The Economic Implications of Retailer Credit Card Programs

Overview:

• Retailer Card Programs remain a valuable part of retailers' operations.
• We believe card programs from warehouse clubs have generally been more successful than those in other retail subsegments.
• The economics to the retailers in a credit card program usually factor in credit losses. This allows for more balance in risk-adjusted returns between the retailers and the issuers.
• Our analysis includes highly curated data on credit card mail and a review of each subject retailer's disclosures for its credit card program.
• We also discuss where the card networks can add value.

The TD Cowen Insight

Retailers' credit card programs have remained an important aspect of the operations. In such programs, economics sharing usually factors in credit losses and thus is more balanced between the retailers and the issuers. Based on several factors, we also believe card programs from warehouse clubs have generally been more successful than programs from other subsegments of retail.

Our Thesis

We believe credit card programs have remained particularly important to the retail industry in both financial performance and driving consumer loyalty.

For card issuers, the growth in royalty fees paid by them to the retailers has ranged from negative to flat to mid-single digits depending on the partnerships, though we believe there are marquee programs as well as newer ones that are growing above this level. This is slower than the growth (low double-digits) that airlines have seen from their card programs as the airlines typically focus on higher spending customers. Additionally, renewals don’t add as much incremental economics to the retailers as they usually do in the case of airlines, and retailer card programs in general don’t renew as often as airline card programs.

Given the economics to the retailers in a credit card program usually factors in credit losses, this is more balanced in risk-adjusted returns between the retailers and the issuers. This sharing structure is in contrast with the economics in an airline card program where the airlines' economics are usually derived from the top line of the portfolio.

What is Proprietary

A collaboration between our consumer finance, retail, payment and information technology (IT) hardware research teams, this report is a product of highly curated data on credit card solicitation mail volume from major U.S. retailer card programs. We researched data across subsegments of retail and our analysis of each subject retailer's disclosures around its credit card program. In our full report, we also show how important these programs are to some of the retailers in areas such as financials and customer loyalty. We believe no one on the Street has attempted to do this.

Financial and Industry Model Implications

Programs from warehouse clubs have generally been more successful than those from other subsegments of retail. Further, the more a program is indexed to higher income customers, the more attractive it is to both retailers and issuers. Other desirable traits include fast growth and top-of-wallet status. We believe this will continue to be the case for retailer card programs, and retailers with such characteristics should have more negotiating power.

We also note that credit card programs drive on average 40-60% of department store earnings before interest and tax (EBIT) as credit card revenue could represent 4-6% of net sales and flow through an estimated 95% EBIT rate to operating income.

What to Watch

Potential renewals and new card partnerships are interesting milestones to watch next in the retailer card landscape. These could set the tone and give investors a sense of the relative leverage between retailers and issuers in the coming years.