Loyalty Ventures Inc. (LYLT, Financial) provides coalition and campaign-based loyalty solutions through its two business segments, the Canadian Air Miles Reward Program and BrandLoyalty Group B.V. It is, in essence, a marketing services company. The company is based in Plano, Texas, but most of its business is in Canada, Europe and Asia. Why the company chose to base itself in the U.S. probably has to do with tax considerations, but I can't be sure.
The Air Miles Reward Program is a full-service, outsourced coalition loyalty program for its sponsors who pay a fee per reward mile issued, in return for which the program provides all marketing, customer service, rewards and redemption management. The air miles program is similar in concept to a frequent flyer program offered by many airlines. Consumers collect the air miles when they buy goods and services and redeem them on travel or other goods and services.
Brand Loyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for high-frequency retailers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered across Europe and Asia, as well as around the world. The program involves rewarding consumers for patronizing the retailers. An example of an implementation would be giving out a toy if a consumer was to buy a certain number of meals from a fast-food retailer.
The company was previosuly the LoyaltyOne business owned by Alliance Data Systems Corp. (ADS, Financial) that was spun off on Nov. 5, 2021. Last year, it had over 1,400 employees and generated $764.8 million in revenue, $75.1 million of net income and $173.4 million in adjusted Ebitda.
Since the separation, Loyalty Ventures has fallen nearly 10% while Alliance Data Systems is flat.
The price chart shows a typical trading pattern for IPOs. When the stock first debuted at around $35, it spiked briefly to $50 and then crashed and settled down in the low $30 range. It looks like a typical pump-and-dump scheme, which bedevils IPOs, where underwriting brokers pump up the stock to day traders who unload it to "greater fools," but soon ran out of the supply of fools. This is a classic reason why investing in IPOs is a fraught exercise. It's almost always better to wait until the froth settles down.
While on the surface the IPO looks interesting, it is not all what it seems. The company has an asset-light business, is profitable with a price-earnings rato of 14 and has a strong balance sheet, but buried in the last 10-Q (released before the IPO) is this statement:
"Additionally, Loyalty Ventures made a cash distribution of $750.0 million to ADS on Nov. 3, 2021 as part of the Separation. The distribution qualified as a tax-free reorganization and a tax-free distribution to ADS and its stockholders for U.S. federal income tax purposes."
I guess $750 million is the price for freedom extracted by the parent company (some "parent" eh, but that is business). This number is not yet captured by financial websites such as GuruFocus as it has not found its way onto the balance sheet or cash flow statement as the company has yet to issue a quarterly report. So, the point I am trying to make is the company is a lot less attractive than it first appears. It is very important to thoroughly read all the notes in the financial reports even if the numbers don't show up on the financial statements. Even the corporate presentation has no mention of this large payment.
I did get some shares from the spinoff because I owned some shares of Alliance Data Systems. It is now a pure-play private label credit card processor. I like Alliance Data because it has now simplified its operations and fattened its wallet with the payment from Loyalty Ventures. But that is a topic for another time. Alliance still owns a 19% stake in Loyalty Ventures, which it will likely dispose of over time.
However, note that insiders (particularly CEO Charles L. Horn) are buying. This is a good sign as the stock is trading below fair value, but I am still not convinced. I need to see organic growth in the top line before I plunk down more cash. For now, I will just hold on to my shares.
| Insider | Position | Date | Buy/Sell | Shares | Shares Owned | Trade Price($) | Trade Percentage(%) | Cost($1000) | Price change since trade(%) | Share ownership details | Filing Date |
| HORN CHARLES L | President & CEO | 2021-11-29 | Buy | 1,762 | 15,796.61 | 28.38 | 11.15 | 50.00 | +12.51 | 15,796.605 (Direct) | - |
| HORN CHARLES L | President & CEO | 2021-11-26 | Buy | 841 | 14,034.65 | 29.74 | 5.99 | 25.00 | +7.36 | 14,034.648 (Direct) | - |
| HORN CHARLES L | President & CEO | 2021-11-19 | Buy | 1,538 | 13,194.00 | 32.50 | 11.66 | 50 | -1.75 | 13,193.996 (Direct) | - |
| HORN CHARLES L | President & CEO | 2021-11-11 | Buy | 2,857 | 11,655.54 | 35 | 24.51 | 100 | -8.77 | 11,655.535 (Direct) | - |
| BALLOU ROGER H | Director | 2021-11-11 | Buy | 2,932 | 7,253 | 34.09 | 40.42 | 99.95 | -6.32 | 7,253 (Direct) | - |
| HORN CHARLES L | President & CEO | 2021-11-10 | Buy | 6,278 | 8,798.39 | 39.82 | 71.35 | 250.01 | -19.81 | 8,798.393 (Direct) |
As such, it would be best to observe Loyalty Ventures' progress over the next few quarters to evaluate its investment potential.
