If Sears, Roebuck & Co. is poised to throw in the towel on its credit card business, will other retailers inevitably follow suit?
That possibility was on analysts' minds as they considered the list of retailers that have opened or dramatically expanded their card businesses during the last few years and now have to steer those much larger operations through a difficult economic environment.
Among those companies, several analysts cited Target Corp. and Circuit City Stores Inc. as companies that have experienced growing pains in their card businesses somewhat like those at Sears.
Cathy Wright, a spokeswoman for Target, said that it had no plans to consider selling its card business and that chargeoffs were expected to begin falling after going up again this quarter. Target will not run into Sears' problems because it was more careful in adding customers, she said.
"Compared to Sears, we sourced with our active guests. We didn't do direct-mail solicitation," Ms. Wright said. "We did not bring people to this card through teaser rates or balance transfers. We don't offer any of those things. They are risky, more risky, and we obviously knew our guests before we offered them the card."
A Circuit City spokesman would not say whether the Richmond, Va., retailer was considering selling off its card business.
Target began breaking out the earnings results for its card operations on Feb. 20, the day it released earnings for its fiscal fourth quarter, which ended Feb. 1, and said it will continue to do so. It said the chargeoff rate for its Visa cards was 7.3% for the quarter - up dramatically from 2.2% in the quarter that ended May 4, 2002, the earliest rate that Target broke out.
The chargeoff rate in its proprietary card portfolio was 8.4% in its fiscal fourth quarter, up from 7.3% in the quarter that ended last May.
The Target Visa generated $212 million of revenue for the most recent period, while the store cards generated $171 million.
Like Sears, Target started out by offering a proprietary card, then introduced a general purpose card.
"Sears made the move when the market was doing very well and when unemployment was at the lowest level since World War II," said David Robertson, the president of the Oxnard, Calif.-based newsletter The Nilson Report. "But timing is everything. They ran into cyclical nature of unemployment and a downturn in the economy."
Sears' stock rose 12.54% Wednesday, to close at $24.14 a share.
Target made a move to convert store card customers into Visa holders beginning in 2001, even slapping a flashy smart chip on its card. The Minneapolis-based retailer's card business is only one-tenth the size of Sears' but has been experiencing fast growth and rising losses.
"There is a similarity in the core base of customers that are frequenting Sears and Target," Mr. Robertson said.
David Campbell, an analyst at Davenport & Co. of Richmond Va., said Target seems comfortable running its own card business in spite of the credit problems.
"I would not expect them to sell it off, though it definitely has put pressure on its valuation as a company," he said. "They seem to be comfortable with the profitability of the company."
Circuit City might be a more likely candidate for getting out of the credit card business and "has clearly had some problems managing it," he said. "They may realize they need to go ahead and let someone manage it who knows what they are doing."
During its fourth-quarter conference call, Target's top cards executive downplayed worries about the rising chargeoff rate in its Visa portfolio.
"In the last 90 to 120 days we have seen changes in the macro-environment and our portfolio, and we are responding to those changes," said Jerry Storch, Target's vice chairman. "We are more focused on making sure the portfolio is optimum quality and balancing between the benefits of extending credit and the risk of extending it in the wrong place."
The retailer also is keeping tight control of the balances of its 9 million Visa accounts, he said.
Michael Baker, an analyst with Deustche Bank Securities, pointed to Circuit City's cobranded credit card program, which it launched in May, as a portfolio under some stress. "Trends have risen steadily from August through January."
He estimated chargeoffs on the $1.574 billion bank card portfolio at 11.8% for last month, down from a high of 14.8% in January.
Robert Hammer, the chairman and chief executive officer of R.K. Hammer Investment Bankers, of Thousand Oaks, Calif., says he thinks the Sears sale may inspire Target and other retailers to reconsider their cards businesses.
"I'd be surprised if somebody in finance at Target hadn't already thought of this," he said. "I would be surprised if somebody hadn't gone through this exercise and said, 'Let's look at Sears and see if we should do this with our portfolio.' "
The problem with quickly growing portfolios like those of Sears and Target is that chargeoffs tend to be masked in the portfolio's early results only to pop up later, Mr. Hammer said.
"The present level of chargeoffs might be understated. They haven't normalized yet," he said. "Anybody that says they are not watching the Sears things now isn't giving you the full skinny."
Steven Baumgarten, an analyst at Parker/Hunter Inc. who covers Target, said he has not heard anything about the possibility of the retailer selling its card operations. He also said he was not concerned at this point about credit quality deterioration in its portfolio.
"It's something we keep our eye on, but at this point it's not a major concern - although down the road it could be," he said.
There is no magic chargeoff number that would necessarily cause concern about the portfolio, Mr. Baumgarten said. Target has managed its card operations differently and more cautiously than Sears and other issuers, he said.
For example, Target did not offer teaser rates to acquire cardholders, he said. "Typically, it's teaser rates that attract a lower quality of customers."
Economic factors, more than mismanagement, are probably causing chargeoffs to rise, he said. "Also, when you're ramping up credit card operations, chargeoffs are just something that can happen."
