Discover Financial Services (DFS)

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Discover Financial Services (DFS)

Q3 2011 Earnings Call

September 22, 2011 11:00 am ET

Executives

Craig Streem - Vice President of Investor Relations

David W. Nelms - Chairman and Chief Executive Officer

R. Mark Graf - Chief Financial Officer, Chief Accounting Officer, and Executive Vice President

Analysts

Richard B. Shane - JP Morgan Chase & Co, Research Division

Adam Hurwich

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

David S. Hochstim - Buckingham Research Group, Inc.

John Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Unknown Analyst -

Michael P. Taiano - Sandler O'Neill + Partners, L.P., Research Division

Presentation

Operator

Welcome to the 3Q 2011 earnings conference call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Craig Streem. Mr. Streem, you may begin.

Craig Streem

Thanks, John. Thank you very much. Good morning, everyone, and welcome to today's call. Let me begin by reminding you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report, in our Form 10-K for the year ended November 30 2010 and in our Form 10-Q for the second quarter 2011, both of which are on file with the SEC. In the third quarter 2011 earnings release and supplement, which are now posted on our website at discoverfinancial.com and have been furnished to the SEC, we've provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information, and we explain why these presentations are useful to management and to investors. And we urge you to review that information in conjunction with today's call.

Our call this morning will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer, and then a Q&A session of course. During the Q&A period, it would be very helpful if you limit yourself to one question and one follow-up so we can make sure that everyone is accommodated.

Now it's my pleasure to turn the call over to David.

David W. Nelms

Good morning, and thanks, everyone, for joining us. Before the market opened this morning, we reported record quarterly earnings of $649 million or $1.18 per share. This was driven by continued improvements in credit and positive growth trends, led by the re-emergence of year-over-year growth in Discover Card receivables. All in, we generated an ROE of 33% this quarter, but even excluding the reserve release, our ROE would have been well above our 15% ROE target.

I want to begin by commenting on 2 principal highlights of our results this quarter, the first of which is solid growth, both in Discover Card sales volume and receivables, and the second is credit performance. Discover Card sales volume reached an all-time high of $26.3 billion, beating our previous quarterly record by over $1 billion. This represented a 9% increase from last year, and the growth came from both new and existing customers. Importantly, we are seeing attrition rates that are the lowest we've seen in over 10 years in our card member base, coupled with an increase in average card member spending, which has contributed to the growth in card member sales. Sales momentum is also being driven through the effectiveness of our rewards programs and our increased brand presence, reflected in sponsorship deals such as the NHL, Six Flags and the Discover Orange Bowl, as well as our marketing initiatives with company like Amazon. We did see a brief slowdown in spending just prior to quarter end when Hurricane Irene hit the East Coast, but during the first 3 weeks of September, we have seen volume growth return to levels that were consistent with most of our third quarter.

Year-over-year growth in Discover Card receivables resulted from strong sales volume, including spending growth from the revolver segment of our portfolio, as well as from increased balance transfers. Sequentially, Discover Card sales grew $1.4 billion this quarter and Card receivables grew by $1.2 billion, while balance transfer and cash advance volume was essentially flat.

Given our continued emphasis on increasing wallet share, we're pleased that the population of our primary card users grew 8% over last year with sales growth from this group of 12%. Additionally, we've seen 12 consecutive months of year-over-year sales growth from our revolver segment of our base.

We believe our efforts to increase merchant acceptance have also contributed to these positive volume trends as our card members are increasingly taking advantage of our growing coverage. Our number of net active merchants grew 7% versus last year.

A second highlight this quarter is the continuing improvement in credit as our delinquency rate in card reached a 25-year low at 2.43%. And for the first time since 2007, our card net charge-off rate dropped below 4% to 3.85%. I'm really proud of our efforts in credit risk management, collections and marketing that have produced such strong results even while U.S. unemployment has remained above 9%.

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