Bread: Inflation making spending ‘increasingly selective’

• Key insights: While credit sales grew 9% in the third quarter, Bread Financial CEO Ralph Andretta said that consumers with lower credit scores showed greater selectivity in their purchasing patterns.
• What’s at stake: Persistent inflation and high gas prices are starting to change consumers’ purchasing patterns, but have yet to impact overall spending or repayment rates. 

Persistent inflation and high gas prices have yet to impact consumer spending or repayment rates, according to Bread Financial, but some consumers are being more cautious. 

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Bread Financial CEO Ralph Andretta said on the company’s third-quarter earnings call Thursday that consumer behavior continued to remain resilient, but that spending “was increasingly intentional. 

“Higher credit quality cardholders remained a consistent source of strength, while consumers with lower credit risk scores showed greater selectivity in their purchasing patterns,” Andretta said. 

Bread’s credit sales increased 9% year over year to $7.4 billion as consumers with higher credit scores continued to spend and consumers with lower credit scores adapted to the higher cost of fuel by shopping for deals and pulling back on some discretionary spending, such as dining out at restaurants.

“Consumers are obviously spending more on fuel, and we’re seeing restaurant spending come down,” Chief Financial Officer Perry Beberman told American Banker in an interview following the company’s earnings call. “Fast casual, no change, but full-service restaurant spend is lower. Similarly, we’re seeing lower [travel and entertainment] costs, which means customers are making choices to make sure they’re still able to meet their needs within their budget.” 

That doesn’t mean consumers aren’t traveling, Beberman said. “We actually have the same number of hotel stays, but the average transactions are down. Middle America is seeking deals on hotel stays or trading down from a higher end hotel to more value-priced hotels.” 

Consumers were staying current on their bills, too. Bread’s delinquency rate decreased 47 basis points year over year to 5.57%, and its net loss rate dropped 99 basis points to 6.4%. 

Looking to the fourth quarter, Beberman said he expects holiday spending to be delayed this year due to the election in November. 

“Anytime you’re in a period like this where you’ve got an election right in the middle of it, retailers usually hold back on their advertising and their deals because everyone’s mailbox is getting filled up with political campaign ads,” Beberman said. 

Still, Bread is expecting a “pretty strong” holiday shopping season, Beberman said. 

“Higher end consumers are going to spend and spend well,” he said. “Middle income folks are going to continue to spend for their kids and families and friends and go out and do things. They’re just going to be a little more value conscious.” 

Broadly, Bread posted a “solid quarter” that sets the company up to finish off the year strong, according to Keefe Bruyette & Woods analyst Sanjay Sakhrani. “We left earnings with more conviction in the fundamentals and our estimates next year,” he said. Revenue was up 5% year over year to $1 billion, while end-of-period loans increased 7% to $18.9 billion. And net interest margin came in at 18.89%, an increase of 40 basis points from the second quarter and 8 basis points from a year ago.