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Credit card delinquencies are rising in the US. There is a proposed cap on how much card issuers can charge for late payments. But it is department stores, rather than lenders, that may have most to lose as the credit cycle sours.
The biggest of these — Macy’s, Nordstrom and Kohl’s — do not own their credit card portfolios. But all three generate surprisingly big chunks of their operating income from profit-sharing agreements with their partner banks. For years, the income stream has helped prop up a retail business model that is now well into its third decade of sustained decline.
This lifeline is at risk — yet all three stocks are trading at or above their three-year averages on a forward earnings basis. Constant takeover interest in the sector helps. Investors should take a hard look at the core retail business and reset their expectations accordingly.
US department stores offer all kinds of perks to get customers to sign up for their branded credit cards at the register. Store cards, with their high interest charges and late fees, turn out to be far more lucrative than running a brick-and-mortar store.
Credit cards accounted for less than 5 per cent of total sales at the three companies in 2022. But they made up 87 per cent of Nordstrom’s total operating income in 2022 and 55 per cent of Macy’s, according to Citigroup. At Kohl’s, they generated 381 per cent of total operating income, meaning without credit cards, the company would have fallen into an operating loss.
Late fees are a big money spinner. These can be as high as $30 per payment at the moment. But a new rule passed last month could cap them at $8.
Analysts at Bank of America think late fees represent between 14 per cent and 30 per cent of the companies’ credit card revenue. A cap on fees could result in a 29 to 68 per cent drop in earnings per share at Kohl’s this year, and under half that at Nordstrom and Macy’s.
Rising delinquencies as well as faltering retail sales growth will add to the pressure. Kohl’s suggested last month that it could take a $250mn to $300mn hit to its annual credit card revenue as a result of the late fee cap. The retailer said there were levers it could pull to offset this, such as growing its co-branded credit card business.
Yet a struggling retail sector overly dependent on these cards will unlikely find the answer by opting for more credit business.
