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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.


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.