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Stock Strategist

Switching Costs Dig Moat for Alliance Data Systems

The company’s growth has been impressive, but we worry about approaching headwinds.

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We believe  Alliance Data Systems (ADS) will continue to profit from retailers’ interest in private-label rewards programs. Retailers benefit in multiple ways from providing a private-label credit card financed by Alliance Data Systems. When consumers use a private-label card, the merchant bypasses all interchange fees.

Most important, it gives retailers the ability to track their best customers’ purchases and target those customers, a service provided by Alliance’s Epsilon segment. This enables Alliance Data Systems to send highly targeted emails and display ads to a shopper’s mobile device, driving incremental sales. We believe Alliance provides a substantial benefit to its retail partners, which has largely driven its impressive returns and recent growth.

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Colin Plunkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.