Sears Credit Problems Continue

In an earlier issue of Spotlight we noted that Sears, Roebuck and Co. was experiencing severe delinquency problems with its credit cards. According to the article in the Wall Street Journal by Joe Hallinan and Amy Merrick, "Sears is the third largest MasterCard in the world, trailing behind only Citigroup, Inc. and MBNA Corp. In the fiscal year ending December 28, 2002 Sears credit and financial services division provided $1.5 billion, or 60 percent of the firm's operating income. In contrast, the retail division produced only $1.16 billion in operating income.

However, the future is not all that rosy. Sears predicts that losses on its credit card portfolio will increase. Since charge-offs tend to worsen as young credit card portfolios age, Sears expects the charge-off rate on its MasterCard to rise from 3.63 percent as of the end of September 2002 to between 6.5 percent and 7 percent this year. Bankruptcies are also an increasing problem. Bankruptcies among holders of credit cards were 20 percent higher in the third quarter of 2002 than in the same quarter of 2001.These increases in the number of filings were significantly higher than national increases in consumer bankruptcies (see related article in the "Forecasts and Statistics" section of this issue). In contrast to the industry's practice of writing off accounts after no payments have been received for 180 days, Sears waits to take action until 240 days have passed.

Sears maintains that its credit card customers are no worse than the U.S. average. Of 60 million total accounts, about 25 million are considered active (some type of statement activity in the past 12 months). About 16 million of these active cardholders are Sears proprietary "Blue" card customers. The remainder hold Sears MasterCard products. Sears reports that its active MasterCard customers have an average credit score (FICO) of 720, which is roughly in the middle of the distribution of U.S. cardholders.

In late February Sears reported that it would scale back its credit card marketing programs for the remainder of this year. The American Banker reported that Sears CEO Alan Lacy told a conference of investors that 15% of Sears MasterCard balances acquired during 2002 were obtained through direct-mail offers of preapproved cards. These accounts have apparently not been profitable. Consequently, the company will send out fewer direct mail solicitations this year, and offer fewer convenience checks and balance transfers. Lacy also said that Sears will lower the credit lines of both proprietary card and MasterCard customers "that are higher-risk than people we'd like to have in the portfolio."