charge-offs increasing 125 bps year over year to 5.28%. American Express tallied an uptick in card payments that were 30 days or more past due, which rose to 1.3% from 1.2% a year ago. JPMorgan Chase, the largest credit card issuer in the United States by volume, forecasted more credit headwinds in its card business.