In deciding to spin off the Discover card, Sears, Roebuck and Co. could be showing excellent timing.

After four years of rising profits, there are several indications that the card's progress will soon level off. That's the opinion of several savvy industry analysts, at least.

"The new shareholders are going to get a situation in which the profitability of the card is not going to be as high as it has been," predicted Edward E. Furash, president of Furash & Co., a consulting firm in Washington.

The issue is a critical one for Sears. The retail giant hopes to profit handsomely by spinning off its Dean Witter Financial Services Group, which owns Discover, in the first quarter of next year. The plan calls for 80% of Dean Witter to go to current Sears' shareholders and a 20% stake to be sold to the public.

Joseph Ronning, a Sears stock analyst with Brown Brothers Harriman & Co., New York, predicted that Sears could make $880 million from the sale of the 20% stake in Dean Witter, assuming the unit sells for 10 times earnings, a rough estimate of the market value of a company with Dean Witter's mix of businesses.

Worth About $2 Billion

That valuation pegs the Discover card's worth at $2 billion to $2.2 billion, Mr. Ronning added.

But, to a large degree, the success of the Dean Witter spinoff will hinge on investor's perception of Discover's prospects.

Reason: The Discover card contributed nearly half of Dean Witter's 1991 profits of $345 million, on revenues of $4.94 billion. And, to many, the Discover card's future is a big question mark.

A Changed Playing Field

When the Discover card was launched in 1986, it successfully wooed millions of consumers by waiving annual fees and offering a cash-back incentive program.

But now, with nonbank entrants, including AT&T and General Motors, offering low- or no-fee cards with a variety of incentive programs, the Discover card's advantages are less compelling.

And the Discover card faces a big problem with its high 19.8% annual interest rate. Most major cards charge less. And many observers predict that the Discover card will have to cut its rates to maintain market share.

Bruce Brittain, president of the consulting firm Brittain Associates Inc., Atlanta, said that a decline in Discover card usage, spurred partly by high interest rates, may have already begun.

He said research by his firm showed that the number of households that regularly used the Discover card dropped 15% from September 1991 to September 1992, the first annual decline in the history of the card.

He added that surveys by his firm show that a quarter of Discover cardholders believe its interest rates are too high. The company is "in an interest rate pickle," Mr. Brittain said, and needs to sweeten the deal.

But lowering interest rates could hurt Discover card's profits more than such a move would affect other card issuers, precisely because the Discover card doesn't get as much revenue from other sources.

Lower Merchant Fees

In addition to not charging an annual fee, the Discover card charges merchants lower fees, less than half those charged by MasterCard and Visa, according to David Robertson, president of The Nilson Report, an industry newsletter in Santa Monica, Calif.

But Dean Witter officials chafe at any suggestion that Discover's profitability will decline.

"I don't agree with that at all," said Dean Witter spokeswoman Beth Metzler. "Everything we've done has shown us to be successful to date."

Ms. Metzler added that Discover has not decided to lower its interest rates, although possible changes are being studied.

Encouraging Numbers

And by one critical measure, the data confirm Ms. Metzler's assertion that all is well.

According to The Nilson Report, the Discover card's market share increased 22 basis points in the first six months of this year, from 5.47% to 5.69% of all charges maintain major cards.

The marketshares of Visa, MasterCards, American Express, and Diners Club declined in the same period.

All that said, the fact remains that Discover is playing in a market that is highly competitive -- and growing more so every day.

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