Indirect to You: Sears Credit Cards

  At one time, Sears, Roebuck and Co. was the top retailer in the U.S. and, with its highly successful credit business, had a place in American homes and in Americans' wallets. Even after Sears dropped from the top retail spot, its credit side remained powerful. So much so, that some wags would refer to the Hoffman Estates, Ill.-based firm as a card company with stores.
  But late this March, Sears announced it just might scale back to its retail business, saying it was studying several alternatives for spinning off its credit and financial products business. Possibilities included selling the entire business, forming a joint venture, or collaborating with another company to manage the unit.
  The finance division manages the nation's eighth-largest credit card portfolio, with $30.8 billion in managed receivables and 25 million active accounts at the end of last year. It includes Sears' proprietary card, which had $18.4 billion in receivables, and Sears' Gold MasterCard, with $12.4 billion in receivables. Sears' proprietary and bank cards accounted for 44% of store sales in 2002, according to Sears.
  In a Securities and Exchange Commission filing, Sears reported that the finance unit generated more than $1.5 billion in income in 2002. In contrast, the retail and related services business delivered more than $31 billion in revenue but only $1.2 billion in operating income, though up 28% compared with 2001, Sears reported.
  The finance division has had some well-publicized problems recently, including growing net chargeoffs, especially in the three-year-old MasterCard portfolio ("A Tale of Two Retailers," Card Watch, April). Sears increased its loan-loss reserves by $189 million in 2002's third quarter. In the fourth quarter, chargeoffs were 5.4% of receivables compared with 5.23% in 2001's fourth quarter. Sears expects total chargeoffs to average between 6.5% and 7% this year.
  The announcement took many by surprise. "This is a watershed event for Sears and the industry," says John C. Grund, partner and retail credit specialist at First Annapolis Consulting Inc., Linthicum, Md.
  Grund notes that Sears gets almost 60% of its profits from cards. "Sears was an inventor of the retail credit business in the U.S. 92 years ago," he says. "The Sears cardholder is its core customer. This is sacred ground here."
  Tire-Kickers
  Speculation on buyers willing and able to pay up to Sears' desired $7 billion for the portfolio was widespread, with many assuming the retailer would seek a stable, deep-pocketed partner already in the retail space.
  That would include the three dominant retail card processors: General Electric Co.'s GE Consumer Finance, HSBC Holdings plc's Household Retail Services USA, and Citi Commerce Solutions, a division of Citigroup Inc., Grund says.
  A major bank card issuer, such as Bank of America Corp. or Bank One Corp., could also step forward. In fact, Bank One's card chief, Philip Heasley, said in a published report that his bank would look at the portfolio.
  Sears plans to conclude its review of strategic alternatives and take action in the second half of this year.