Credit Card Spending Surges, While Retailers Slump

Today MasterCard (MA) raised its long-term net income growth to 20%-30% annually up from a previous 15%-20% and that revenue may grow an average 12%-15% annually, up from a previous 8% to 10%. This growth takes place as more consumers switch to credit card spending and away from cash or checks. It is now estimated that 55% of all US transactions will be done using cards, up from 40% in 2005.

Visa (V) is the other big beneficiary of this growth, and as neither of them assume the credit risk of customers, they both seem to have a fairly low-risk, high growth business business model. The current economic crisis has done nothing but boost these company’s growth as consumers struggling with higher prices and lower incomes are forced to make payments on credit.

Retailers, on the other hand, especially those in the mid-end range, are suffering from higher prices and lower spending. Sears (SHLD) reported an unexpected net loss of $56 million, or 43 cents per share in Q1, vs a profit of $223 million, or $1.45 a share last Q1 and analysts’ expectations of a 15 cents per share profit.

What went wrong? A lot of things. Revenue fell by 6%, US same store sales were down 9.8% for Sears and 7.1% for Kmart, gross margins dropped to 27.3% from 28.2% last year as the company slashed prices, and sales and administrative costs rose 6%. It seems Sears is experiencing what many of their consumers are going through, a time of higher costs and lower income.

At least for today, the higher cost of living is continuing to rise as oil jumped back up to above $132 a barrel after government data showed a surprise decline in stockpiles last week.

Comments

[User 68127:]

On the other hand, maybe consumers are charging more on their credit cards because they aren't earning enough to pay for gas and food out of their paychecks, and because no one else will lend to them any more! Should this be extrapolated into greater long term growth by MA? Maybe it is just the last gasp of the dying consumer which would result in large charge-offs by credit card companies and lower transaction growth for MA and V?

2008 May 29 01:31 PM

[DP:]

in many instances credit card debt lays on the hands of banks and other financial institutions. For example, US Bank Visa credit card: US bank lends the money, not Visa.

2008 May 29 03:53 PM

[John Pseudonym:]

"Sears (SHLD) reported an unexpected net loss of $56 million"

"unexpected"? Have you been in a Sears or Kmart in the last 5 years?

The stores are sadly outdated with low selection and high prices.

Sears has on foot in the grave and the CEO is clueless as to how to turn the company around.

There was another article here where the CEO of Sears responded to complaints that run down stores are causing consumers to shop elsewhere.

His reply? I'm not going to invest money in stores that are losing money..what a fool.

2008 May 29 05:07 PM

[Rusty Shack...:]

Ms. Cheng,

Have you researched where these borrowers are spending this additional money? So far we know it's not Sears and KMart; so, where is it? Thanks.

Rusty

2008 May 29 05:34 PM

[billddrummer:]

Rusty,

Try WMT, COST, and Kohl's (KSS). None of these retailers are scaling back store opening plans, WMT is posting same-store sales growth that outpaces inflation, COST benefits from high median income shoppers who bargain hunt, and fresher discount product offerings at KSS are luring people away from JCP and SHLD.

K-mart is a train wreck. They could bring back the blue light specials but no one would respond.

2008 May 29 07:53 PM

[ustaad:]

Despite all its reported troubles - Sears has generated a billion dollars in FCF annually in the past 2-3 years. It has a 600 million in buy back authorization remaining and an undervalued share price (and heading lower likely) to boot. What's not to like?

I give Eddie Lampert credit - the worst thing he could do is to spend money like crazy to try and make Sears into a WMT or COST. Clearly, no amount of money will make it into COST ot WMT.

I don't believe the Sears story is about reinventing the retail outfit. It will be about reinvesting the cash flow from operations and from sales of assets profitably. It will take a long time. These problems were not created overnight and won't be fixed in a hurry.

In the meantime Eddie Lampert gets to buy back stock at good prices. If it went down another 50%, I don't think he'll complain. Cheaper the price, better it is for a buyer.


Unless the chronic underinvesting starts hurting the FCF significantly, we should be in good shape. As someone pointed out, Sears' share price troubles are shared by many other retailers despite retail investment in their stores. In this environment, I'd rather have an asset allocator at the helm rather than a retail turnaround specialist.

2008 May 29 08:25 PM

[Plantinseeds:]

It is sad about Sears though. Sears was the 1st to give me credit when I was 20 years old ( wow that was a long, long time ago ).
Personaly I like Sears. Craftsman tools is all I'll own.

But they have no motivation at there stores. It is definetly an upper management problem too.
Their marketing is a disaster. I have thought many times about sending an e-mail to the VP of sales and sayin; Hey, fire your regional manager over my area and I'll double your inventory turns and boost your same store sales by at least 10% in a 16-20 month period!
It would be sooooo easy. Yes even and really easier during this recession.

2008 May 29 11:43 PM

[Adam Axler:]

Bill, unlike the other box discounters you mention, Kohl's got hammered last quarter (revenue down 27%). DP makes the proper distinguishment from credit cards issued by banks and simply those that make money off merchant fees (Visa, Mastercard). Credit cards tied to actual banks like Capital One have daily increases in delinquency rates....

2008 May 29 11:45 PM

[John Pseudonym:]

I would own Kohls long before Sears.

----------------

Sears is a bloated bureaucracy. Clogged with dead wood trying to hold on to their overpaid positions.

The roots are well rotted and it's only a matter of time before the tree falls.

2008 May 30 10:35 AM

[User 202410:]

i have the same question as rusty--where are these credit cards being used? my guess is for essentials like groceries, household products, gas, etc...

2008 May 30 11:49 AM

[bankshot:]

Its likely that the growth experienced by MA is as a result of consumers trying to tap into credit lines as cash becomes tighter. If credit quality worsens beyond subprime/RE relates assets, and evedntually extends into consumer credit (credit cards, auto) eventually banks will start to rein in credit lines and that would auger poorly for MA, V longer-term growth rates

2008 May 30 12:37 PM

[billddrummer:]

Adam,

Last quarter KSS revenue was up 1.5%, according to the transcript from the conference call.

seekingalpha.com/artic...

What dropped was net profits and EPS, linked to higher SG & A expense resulting from 28 new store openings, higher pre-opening costs driven by the same metric, and higher interest costs resulting from the $1 billion credit facility they tapped this year.

2008 Jun 04 05:21 PM