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Alliance Data Systems Corp (NYSE:ADS)
Q1 2020 Earnings Call
Apr 23, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Alliance Data's First Quarter 2020 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Ms. Vicki Nakhla of AdvisIRy Partners.

Ma'am, the floor is yours.

Viktoriia Nakhla -- Senior Associate

Thank you Carol. By now, you should have received a copy of the company's first quarter 2020 earnings release. If you haven't, please call AdvisIRy Partners at 212 750-5800. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; and Tim King, Executive Vice President and Chief Financial Officer of Alliance Data. Before we begin, I would like to remind you that some of the comments made on today's call, and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at alliancedata.com.

With that, I would like to turn the call over to Ralph Andretta. Ralph?

Ralph Andretta -- President & Chief Executive Officer

Thank you. Good morning. Thank you for joining this morning's call to discuss our first quarter results. We are in unprecedented times, but our organization has responded immediately, and effectively to the pandemic challenge. We have moved swiftly during the month of March to activate business continuity plans and implement work-from-home protocols. I am proud of our associates and the global leadership team at Alliance Data, who have completely rose to the challenge. We are fully operational and performing well throughout this crisis.

Today, I will discuss our immediate response to COVID-19, review our first quarter results and update you on the steps we have taken to improve our operating model with an eye toward investing in our future. On Slide 4, you can see a summary of the actions we have taken to support our associates, card members and consumers, brand partners and clients and, of course, our communities. First and foremost, we have taken a number of steps to protect the health and safety of our workforce.

Currently, 95% of our associates worldwide are working from home. We have instituted paid leave, where appropriate, as well as other health and welfare ccommodations to support our associates during this difficult time. With a small number of associates who must still come to the work site, we are paying bonuses, practicing social distancing and staggering shifts. For our card members and consumers, we are proactively introducing a number of forbearance options including the option of skipping the next payment without a late fee rather than enrolling in a formal hardship program.

We are also waving late fees where appropriate. For our brand partners and clients, we have maintained a regular dialogue to understand, both their current and future needs and to support them as they, too, adjust their business operations. At Card Services, we are working with our brand partners to optimize their budgets and marketing support and shifting resources to areas that have become more relevant like e-commerce. At AIR MILES, we have added merchandise reward options to increase engagement as collectors interest shifts from aspirational items such as travel to more practical domestic merchandise and stay at home essentials.

At BrandLoyalty, we are extending the length of certain short term loyalty programs, allowing consumers, a better opportunity to collect and redeem points prior to program expiration. The goal is to increase in store traffic for our grocer clients. Additionally, we immediately responded to community emergency relief needs, in virtually all of our key locations including contributing to food banks and mental health services organizations for youth. We allowed collective and our AIR MILES program to donate miles to charitable organizations for relief efforts.

We also accelerated corporate charitable donations planned for later in the year, to support immediate emergency relief efforts and continue to match our associates' charitable donations dollar-for-dollar. These actions exemplify Alliance Data's commitment to responsible business practices and demonstrate our sustainability strategy in action, as we respond to the needs of our key stakeholders during this time.

I'm proud of these efforts and our culture of partnership, perseverance and resolve, in navigating this difficult period. Now, let me talk about the first quarter. It's best to break this down between the first two months, and then March, when COVID-19 began to have the impact on our retail partners and customers. Our business was tracking well in January and February with revenue up mid single digits, and profitability increasing by double digits, as we benefited from higher yields, lower operating expenses and cost reductions made last year.

As retail partners closed and travel slowed during March, we began to experience consumer spending declines which continues today. In Card Services, our credit sales declined more than 50% as brick and mortar retail essentially stopped, partially offset by shift to e-commerce. At LoyaltyOne, we saw a similar story with business holding strong through mid March, but falling off sharply as travel related redemptions declined 90%. The combination of strength in January and February, and softness in March, led to a 4% consolidated revenue growth for this quarter.

Trends at the end of March for Card Services was similar to what we are experiencing today. Retail, brick and mortar sales were down more than 80% but e-commerce was down in low single digits. As for the first quarter profitability, we benefited from approximately $50 million of the $150 million of cost savings we expected for this year.

Operating expenses were down $90 million in the first quarter, adjusting for one-time benefits. Tim will discuss our savings in greater detail from the actions we took in 2019. Considering our adoption of CECL effective January 1, and the impact of COVID-19, we increased our loan loss reserve by $404 million, resulting in first quarter earnings before taxes of $25 million. Based on what we know today with April nearly over, and our current economic assessment, we believe this is the appropriate level of reserves for the economic slowdown and related loan losses.

It puts us at a reserve percentage of 12%. Of course, we continue to monitor the economic outlook, which remains fluid and will adjust further if necessary. Looking at losses in the COVID-19 environment, we are likely to see increased pressure on loan losses in the back half of 2020, consistent with the reserve actions taken this quarter. We're also seeing increased delinquencies and requests for forbearance, which we would expect to continue given increasing unemployment.

We do expect some mitigation from the government relief programs, including additional unemployment benefits, and other stimulus programs. We also expect to see a benefit when the states begin to relax stay at home restrictions and begin a staged reopening. Given the uncertain climate and the limited visibility into the duration of this health crisis, and its impact on the economy and consumer spending and consistent with other companies, we are suspending our guidance for 2020. Our priorities are to protect our liquidity, to work proactively with our customers and partners, and to be ready for a phased reopening of the economy.

We continue to proactively manage the business with an eye toward enhanced liquidity and competitive positioning. We are not taking our eye off the ball on strategic repositioning and continue to look for operational efficiencies, cost Management improvement through the eyes of a fresh CEO. We are taking prudent steps today to strengthen our financial position and mitigate risks, we may face during this next several months. To that end, we announced a reduction of our quarterly dividend to $0.21 from $0.63, which will reduce our annual dividend by approximately $80 million.

Further, unlike many other publicly traded companies, we have suspended our share buyback program. We also have a number of other levers we can pull as needed to add to our liquidity and reduce our expense base. Tim will speak more fully regarding our liquidity, but I want to remind you of what I said last month. We have over $1 billion of liquidity at the parent level, with no near term maturities on our approximately $3 billion of debt. We continue to rigorously stress test the business, prudently using more aggressive cases than we modeled even a month ago. Based on our underlying assumptions of large reductions in GDP, increased unemployment, less disposable income and lower retail spend the outcome is the same. We are cash flow and EBIT positive under some fairly dire economic scenarios.

To navigate through the current period, we are focused on prudent credit and risk management, near term expense reduction and investing in our business strategically. For credit and risk management, we have put our recession readiness plan into action and continue to move through its stages. Compared to 2009, we believe our portfolio is better positioned today, as it is more diversified, and we have enhanced our scoring model which stratifies risks via dozens of different metrics.

We're also skewed toward a higher percentage of prime card members today. We have proactively implemented our forbearance programs which are being actively embraced by our card members. Since the middle of March 3% of accounts and 4% of balances have engaged in this program. It's still early days but we expect this program to continue to grow.

As part of our recession readiness plan, we were managing toward higher credit scores and have tightened our customer credit. Consequently, our credit exposures are down by 25% from the start of the year. We closed inactive accounts to further limit credit exposure. We have taken a disciplined approach to expense management and operations. Actions already had been taken, as evidenced by the $150 million of savings we expect for 2020 and we have identified and begun to execute on over $100 million of additional cost savings. These savings will come from adjustments in marketing spend, renegotiation of contracts and operating expenses, all while maintaining our service levels.

Finally, as we focus on our future, we continue to explore strategic investments for our business. Areas of interest include digital and Information management, new customer facing products and services, and continuing to enhance our recession readiness capabilities. To sum up, we are pleased with the early progress made on repositioning Alliance Data and generating cost savings, which was evident in strong performance we had in the first two months of this year. Our business continuity plan is functioning well, we have taken actions to further manage our risk, strengthen our liquidity to improve our resilience and identify additional opportunities to reduce our cost structure. Importantly, we continue to thoughtfully evaluate strategic investments that would enhance our business in a post-pandemic environment.

Now, I'll turn the call over to Tim for a more detailed review of our financials, Tim?

Tim King -- Chief Financial Officer & Executive Vice President

Thank you Ralph and good morning everyone. Let's turn to Slide 5, where I'll start with an overview of our consolidated results. Revenues grew 4% in the first quarter, driven by higher yields in our Card Services business and consistent with our expectations. We also saw increases in our LoyaltyOne segment while adjusted for currency fluctuations and the sale of Precima. We benefited from large expense savings across all areas of our business, including corporate, card and LoyaltyOne. And all the expense initiatives we undertook last year, generated approximately $90 million with direct operating savings. As Ralph discussed, we made significant improvements in our payroll, facilities and marketing costs. However, income from continuing operation was down 83% year over year.

The driver of this decline was our provision expense of $404 million, as we stepped up our reserves considerably for potential future losses. Looking at the business pre-provision demonstrates the underlying business benefited nicely from the revenue and decreased expenses. Pre-provision, earnings before taxes was up $216 million or 46%. Net income and net income per diluted share were down 80% and 70% respectively consistent with our increase in provision expense.

Let's turn to Slide 6, where I'll discuss LoyaltyOne. Revenue for this line of business was down, 3%, to $198 million, and adjusted EBITDA, net increased 5% to $58 million adjusting for Precima which was sold in January of 2020 and the effects of the currency fluctuation, revenue increased 7% and adjusted EBITDA increased 6%. Breaking the results down further, AIR MILES revenue, excluding Precima, increased 1% on a constant currency basis, primarily due to an increase in brand revenue associated with strong issuance growth. AIR MILES issued increased 5% in the first quarter, with strong increases in January and February, part of the slowing in March due to the COVID-19.

Brand royalties revenue increased by 11%, on a constant currency basis, due to a strong performance in our grocery clients. A strong start to 2020 was tempered in March as clients reduced promotional efforts, due to an already strong store traffic, and redirected focus on sourcing. Moving to Slide 7, I'll review the underlying card metrics. Credit sales were down 3% on the first quarter, as Ralph mentioned heading into March we are trending toward high single-digit growth. In the month of March, we saw clear downward pressure on our sales.

As we sit today, activity remains down almost 50% year to year. Normalized card receivables, which include held-for-sale receivables were down 1% on a quarter to $18.6 billion. We saw pressure from the sales tail off late in the quarter, prior to this, we were trending toward low digits growth. At the end of the period -- our end of period receivables was $17.7 billion were up 5% year-over-year, and as expected, this was due to the ramping up of our '19 vintage. Gross yield was 25.5% up 140 basis points, due to the slowing growth, and the ramping up of new receivables

Operating expense, as a percent of receivable, excluding mark-to-market adjustments was 8.2% down to 130 basis points year-over-year, that is excluding from the cost reductions we have discussed. Our principal loss rate was 7% up 60 basis points and consistent with our expectations at the start of the year. Our delinquency rates of 6% was up 80 basis points. We do expect both our principal loss rate and our delinquency rate to increase as we are seeing deterioration owing to the effects of COVID-19 and the lower denominator, due to a lighter sales.

We would expect related charge offs to be evident in the second half of the year. Finally, our ROE of 18%, was down from 32% a year ago. This also is solely a function of this significant increase in allowance during the first quarter Turning to Slide 8, I'll review Card Services' financial results. Card Services revenue increased 5% while earnings before taxes and adjusted EBITDA were down 88% and 84% respectively, entirely due to the increase in provision for loan losses.

Our first quarter provision was $656 million, up 160% or $404 million from last year. This led to an adjusted EBIT net of $47 million, and earnings before taxes, of $32 million. Our operating expenses of $385 million were down 24% year-to-year, embedded in the savings are the cost reduction for marketing, payroll, facilities and consulting expenses. Adjusting for the mark-to-market and gain on sale, our operating expenses would have been $401 million which would be $44 million or 10% better than last year.

Moving to provision expense, there are a couple call outs. First, as we expected charge offs were up year-over-year. However, the big increase in our provision expense, was the allowance bill. For the quarter, we added $336 million to our allowance through the P&L and another $644 million to the CECL adoption, for a total increase in our allowance of $989. Our quarter end allowance is now 184% of work -- ended at the end of 2019. In total, we now have $2.15 billion in allowance, which is over 12%, or end of period receivables of $17.7 billion.

The last item worth note on this page, is our funding costs. There was a slight increase year-over-year, that 4% this was driven by a modest increase in our cost of funds. Our cost of funds, increased to 2.4% for this quarter from 2.3% one year ago. Let's turn to Slide 9 and I'll give you an overview of our liquidity. Starting with the company, at the end of the March, we had $1.1 billion of available liquidity which was a combination of $588 million of cash on hand and $500 million available on our revolver.

In addition to the healthy liquidity position, out of abundance of caution, we have taken additional steps to strengthen our balance sheet. Consistent with others, we have suspended our share repurchase programs and we have reduced our dividend. As Ralph mentioned, we are looking at a number of other avenues to further reduce our costs which would improve our incoming cash positions.

Turning to the banks. There too, we are well positioned. Cash of the bank is $3.9 billion they have $2.5 billion in equity, very strong capital ratios even after paying a $75 million dividend to the parent. We've not encountered any issues raised in deposits where we have been active in both the retail and broker markets. We have also been successful in the securitization market, where we recently renewed a $2 billion of capacity. To summarize, we feel the core businesses while hurt by the pandemic are still functioning well, making money.

We have provided for a substantial increase in charge-off through our provision for loan losses. Our banks are well capitalized and have large cash positions. At the parent level, we have plenty of cash and liquidity. We've taken further steps to manage expenses and do not have any refinancing risk for almost three years.

I'll now turn it back over to Ralph.

Ralph Andretta -- President & Chief Executive Officer

Thank you Tim. In closing, I started my tenure with Alliance Data halfway through the first quarter and approximately one month prior to the onset of COVID-19. I am immensely proud of the immediate and successful mobilization of our teams and the response efforts which continue. It is also not lost on me that next to protecting the health and safety of our associates during this time, earning the trust of our valued investors and analysts is among my top priorities. As such, I have been and will continue to be committed to being accessible and communicating transparently and directly, with this important stakeholder group.

Alliance Data is moving forward on a path to reposition business, consistent with our strategic review and to emerge more -- and to emerge from this crisis, a more efficient competitor. At the same time, we are thoughtfully investing in the future. We are working hard to do all of this, while continuing to support our key stakeholders in any way we can, and show we are a partner of choice.

As I said on the March analyst call, because of prudent and proven actions to responsibly manage all aspects of our operations, Alliance Data has come through many tragic and economic events, better positioned. I am confident this will be no different. We are managing through the COVID-19 environment, we are implementing a more efficient and effective operating model and thoughtfully investing in the future.

With that, thank you, and be happy to open up the line for some questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question this morning comes from Sanjay Sakhrani from KBW. Please go ahead.

Sanjay Sakhrani -- KBW -- Analyst

Thanks, good morning, and I hope you guys are doing well. I wanted to ask about the reserve build assumptions first. If I'm doing my math correctly, based on sort of the day one assumptions you made for the CECL build, you're assuming about an 8% charge-off rate under the recessionary view that you have. Do you guys think that, that's appropriate? Maybe you could just talk contextually about the macro assumptions you made, and sort of where you expect the loss rate to pan out under this scenario. And I think if you hear some of the other issuers and banks that have reported, they've said the macro forecast has actually deteriorated since quarter end. So, maybe you could just speak to what that might mean for you guys, as we look into the second quarter? Thanks.

Ralph Andretta -- President & Chief Executive Officer

Hey Sanjay, thanks for the question. Actually, let me start with the end of your question and work my way backwards, which is we actually clearly can see the economy as we set that CECL later in the month than I think some of our competitors. So, we did have a pretty good look into mid-April and thinking about all the economic environments. And of course, when we set the CECL, it's going to be a variety of economic indicators. But, like a lot of our competitors, we stressed that, we've stressed it. We stress GDP, we stress unemployment, it pushed our unemployment rates and some of our stress scenarios north of 10% some of our GDP -- I guess, contractions of 30%, depending on the quarter. So, we did stress it, variety of different ways. We felt we had a pretty good look late in the quarter -- late, meaning as into the first couple weeks of April to set that and we did not set a specific charge off number, we looked to the economic overlays, we looked at whether delinquencies were to set our CECL level.

Sanjay Sakhrani -- KBW -- Analyst

Okay. And then are you -- you're assuming a recovery inside your macro assumption?

Ralph Andretta -- President & Chief Executive Officer

Yes, we are. So we think that we should start coming out of this on a rolling basis at the end of Q2, starting to get back to some type of normalcy toward Q3. We did, of course a stress test to make sure that we're being conservative on the CECL side of that. But, we did expect a recovery by the latter half of the year.

Sanjay Sakhrani -- KBW -- Analyst

Okay. All right, great. And then, I guess second question for Ralph. I know you had embarked on a listening tour and I know unfortunately we've thrown a wrench into sort of what you might have decided at the point that you finished it or concluded it. But, you're pulling guidance and obviously, a lot of structural change might occur over this situation unfolding. I'm just thinking at a high level, how different ADS might look based on your preliminary review, and what you might see unfolding given you've been around in previous recessions? Thanks.

Ralph Andretta -- President & Chief Executive Officer

Yes Sanjay, hope you're well as well. I think a couple of things. I just wanted to take a step back. I joined ADS because it was a company that had really good bones and had really good reputation that had been -- you know, had a couple of bad years and my view was, this was an organization that we could certainly move quickly without a bureaucracy of a large organization, and I still believe and see that. So, for me obviously my listening to her -- my listening and discovery to her got cut a little short, but the way we responded to COVID-19 really gives me a lot of confidence that we can become a more efficient and effective organization, going forward.

We're able to pivot, you know, reduce our operating costs and improve our margins as we go forward. But, as importantly really invest, where we think where the consumer is going to be. So, digital and online, was investments that we'll continue to make. I think the avenues that will be more important is clearly here and we'll continue to invest there and you know customer facing capabilities and continue to move to digital and mobile. So, my thesis hasn't changed, and I think this has really put a spotlight on why our investments are important in the near term.

Sanjay Sakhrani -- KBW -- Analyst

All right, thank you.

Operator

Our next question comes from Darrin Peller from Wolfe Research. Please go ahead.

Darrin Peller -- Wolfe Research -- Analyst

Hey, thanks guys. You know, maybe just to help us understand revisiting the structural opportunity versus risk for someone like yourselves in the sense that, I think you guys have spent a lot of time and investment over the years on being able to help your clients, your merchants with -- as you mentioned, just a minute ago omni-channel and would be curious to hear the kind of demand you're getting right now from the end market for that upgrade. What you can do to help them out and maybe on the other side of all those, maybe any type of new percentages or numbers that give us a sense of what part of your portfolio you think would be really able to survive and benefit from those trends around omni-channel -- those technologies that you can help them with versus those that really are relying on just physical brick-and-mortar without any type of on-demand or omni-channel capabilities?

Ralph Andretta -- President & Chief Executive Officer

Yes. It's Ralph. So, we are we are in constant contact with our partners and ensuring that we are -- assessing what their needs are, assessing how they want to move forward. So, the shift of our -- some of our marketing resources to online was clearly evident and the continued switch to ensuring that we have the right online capabilities is our focus going forward. You know, no matter where the customer shops, whether it's in the mall or in their living room or on their phone, in their car we're going to be there to provide the right capabilities for them to have bigger baskets and have that ability to you know get engaged with the brand. So, for me it's about -- it's about helping our brand partners, enhancing their customers' experience with that brand. So, I view this as certainly an opportunity to enhance our digital capabilities. You know, I think in terms of bricks-and-mortar, 25% of our sales -- or our portfolio is probably bricks-and-mortar, but they've also coupled with each of those bricks-and-mortar organizations, certainly have online capabilities and that's what we're helping our brand partners focus on now, which was online capabilities.

Darrin Peller -- Wolfe Research -- Analyst

Okay. All right, now that's helpful. So, I mean, look segmenting the portfolio for us, we're all trying to figure out -- I think most investors are kind of looking through the second quarter right now, and probably even 2020 to some degree. You mentioned your liquidity is in a sound position to take advantage and kind of weather the storm. So, we're trying to figure out structurally, how a) what size someone like ADS can be on the other side of all this, and then structurally if you're going to be able to win market share, by helping these merchants or maybe others out, and it sounds like has end -- demand been coming in already and these conversations already having to help along, this process?

Ralph Andretta -- President & Chief Executive Officer

Yes. I mean, good times or bad, we're always in conversations with our merchants to make that -- and partners to, enhance their sales, enhance their market share. Now, it's a matter of talking to them to plan their emergence from it, how they are going to emerge from this -- when -- making sure we're coordinated with the timing, making sure where they need us most and right now, where they need us most is the capabilities online, but we are working with them on a pretty regular basis to talk about a staged reopening during the course of this year.

Darrin Peller -- Wolfe Research -- Analyst

Yeah. All right. And just last question, I know it sounds like you touched on this, but with regard to credit quality, look, I mean you mentioned in the prior cycles I remember also, just seeing peak charge offs at around 10%. I'd be curious, what's the dynamic in this environment that would give you confidence, and what kind of rate should we be thinking about? I mean, is it potentially something that could be 12% to 14% or any thought process on that? Thanks guys.

Ralph Andretta -- President & Chief Executive Officer

So, if I just think on -- we've stretched our business to the last recession and I think that's a -- it's a good barometer for us and through every stress test, through every dire scenario, we are cash flow positive and EBIT positive as we exit 2020. That said, there are certain things that are available to our consumers now that weren't available during the Great Recession. The economic stimulus to the consumer wasn't available during the Great Recession, it's available now. And early days, but we've seen some good pick up when those stimulus checks came out, in terms of our customers and card members, reaching out proactively to make payments. So, it gave us a bit of confidence and early days, but certainly people are -- are certainly meeting their obligations.

Darrin Peller -- Wolfe Research -- Analyst

Okay. Thanks guys.

Operator

Our next question comes from Andrew Jeffrey from SunTrust. Please go ahead.

Ralph Andretta -- President & Chief Executive Officer

Hey Andrew, you're breaking up a little on us. Hey Vicki, go to the next question, we'll see if we can get Andrew back in.

Operator

Next today is Bob Napoli from William Blair. Please go ahead.

Bob Napoli -- William Blair -- Analyst

Thank you. And good morning and also hope everybody's well. If I recall, going back to the last recession with charge-offs peaking at 10% I think the market -- the stock market grossly underestimated the profitability at higher charge-off levels and I think that the company was able to stay profitable at even materially higher charge-offs. What is the maximum charge-off rate that this company can withstand for say a period of a year without having significant losses and liquidity challenges?

Tim King -- Chief Financial Officer & Executive Vice President

Look, clearly we test our banks at a variety of different stress test, it's going to depend on how long. We tested it back to the last recession, we remain profitable and cash flow positive. It's going to be a combination of both that charge-off rate as well as what happened with our receivables for liquidity and cash positions. We tested it for a variety of different scenarios, including the peak charge off we saw in the recession, decreases in receivables -- receivables staying flat and in all those cases, we stay cash flow and income positive.

Bob Napoli -- William Blair -- Analyst

Okay. What are you seeing so far in April from a payments perspective? What should we expect out of the payment rate or I mean are you -- have you seen -- you have due dates throughout the month, I mean have you seen any significant -- what type of change have you seen in payment rates, delinquencies as we've gone through April?

Ralph Andretta -- President & Chief Executive Officer

This is Ralph. So, in terms of payment rates, if I look at payment rates, year-over-year our payment rates have not gone down. So, payment rates are essentially stable. We're seeing people proactively reach out to us to make payments. Now, people are proactively also looking at forbearance programs. But that said, the forbearance programs people are taking advantage of, are shorter in duration 30 days or 60 days as opposed to a 12-month forbearance program. So, we're seeing people actively want to get a little relief, but also engage in terms of paying their obligations.

Bob Napoli -- William Blair -- Analyst

Thank you. That's helpful. And the 50% decline in spend volume that you've seen in April has that -- I mean what percentage of your spend is currently e-commerce and online and have you seen -- did that trend -- is it continuing to decelerate or has it bottomed out?

Tim King -- Chief Financial Officer & Executive Vice President

I talked about in my opening comments, we've seen a 50% decline in bricks and mortar. But we -- we, in the beginning, we did see an uptick in e-commerce. Our e-commerce spend is about 30% to 40%, that's where we see -- that's where we pretty much land on e-commerce spend, now that'll fluctuate, but we've seen that increase a bit during the crisis.

Bob Napoli -- William Blair -- Analyst

And I guess, again through the month of April that -- so the 50% was bricks and mortar, so it's a combination e-commerce, so overall blended you're down 40%-ish and again, can you give any color on the trend over the month?

Tim King -- Chief Financial Officer & Executive Vice President

Yeah. So what we've been seeing is similar to the end of March, we've seen our collective sales down 50%, bricks and mortar are down almost to nothing 10%, 20%, 90% -- I mean 10%, 20%, and we're making the rest of that up on our e-commerce group, and our e-commerce is actually down slightly, but doing pretty well.

Bob Napoli -- William Blair -- Analyst

Okay. And I guess last question, just a follow up, I guess on the customer base and is there any -- I mean, what is your confidence level that -- I mean, obviously this is an unprecedented environment that your customer base -- I mean, what percentage of your customer base, do you think is at risk? So, I mean is this company 30% smaller coming out of -- in a potentially, like in a worst case scenario a 30% smaller company, coming out of this before -- and you have to grow on top of that or just any feel for what percentage of your customer base is that risk, is it more than 30%?

Tim King -- Chief Financial Officer & Executive Vice President

So, are you -- are you referring to our retail partners or -- our consumer? The retail partners?

Bob Napoli -- William Blair -- Analyst

Yes. The retail partners. Yes.

Tim King -- Chief Financial Officer & Executive Vice President

Yes. A good question. We're obviously watching that very closely. It's tough for us to tell at this point, because we don't know what type of government support any of our retail partners will get, what type of forbearance on their rent payments. Certainly, we expect it to be smaller, we've run some stress, but just it's too early for us to talk of it, we just don't know how it's going to affect our retailers being -- post, the type of help they're going to get from the government and some of their forbearance programs, debt, rent etc.

Bob Napoli -- William Blair -- Analyst

And you can, under a smaller business you can maintain -- you could hit targeted returns, obviously you have work to do on the organization.

Tim King -- Chief Financial Officer & Executive Vice President

You know, there's one thing, clearly Ralph and I have a very, very sharp focus on is going to be the expenses and making sure we have the expenses. Luckily, this doesn't snap overnight, so when they start seeing the sales start dropping, our receivables start dropping, if that were to ever happen, we can adjust our cost basis into that. So relatively low fixed overhead is going to be the variable associated with the attrition we might have to have in a call center, natural attrition to match it with the receivables drop, but a small base. Yes, we could be profitable and we would be profitable.

Bob Napoli -- William Blair -- Analyst

Thank you. I appreciate it.

Operator

Our next question comes from Andrew Jeffrey from SunTrust. Please go ahead.

Andrew Jeffrey -- SunTrust -- Analyst

Is this better guys, I'll try again?

Ralph Andretta -- President & Chief Executive Officer

Much better.

Andrew Jeffrey -- SunTrust -- Analyst

Okay. Excellent. Appreciate your patience with me. I wonder, Ralph if you could elaborate a little bit on underwriting standards. I know you mentioned curtailing some credit lines, and this is a dynamic environment -- heard, at least one credit bureau this week talk about the challenges of trying to ascertain employment and income, given furloughs and compensation cuts and things like that. I know historically Alliance hasn't used FICO scores necessarily to underwrite. Are there specific changes and assumptions you're making in your underwriting criteria that try to account for sort of the dynamic environment today where people may be out of work for a little while and come back and have variable incomes and things like that. How are you going to think about risk management in that kind of world?

Ralph Andretta -- President & Chief Executive Officer

Yeah. So I'll just talk about our underwriting strategy, and how it's evolved. So, today our card members look much different than they did in the past, and we believe our portfolio is more resilient than it was during the recession. The changes have been driven by both a product diversification. We started several years ago, underwriting changes -- we started making about a year ago, which indicates a potential economic slowdown.

So, we constantly look, it's not that we have a knee jerk reaction to what happened. We constantly look at it to enhance our models -- our scoring models by upgrading to a newer version of tribunal [Phonetic] score, and can you define add-on scores focused on fraud prevention, synthetic identities and credit file customers and other elements.

In 2009, our underwriting changes were focused on finalizing scoring enhancements, raising minimum due scores for new applicants and reducing contingent liability by closing inactive accounts or scaling back. That said, we're certainly very diligent on -- we've tightened our underwriting criteria, but also we're a responsible lender. We're not going to go out there and offer credit lines or product to those that do not have the capacity to pay.

Andrew Jeffrey -- SunTrust -- Analyst

Okay. Well, good to hear you're proactive I think that was good foresight. And then, with regard to forbearance and I know it's early days and encouraging perhaps that you're not seeing some of your borrowers really want to stretch out to 12 months, for example. I'm just thinking back to the experience with Harvey and the sort of bubble it created in delinquencies that lasted, I think a lot longer than maybe you expected at a time recognizing one of the company. Is there a risk that, we're still talking about COVID-19, elevated delinquencies and/or losses a year from now, 18-months from now? I guess, what -- how do you probability weight the outcome if this just drags on for a protracted period?

Ralph Andretta -- President & Chief Executive Officer

Again, nobody could predict what's going to happen over a protracted period, particularly with something we've never really faced before. But, my view is, there are more resources today than it had been with past crises, whether it was hurricanes or other economic crisis. The assistance to the general public, our ability to react quickly, offering programs, that are more flexible than they've been before I think will certainly curtail that bubble, long-term.

Andrew Jeffrey -- SunTrust -- Analyst

Appreciate it. Thank you.

Operator

Our next question comes from Ryan Cary from Bank of America. Please go ahead.

Ryan Cary -- Bank of America -- Analyst

Good morning. I hope you're all well and thank you for taking my questions. Just wanted to build on Andrew's question a little bit. I think on the update call you mentioned majority of customers applying for forbearance, up to that point, they opted for shorter term programs and that these customers are more likely to end up current on their loan. And so, how has that changed since late March, and if it has how do you think about the inferences, as a result from that and the impact on the business?

Ralph Andretta -- President & Chief Executive Officer

You know, it hasn't changed. So we're seeing customers proactively want a shorter -- a shorter forbearance program and in fact, wanting to just skip a month's payment rather than going to a forbearance program. So, that's what we're seeing, it's early days, these programs are just getting up and running.

As I said right now, they're in the low-single digits but we expect them to probably settle in the low-double digits as we move forward. And so, it really haven't changed yet, it's a little bit too early to tell. What we're seeing though in the month of March of our payment rates are holding to what we have predicted, and we're seeing based on the first wave of stimulus checks, customers have a willingness to make payments.

Ryan Cary -- Bank of America -- Analyst

Got it. Okay, it sounds like before you're expecting to see pent up demand and a potential bounce back once the COVID situation is under control, but now it feels like this is a little bit more wait and see, is this just due to the duration and severity of the slowdown. Are you seeing anything else change over the past month that would lead you to think the recovery might take a little longer?

Ralph Andretta -- President & Chief Executive Officer

I think people are optimistically looking at the recovery as May 1. But, you know as you can tell, publicly that recovery is going to be a staged recovery over a period of months. So, it's going to be a ramp up rather than a big bang and certainly we've -- you know, we've stretched our business model for that and under those scenarios, our business model is still EBIT and cash positive for the year.

Ryan Cary -- Bank of America -- Analyst

Got it. And just to make sure -- just a clarifying question on that. I know before you were talking about the stress scenarios as retail sales down kind of 25% extended for 12 months. Is that still the standard of code in these most recent stressed examples?

Ralph Andretta -- President & Chief Executive Officer

Yeah. We've, we stressed it down 25% for the year to go. But that's actually more like 33% -- actually be 25% on the full year, which is more like 33% on the year to go. So, that was one of the stress scenarios we ran.

Ryan Cary -- Bank of America -- Analyst

Great. Thank you for taking my questions.

Ralph Andretta -- President & Chief Executive Officer

Yes.

Operator

Our next question comes from Dan Perlin from RBC Capital Markets. Please go ahead.

Dan Perlin -- RBC Capital Markets -- Analyst

Thanks. Can you guys just remind us a little bit about the customer concentration risk that's embedded in the current portfolio today? I mean, we're really just trying to handicap what is going to happen, to the extent that we have more retail failures? So, maybe you can just walk through the puts and takes that we need to be thinking about modeling in that environment?

Ralph Andretta -- President & Chief Executive Officer

Yes. So, I'll do it in terms of high level -- in terms of percentage of receivables. I think our portfolio has changed since the a Great Recession. If you recall, probably during that time, we were 95% private label. We've evolved to something less than that. So 50% of our portfolio is retail goods or private label, 25% of our portfolio is big ticket items, where you tend to get better credit quality and then 25% of our portfolio is co-brands, where you tend to get better credit quality and general purpose plastic, that how I dimensionalized the portfolio now. So certainly, stronger than we were in the Great Recession and a bit more diversified than we were.

Dan Perlin -- RBC Capital Markets -- Analyst

Okay. That's helpful. And then to the extent that we have to brace for additional failures for your retail partners, over the coming months and quarters, can you just talk through the puts and takes that we need to be thinking about in the model? I know, you're talking about these stress tests, but what are the actual outcomes or optics that we need to be thinking about, and how long a duration are you able to kind of fend off those?

Tim King -- Chief Financial Officer & Executive Vice President

Yeah. So, I'll use the most -- egregious -- the worst scenario, we get a private label retail partner, who filed for Chapter 7 goes out of business. It takes, call it, six months to nine months for you to get half of those receivables, and then you continue with that type of half-life, so to call, we went to the consumer, not the retailer. What happens is, of course, we stopped getting new sales from that retailer, if they go out of business, and it takes -- and then, we of course make a lot of money as they unwind, but we just start losing the receivables. We lose about half of it -- six months to nine months, then lose another half six months to nine months, and so it quickly [Phonetic] try its way up two years to three years, we don't have that receivable. So, our real risk is that we make less money on a volume basis. We make a higher percent on those receivables, and then of course, it's up to us as an organization to replace those receivables with a new partnership.

Dan Perlin -- RBC Capital Markets -- Analyst

Okay. That's super helpful. Just one other one, if I could sneak it in. Just for cadence of the provision expense, I know -- I mean, you had a huge reserve build. I'm just trying to think about -- what are we jumping off into in kind of the second quarter as you are framing it, from a plus or minus range for the provision expense in that quarter -- the next quarter?

Ralph Andretta -- President & Chief Executive Officer

Yes. So obviously, we'll take into consideration everything we know at the time we set that provision expense. We clearly were able to do that as we saw April unfold in the first couple of weeks of April. There's always risk that the economy continues to deteriorate or people don't come back as quickly as we'd expect. At this point, we looked at it and we felt very good that we'd factored everything, where we took a nice, solid, conservative look at the balance sheet and what we needed for the reserves at the end of Q1.

Dan Perlin -- RBC Capital Markets -- Analyst

All right, thank you guys.

Operator

Our next question comes from Eric Wasserstrom from UBS. Please go ahead.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much for taking my questions. Can you hear me all right?

Ralph Andretta -- President & Chief Executive Officer

Yeah, we can.

Eric Wasserstrom -- UBS -- Analyst

Okay. Great. Thank you. So, thank you for going through some details of the liquidity and capital position. I think in my recent experience with the stock, I think that is, in fact, probably the more of a [Indecipherable] relative to credit quality in the current environment. So, could you just, maybe talk about how you're thinking about the overall company's leverage position at this point, and whether these circumstances has caused any rethinking about that relative to, let's say, even a month or two ago?

Tim King -- Chief Financial Officer & Executive Vice President

Sure. Obviously, the leverage ratio, when you take that big an equity hit, to set up CECL it's going to cause the leverage ratio to go up, and you'll see that we also took a drawdown on our line of credit. Having said that, we are concerned about the leverage ratio; we are not tossing and turning about it. We have enough cash flow to cover that. We are comfortable with that. It's clearly something Ralph and I will need to adjust -- address, excuse me, long-term. But, at this point, the leverage ratio from our perspective is, first and foremost, do we feel comfortable that we can pay our debt service? We feel very comfortable that we can.

Eric Wasserstrom -- UBS -- Analyst

Okay. And just to follow-up on the -- in terms of the subsidiary bank position, do you think that do you anticipate any challenge to continuing to upstream dividends to the HoldCo based on the near-term operating outlook at the subsidiary level?

Tim King -- Chief Financial Officer & Executive Vice President

Sure. Obviously, one of the things we're going to watch very carefully is the banks and their capital position. I've said before, and I know Ralph and I've had the conversation. First and foremost, we want to make sure we have very robust balance sheet for both the parent and the bank, the bank being part of that -- part of -- of course, the reason we called out the total leverage ratio at the bank of that 16.7%. The banks have been profitable, they were profitable throughout the recession, we expect them to continue to be profitable.

Then the question becomes a growth versus the income. If this recession plays out one way that we might see it, which is decreased sales lead to decreased receivables that actually allows us to dividend up more capital, meaning that, we don't have as much receivables we have to hold capital against, and we're going to be very prudent, make sure our banks are very well positioned, very heavily capital-intensive, so that they can withstand shocks like this. So, there's a variety of different scenarios we run. In most cases, we feel the banks would be able to upstream some cash to the parent.

Eric Wasserstrom -- UBS -- Analyst

And just one last one on this topic. I know that, obviously, we're -- you are understandably at sort of in crisis mitigation mode. But, over the longer term Ralph, I'd love to understand your philosophy about earnings growth versus tangible book value accretion, and how you think that -- if you think that tangible book value accretion is an important role of value creation for ADS?

Ralph Andretta -- President & Chief Executive Officer

Yes. I think a couple of things. So, let me just say this, the safety and soundness of our banks influences every decision we make, and I think even through the crisis here where we've taken prudent measures to enhance our capital position, cut expenses I think those are clearly important actions we've taken to ensure the safety and soundness of our institutions. I think from my perspective predictable, sustained, good growth on top line and bottom line is what we're looking for long-term. And I think that will sustain our safety and soundness and assets in the bank.

Eric Wasserstrom -- UBS -- Analyst

Okay. Thanks so much for taking my questions.

Operator

Our next question comes from Ashish Sabadra from Deutsche Bank. Please go ahead.

Ashish Sabadra -- Deutsche Bank -- Analyst

Hi, thanks for taking my question. Just a quick question on the March data, was there any benefit from the forbearance program on the delinquencies and the charge-offs? Is there a way to quantify that?

Ralph Andretta -- President & Chief Executive Officer

Yes. It's very early. I will tell you, but what we have seen, as I think I mentioned it earlier, the payment rates, if I compare them to last year were virtually the same and we're seeing our roll rates are where they thought they would be, probably a little bit better. And we saw a -- when the first stimulus checks came out, we did see incremental phone calls and incremental payments come in during that period of time. Now, that does not make a trend. We're still managing it very closely, but we did see some improved activity or increased activity.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's helpful. And maybe just as we think about, again, the charge-off and charge-off trend going through the year, Ralph, as you mentioned, charge-off could potentially go up in the back half, as more consumers come out of the forbearance and also, as we see a higher unemployment rate. But, is there a way to think about all the puts and takes and potentially some impact from any potential retailer bankruptcy? But, as we think about going into the back half, is there a way to think about where that could head to, and all the puts and takes going into the back half of the year? Thanks.

Ralph Andretta -- President & Chief Executive Officer

Yes. I think -- as I think about the back end half of the year, we traditionally see loss rates come down. We're going to, I believe, see elevated loss rates. I think what we -- the actions we've taken in the first quarter to reserve, I think, are appropriate for what we are -- what we're projecting in the balance of the year. That said, it's a very fluid environment, and if things change, we will certainly adjust accordingly.

Ashish Sabadra -- Deutsche Bank -- Analyst

That's helpful, thanks.

Operator

Our next question comes from Tim Willi from Wells Fargo. Please go ahead.

Timothy Willi -- Wells Fargo -- Analyst

Thank you, and good morning. Just had one question, if we could talk about e-commerce a bit. I understand that probably a fair amount of your retailers are probably in the discretionary bucket, which is going to obviously impact their overall volume, but we're obviously seeing from some retailer stories of exceptionally strong e-commerce and digital, etc. Is there any way that you could just sort of comment or discuss where you think your retailers are with their digital commerce plans? And are they punching after weights, or do you think that some of these retailers are still reacting and there is still better experiences and better volume to come from them, as they really reposition their businesses for more digital and e-commerce than maybe they otherwise would have expected six months ago or a year ago?

Ralph Andretta -- President & Chief Executive Officer

Yeah. I would categorize it probably as a mixed bag. I think, we have some good partners out there that have really good retail -- really good sites, sites like Sephora for example, but there are -- certainly, this has been a opportunity for them to rethink their strategy and ensure that they have a robust e-commerce channel, which plays right into the investments we've been making and the investments we're going to continue to make to be even more relevant in e-commerce for our partners and our customers.

Timothy Willi -- Wells Fargo -- Analyst

And if I could ask just one quick follow up, I guess there's some stories and chatter out there about the Victoria's Secret transaction, and whether or not that will occur. Is there anything that we should be aware of or think about, relative to that deal closing or not closing, as it might impact anything with ADS?

Ralph Andretta -- President & Chief Executive Officer

It's difficult for me to comment on -- what was in the news over the last couple of days. Victoria's Secret has been a partner for a very long time. I think it will continue to be a partner, down the road. I think we'll work with them -- and we're set to work with them in their current capacity, we were set to work with them in their future capacity, and we'll continue to be a supportive partner.

Timothy Willi -- Wells Fargo -- Analyst

Okay. Yeah, thanks very much.

Operator

This concludes the question-and-answer portion of our call, and I would like to turn it back to Ralph for final comments.

Ralph Andretta -- President & Chief Executive Officer

Well, thank you all for participating this morning. I know this is very difficult circumstances, and we are in many different locations as opposed to Tim and I being in the same room. Thank you for your time. And as I said, this is an important stakeholder constituency group for me, and I intend to be available and certainly transparent as we communicate going forward. Everybody have a good day and thanks again.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Viktoriia Nakhla -- Senior Associate

Ralph Andretta -- President & Chief Executive Officer

Tim King -- Chief Financial Officer & Executive Vice President

Sanjay Sakhrani -- KBW -- Analyst

Darrin Peller -- Wolfe Research -- Analyst

Bob Napoli -- William Blair -- Analyst

Andrew Jeffrey -- SunTrust -- Analyst

Ryan Cary -- Bank of America -- Analyst

Dan Perlin -- RBC Capital Markets -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Ashish Sabadra -- Deutsche Bank -- Analyst

Timothy Willi -- Wells Fargo -- Analyst

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