As a credit card issuer, Sears, Roebuck and Co. does not have a particularly large portfolio of receivables compared with other big companies, and its general-purpose cards, introduced two years ago, do not generate nearly the transaction volume as those of competing lenders.
Yet every year Sears earns more from its card businesses than almost any other issuer.
The retailer came in third in The Nilson Report's most recent list of the most profitable U.S. card issuers. Last year it earned $1.53 billion from its private-label and MasterCard portfolios, up 1% from 2000, the newsletter reported. Only Citigroup Inc., with $2.13 billion (up 19%), and MBNA Corp., with $1.69 billion (up 29%), earned more.
In 2000 Sears came in second to Citi, after having been first in profitability "for decades," the newsletter said.
The curious aspect of Sears' card lending success is that its operation is so much smaller than those of its rivals. At yearend Sears had $27.6 billion of card loans outstanding (of which $5.2 billion was from MasterCards and the rest from its private-label cards). Citi had $99.5 billion of general-purpose Visa and MasterCard loans alone. Even American Express Co. - which came in fourth in the 2001 rankings - had, with $51.3 billion, nearly twice as many loans receivable as Sears.
The retailer says there are several reasons it can squeeze more profits out of fewer loans. Its stores enable it to acquire card customers at much lower cost than commercial bank card issuers, because shoppers like to get instant credit. The company places a heavy emphasis on risk management, and the time-honored brand name is a big help, too.
Because so many people sign up for Sears cards at Sears stores, or respond to mail offers because of the brand name, "we can afford to spend less," said Kevin T. Keleghan, its president of credit services. "We are lower than anyone on our operating expenses. Citibank is three times our size in receivables, but we are just as cost-effective, if not cheaper."
One of Sears' biggest accomplishments is managing risk while running a large middle-market portfolio, Mr. Keleghan said. Chargeoffs for the portfolio as a whole were 5.3% last year, much lower than for the MasterCard portion.
Sears' strength in the middle market was one of the reasons it turned to MasterCard when it looked for a bank card partner, he said. Visa had tested a little too upscale for its customers' taste, according to Mr. Keleghan, whose background is in risk management.
"The more we play up the Sears brand, leaving MasterCard neutral, the better the response rate," Mr. Keleghan said. "MasterCard allows us to draw new customer segments, but the Sears brand overpowers it."
Now that it is "upgrading" many private-label credit card customers by sending them replacement MasterCards, even people who do not habitually shop there are signing up. Sears says its expertise in database marketing and risk management - honed in its decades of running a private-label business, and from running the Discover card business it founded - made the MasterCard program a piece of cake.
Mr. Keleghan said that one of the measures of the Sears brand's strength is in its direct-marketing pull. He cited statistics from BAIGlobal, a Tarrytown, N.Y., company that tracks response rates to credit card solicitations, that show the average response to direct-mail advertising in the 0.05% range. "We typically are in the 1.2% to 1.4% range, which lets us acquire a new account for $30 to $35," Mr. Keleghan said.
Mr. Keleghan would not say how many MasterCard accounts Sears now has, but he did say that he envisions the two portfolios becoming equal in size. "There will always be a Sears private label of around 35 to 40 million [accounts], but most growth will come from MasterCard."
He said the company was surprised when customers who received - unbidden - new Sears MasterCards in the mail began coming back to the stores. In-store spending by the 10 million or so light card users who received new MasterCards surged 35%.
Mr. Keleghan said that when Sears can entice inactive cardholders to transfer balances to Sears MasterCards, in-store spending spikes, with 25% of those cardholders making purchases at Sears.
The boost in the card spending from the MasterCard portfolio has helped offset the longstanding decline in the percentage of store sales placed on Sears cards. In 2000 only 47.4% of store sales were on a Sears card, down from about 57% in the mid-1990s.
Of the roughly 60 million accounts on its books, only about 38 million are active. Mr. Keleghan said the MasterCard upgrades were sent to around 10.5 million carefully vetted light card users and 8.5 million inactive account holders in 2000, at an acquisition rate of about $5 each. In-store acquisition rates are around $15 per customer. Mr. Keleghan said Sears typically acquires three million accounts this way every year.
Sears learned some hard lessons from its credit problems in 1997 and 1998, when chargeoffs rose dramatically, he said.
"We concentrated on getting best-in-class, in-house scoring technology as good as anyone out there," said Mr. Keleghan, who headed that effort before being promoted to vice president of credit card products in 1999. He began his current job when his boss, Alan J. Lacy, took over the Chicago company.
Comparing chargeoff rates on a lagged basis, which helps remove the influence of a rapidly growing portfolio on the ratio, Mr. Keleghan brags that Sears' portfolio nearly equals the market leader MBNA in its chargeoff rate.
Private-label Sears cards are not the first things consumers drop when they get into financial straits, because customers see the cards as "a rainy-day card for emergencies," he said. "'I can get a MasterCard or Visa from any bank' is the way many cardholders seem to see it."
Sears is not immune to the problems other issuers face. A recent lawsuit filed in Chicago accused Sears of invading its cardholders' privacy by sharing account information with outside telemarketers.
Mr. Keleghan said that two years ago the company took a hard look at its outside telemarketers, and has since terminated most of its agreements. "We had a lot of clubs and services offered by third parties. We didn't like the quality of products, and we have gotten out of most of those." 
