Garnet Capital Advisors Blog

EXCERPT: Retailers have been struggling to remain profitable amidst the growth of online retailers and slowdown in consumer spending. As such, they've been tapping into other ways to boost profits, including earning interest with store-branded credit cards. Yet such cards are likely only a short-term fix for bolstering profitability, as mounting defaults on these credit cards are spelling trouble for retailers.

With stiff competition from online retailers and slowed consumer spending, traditional retailers have been seeking ways to boost profitability, including issuing store-branded credit cards.

As explained in a recent NY Times article, big-name retailers and department stores have been pushing the sale of their credit cards on customers by promising discounts on goods. Macy's store credit card offers as much as $100 in savings for a two-day shopping spree, while J. Crew's card offers 15 percent off on first purchases.

With sky-high interest rates, these credit cards have been a valuable source of profits for retailers who are struggling to compete with expanding online opponents and dealing with weaker consumer spending habits. Even as sales at many retail stores have been falling, the interest made from credit cards has allowed retailers to hoist profits. 

Over the recent past, tens of thousands of employees have been let go in the retail industry, which has subsequently been causing stock prices of some of the biggest retailers in the country to tank.

In an effort to counter such a scenario, retailers have been enticing consumers to assume more debt by taking out their credit cards. Yet while these cards are designed to drive revenue for struggling retailers, they've also become a source of concern for both customers and the industry as a whole.

Mounting Credit Card Debt Could Eat Up Profits For Retailers

The very thing that retailers have been depending on to reinforce profits could end up magnifying retailers' predicament. This issue is even more prominent for retailers whose credit cards account for a large chunk of total profits. The interest on Macy's branded credit card made up 39 percent of total profits in 2016, while Kohl's and Target's cards accounted for 35 percent and 13 percent of profits last year, respectively, all of which are increases from 2013. 

In comparison, branded credit cards from online retail giant Amazon only accounted for 3 percent of operating profits last year.

The NY Times article hit the nail on the target: "The cracks are starting to show. As signs of customer distress rise, one major lender, Synchrony Financial, which handles the credit cards for stores like Sam's Club, Gap and Toys "R" Us, is now setting aside more money for bad loans." As defaults on these store-branded cards continue to mount, the banks that are handling these credit cards are starting to crack down. 

Major lenders like Synchrony Financial are actually building a financial cushion to deal with bad loans. Further, investors do not view favorably on retailers who are under financial duress as a result of heavy reliance on credit cards for their income stream.

Credit Card Profits May Prove Transient For Retailers

While struggling retailers may have experienced some profitability from their branded cards, this revenue source is likely short-lived. "Investors may not appreciate the magnitude of the retailers' stress because of the store card income stream," according to Morgan Stanley retail analyst Kimberly Greenberger, as quoted from the same NY Times article. Lenders are cracking down on extending new branded credit cards as more and more customers default, which could quickly cause this income stream to dry up. 

At the end of the day, branded cards simply cannot sustain these profits, and cannot be depended on by retailers for a long-term fix. The Times reported that "Christian Buss, a retail analyst at Credit Suisse, said credit card profits were a "temporary subsidy" that the industry could not count on over the long term."

The problems are already starting to appear.

Selling Risky Assets With the Help of Loan Sale Advisors

The ripple effect of bad credit card debt among retailer credit cards is being felt by banks that are backing this plastic. Rather than accumulating such risky assets on the books, lenders would be prudent to sell them off and focus on performing assets. Garnet Capital has plenty of experience in this department and has helped countless financial institutions optimize their loan portfolios thanks to the skill-set and expertise of our team of loan sale advisors.

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