$125.52
$297.47
bear $125.52
base $220.41
bull $297.47
margin of safety $95.00
market price* $102.56
Bread Financial is a U.S. credit card lender. It runs private-label and co-brand card programs for retail partners such as Ulta Beauty, Victoria's Secret and Signet Jewelers, plus its own Bread Cashback cards and Bread Savings deposits, through two banks. It earns interest and fees on about $18.7 billion of card loans (August 2026). Its costs are credit losses, funding and operating expenses. What drives the business. Before credit losses, the business is very steady. Pre-provision profit, excluding one-time gains and debt-repurchase costs, was $1,968 million in 2023, $1,884 million in 2024 and $1,928 million in 2025, about 10.8% of average loans each year. Almost all of the swing in earnings comes from credit losses. The net loss rate was 6.0-6.1% in 2017-2019, 7.5% in 2023, 8.2% in 2024 and 7.7% in 2025. It fell to 6.40% in August 2026, from 7.57% a year earlier. Loans were up 5.6% from a year earlier, after six years of staying around $17-19 billion. How we measured earnings. For a lender, bad loans are the main cost of doing business, so we charge the full provision for credit losses. We do not count reserve releases as income. The 2025 result was helped by a $135 million release, so on its own it overstates normal earnings. We removed one-time items: portfolio-sale gains such as the $230 million gain in 2023 and losses on repurchasing debt ($117 million in 2024, $74 million in 2025). We used a normal tax rate of about 24.6%; 2025 benefited from a one-time tax benefit. We treat spending on technology and the premiums Bread pays for partner card portfolios as ongoing costs, equal to the related depreciation and amortization. The cash-flow statement reports capital spending only as a net figure combined with other items, so we did not credit any gap between amortization and that figure as cash to owners. On this basis, owner earnings are close to normalized net income. Normal earning power. At a 7.0% loss rate on today's loan book, pre-provision profit of about $2.0 billion less about $1.3 billion of losses leaves about $530 million a year, or about $13.40 per share on 39.5 million diluted shares. That is our normal level. We use 7.0% rather than the 6.0% of 2017-2019 because the book has carried higher losses since 2023 even with low unemployment. The first half of 2026 ran ahead of this: net income was $328 million, up 19% from a year earlier, with lower losses and higher net interest income. We let the next two years reflect that, then return to the normal level. Owner earnings rose about 38% in 2025 as credit recovered. Our first forecast year assumes a smaller rise, about 16% on the same basis. Debt and other claims. For a lender, borrowing is its raw material. Deposits of $14.7 billion, card-backed securitisations and holding-company notes fund the loans. Their interest is already charged in the earnings above, so we do not subtract them again. The holding-company notes are $500 million of 6.75% senior notes due 2031 and $400 million of 8.375% subordinated notes due 2035. The $700 million credit line was undrawn. There is no holding-company maturity before 2031. Preferred stock ranks ahead of common shareholders: $75 million of 8.625% Series A and $135 million of 8.875% Series B. Because the coupons are above market for several years, we value this claim at about $225 million, or about $5.70 per common share. Base case, about $220 a share. Earnings of about $600 million next year and $565 million the year after, then $530 million a year. Pre-provision profit stays near 10.8% of loans and losses average 7.0% through good and bad years. We credit no loan growth beyond today's book. Loans were flat from 2019 to 2025 because new partners only replaced departing ones, so growth is not proven. The business has signed and renewed retail partners for about 30 years. On that record, earnings continue at this level beyond year ten. The business is worth about $8.93 billion. It owes about $0.23 billion of preferred stock, leaving about $8.71 billion for common shareholders. Bear case, about $126 a share. This case includes a full credit cycle like 2008-2010. In that downturn, Bread's predecessor, Alliance Data, saw its card loss rate rise from 5.8% in 2007 to 7.3% in 2008 and 9.3% in 2009, about 1.6 times the starting level. Starting from 7.2%, we assume losses reach 8.5% in 2028, 11.2% in 2029 and 9.9% in 2030, then return to 8.0% and 7.2%. Loans shrink from $18.6 billion to about $16.6 billion as lending is tightened. Pre-provision profit falls to about 10% of loans at the trough because more interest and fees are reversed on accounts that go bad. Loss reserves rise from 11.2% of loans to 13.5% before being released. Earnings fall from about $500 million to $200 million, then a loss of about $220 million in 2029, then $110 million and $400 million. In the same period Bread loses one of the three partners that each supply at least 10% of revenue; its five largest programs are 49% of revenue. That leaves loans permanently near $17 billion. The partner buys back its loans, which frees about $200 million of capital. We also allow about $35 million a year for costs left behind by the lost partner and for state rate caps. A November 2025 federal appeals ruling lets Colorado cap interest rates for its residents, and other states could follow. Earnings then settle near $414 million and decline 2% a year after year ten as private-label cards lose ground. The business is worth about $5.18 billion. It owes about $0.23 billion of preferred stock, leaving about $4.96 billion for common shareholders. The bank survives this case without raising new equity. Its common equity tier 1 capital ratio was 13.0% at the end of 2025. Because shrinking loans release capital, the ratio stays above 11% even in the loss year. This case is worth about twice tangible book value of about $64 a share at June 30, 2026. That is justified because the franchise stays profitable across the cycle as a whole. Pre-provision profit of about $1.7 billion even at the trough nearly covers peak losses. Only one year is a loss, and earnings recover to above $400 million on a smaller book. Bull case, about $297 a share. Credit stays near current levels, averaging 6.4% (2017-2019 ran 6.0-6.1%). Loans grow 4% a year for four years as recently signed programs mature; loans were already up 5.6% from a year earlier in August 2026, and Bread expanded its Signet partnership in September 2026. About 13% of each new loan dollar is kept as capital. Earnings then hold flat at about $755 million. The business is worth about $11.98 billion. It owes about $0.23 billion of preferred stock, leaving about $11.75 billion for common shareholders. Margin-of-safety price, $95. How sure we are of the earnings level: fairly sure of the business before credit losses, which has held within 5% for three years. We are less sure of losses, which have moved by $300 million or more in a single year. The worst plausible outcome is one no case models: a national cap on card interest rates. A Senate bill would cap rates at 10%, and the President called for a 10% cap in January 2026, but nothing has been enacted. With an average loan yield of 26.6%, a 10% cap would make most of this lending unprofitable. The value would then fall toward what the loan book returns as it runs off, roughly tangible book of about $64 a share or less. The structure would survive a 2008-type downturn: deposit funding, a capital ratio near 13% and no holding-company maturity before 2031. A cap is a different kind of risk. The two things we are most likely to be wrong about are the normal loss rate and the partner base. If losses average 8% instead of 7%, normal earnings fall to about $390 million and the shares are worth about $160. Combine that with a recession and a lost partner, and value falls toward the bear case. At $95, normal earnings are about 14% of the price. Bread has been returning nearly all of them, through a $0.92 annual dividend and buybacks that retired about 12% of shares in the first half of 2026. That payout alone does not reach the 20% target. It needs only a modest move toward the bear value over three years to clear it, and it leaves room for a downturn arriving early. Above roughly $100, the regulatory tail risk and the 2008-type cycle together would leave too little margin. Compared with our previous estimate. The earlier figures were built on a somewhat different basis and are not directly comparable. In business terms, three things changed. First, the bear case now uses the 2008-2010 credit cycle rather than the 2020 pandemic, when government support kept card losses unusually low. Second, credit and loan growth have kept improving through August 2026. Third, the share count fell to 38.7 million at June 30, 2026 and the Series B preferred was issued. What would make this wrong: losses settling above 8% for years, the loss of more than one major partner, or any national or widespread state rate cap. Items we could not fully reconcile: capital spending is reported only net of other investing items, and the 2022 treatment of Bread's retained stake in Loyalty Ventures, the business it spun off, appears small but could not be fully traced.