Byline: Vicki M. Young

NEW YORK — Plastic is helping retailers remain elastic.
Highly profitable credit card operations have allowed department stores to maintain much of the revenue and compensate for much of the profit lost to thin traffic and declining market share. Additionally, they’ve provided those stores, and others, with synthetic, magnetic-stripped allies in their marketing efforts.
Securities and Exchange Commission filings by retailers with proprietary credit card operations document year-over-year increases in their credit businesses. The risks incurred in owning the receivables — uncertain economic conditions and consumer defaults — appear to be outweighed by the profitability of the credit operations, which give retailers another source of revenue, one generated by fees brought about by the extension of credit.
To be sure, shoppers no longer gravitate toward the department stores as they once did. According to Walter Loeb of Loeb Associates, a retail consultant: “My estimate is that proprietary cards represent an average of 40 percent of total sales at department stores, down from 53 percent 10 years ago. Many retailers use the proprietary credit card as a calling card to communicate special sales events to their customers and remind them to shop at the stores. For most retailers, the credit card operations are profit centers.”
The point isn’t being lost on discounters or specialty stores. The addition of cards that can be used at other stores by retailers including Target, with its new Visa card, and Sears, Roebuck & Co., with its Gold MasterCard, will provide an even larger infusion of receivables-related income for those retailers.
Shari Schwartzman Eberts, retail analyst at J.P. Morgan Securities Inc., observed that many retail credit card operations are profitable and have become important contributors to a chain’s bottom line. In the case of Target Corp.’s flagship discount division, she said that the “credit business has contributed about 15 percent of pretax segment profit each year. That penetration has been fairly stable but should grow as a percentage over the next few years as the company completes its rollout of the Target Visa card.”
Unlike the store proprietary card, the Target Visa card can be used at other retail establishments as well. She expects the rollout to jump-start Target’s accounts receivable growth.
In a research note late last year, Eberts wrote that Target’s total accounts receivable serviced are expected to “jump 30 [percent] to 35 percent in 2001 and 2002, reaching almost $4 billion and over $5 billion, respectively, with all but $200 [million] to $300 million of the increase from the new Target Visa card. Target expects to add $1 billion in new Target Visa card receivables in 2001, and an additional $1 [billion] to $1.5 billion in new Target card receivables in 2002.” The latter amounts refer to newly opened accounts.
Linda Kristiansen, retail analyst at UBS Warburg, in a March 7 research note on Sears, Roebuck & Co., wrote that Sears’ credit business in fiscal 2001 represented close to 70 percent of the retailer’s consolidated operating income. She expected additional upside in fiscal 2002 with regard to receivables growth based on the “activation of a large percentage of the 7 [million] to 8 million planned Gold MasterCard conversions” from the store’s private label card. Total receivables growth, she concluded, could be between 7 and 8 percent during the current fiscal year, which assumed a 2.6 percent decline in private label card receivables and a 47 to 50 percent increase in Gold MasterCard receivables.
According to Kristiansen, Sears’ two strategic advantages are its proprietary database of 60 million accounts and its strong brand recognition. In addition, “among cardholders who have transferred balances to the Gold MasterCard from a third-party bank card, approximately 25 percent have subsequently shopped at a Sears. And, spending has increased about 35 percent among the 19 million dormant Sears card accounts transferred to Gold MasterCard.” She is projecting $1.5 billion in annual Gold MasterCard receivables growth over the next three years.
Bret Levy, vice president and treasurer at Gottschalks Inc., said the Fresno, Calif.-based chain has had increasing sales gains through use of the company proprietary card and that its use by loyal customers also has helped the retailer post same-store sales increases. Cardholder benefits include no annual fee, advance notice of sales, deferred-payment plans, check-cashing privileges and exclusive sales events.
“Yes, the operation is profitable. We have not seen any deterioration in the portfolio and now see a strengthening in the credit cycle,” Levy said.
While the retailer’s card holders are predominantly women, many account holders are also retirees on fixed incomes or gainfully employed college students. According to the treasurer, there is less risk than one might think when it comes to the chain’s ownership of its credit card receivables.
Although Gottschalks uses a scoring method comparable to those at banks, the company also tries to protect its risk in other ways. “We are conservative on our payment rate. Our minimum payment is much higher than a Visa card and even higher than [the amount required by] some of our peers. The higher minimum increases the credit quality and we find that our customers do pay on time,” Levy said.
According to an SEC filing by Gottschalks in April 2001 for the year ended Feb. 3, the average credit card receivable serviced rose 2.4 percent to $81 million from $79.1 million, while service charge income increased 7.7 percent to $16.8 million from $15.6 million. The contribution to the bottom line from credit revenues rose 5.1 percent to $9.2 million from $8.7 million. The filing said that as of March 31, 2001, active card accounts increased 14.9 percent to 747,000 from 650,000 in the comparable year-ago period.
Supporting Levy’s contention, Gottschalks told the SEC that its delinquency rate is 3.6 percent, meaning that between three and four out of every 100 customers fail to pay minimums due within 30 days. Credit losses, it said, were .55 percent of sales. By contrast, Sears’ most recent annual filing indicates that 7.6 percent of its credit accounts are delinquent, a designation it confers upon an account after a customer has failed to make a required payment for three or more months.
When The Bon-Ton Stores Inc. reported fourth-quarter results earlier this month, James Baireuther, vice chairman and chief administrative officer, said: “The ‘Best of the Bon-Ton’ proprietary credit card loyalty program continues to receive a very positive response from our customers, resulting in an increase of 4 percentage points in the ratio of credit card sales to total sales.”
In a SEC filing last year, Bon-Ton said it issued 276,000 Bon-Ton cards for newly opened accounts in 2000. The proprietary card accounted for 48 percent of credit sales; the national bank cards, 26 percent, and cash or check payments, 26 percent. In 1999, the results were 47 percent, 25 percent and 28 percent, respectively.
Most chains with proprietary card operations tend to be big chain operators. If the profitability is there, why aren’t there more retailers entering the fray?
Peter Thorner, who was chief executive officer of the defunct regional discounter Bradlees Inc., observed: “In the mass market, you don’t do that much direct-mail marketing. The department stores do and they do a better job utilizing the data they can accumulate on their customers. For department stores, direct marketing is a form of advertising.”
Thorner added that retailers don’t mind “taking the risks for bad accounts because the operations are so profitable.” A retailer with difficulties moving goods out the door during down cycles might be able to sustain part of its operations through a profitable credit card business, assuming that the other parts of the chain’s business are well managed, he noted.
A smaller chain or specialty store might find it difficult to take on the risk or might cater to a demographic segment that heightens it, he observed. “Department stores tend to get a more upscale customer. A smaller retail operation might not have enough volume to warrant the infrastructure costs,” Thorner said.
At Federated Department Stores Inc., for example, the company reported in its SEC filing for the year ended Feb. 3, 2001 that accounts receivable for its Federated credit operation, which doesn’t include Fingerhut, were $2.44 billion, after deducting an allowance of $71 million for doubtful accounts. In comparison, accounts receivable at its Fingerhut catalog subsidiary, which Federated is in the process of selling, were $1.64 billion, but the deduction for doubtful accounts was $584 million. So, while Fingerhut accounted for 40.2 percent of Federated’s total accounts receivable, Fingerhut and all other direct-to-consumer activities represented only 10.5 percent of net sales in fiscal 2001.
Credit card delinquencies at Fingerhut are higher principally because its account holders tend to be lower-income customers.
By contrast, Talbots Inc., which targets a higher-income customer, created its own bank when it rolled out its reissued card in January 2001. The reissued card offers a $25 appreciation dividend for every $500 in purchases and 10 percent off any purchase made in the month of the cardholder’s birthday.
According to a spokeswoman, charge sales on the card at the end of 2001 increased 35 percent over the year-ago period, with the number of applications more than doubled from the year-ago figures.
“Our risk is very low because our customer tends to be a better credit risk,” she said. In 2001, card usage accounted for 36 percent of sales, up from 29 percent in the year-ago period. The spokeswoman said that the company is looking to build that ratio up to 50 percent of sales, and is moving closer to that percentage now.
Actual comparisons between the reissued card and the old credit card are not yet available. Talbots just released earnings results last week, and has not yet filed its SEC report for fiscal 2001.

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