Sears looks to bail out of decades-old credit business - Sears, Roebuck & Co

DSN Retailing Today, April 7, 2003 by Doug Desjardins

CHICAGO -- Sears, Roebuck & Co. surprised investors last week when it announced plans to sell its massive $31 billion credit card portfolio. Sears ceo Alan Lacy said assets from the sale would provide a windfall for investors and help the company trim its debt and focus on its troubled retail business.

Though Lacy said the company would remain "vague on the economies for now," estimates on how much Sears would net from the sale ranged from $4 billion to $7 billion. Sears currently has 25 million active accounts on the books for its Sears Card and Sears Gold MasterCard. Analysts said potential suitors for its credit card business--the eighth-largest in the United States--include GE, Bank One and Citigroup.

While the credit card business has been a consistent moneymaker for Sears-generating $1.5 billion and 60% of the retailer's total operating income last year-it's also been a trouble spot. The poor economy has produced a sharp increase in delinquent accounts and Sears recently had to add $186 million to its reserve fund for uncollectible accounts.

Lacy said Sears would be following an industry trend if it exits the credit card business, noting that during the past 10 years, "most retailers have teamed up with third parties to operate their credit card business." Selling the business would also provide the company with cash it could use to improve its finances and "allow us to focus on our core retail business."

But the sale is not a sure thing. Lacy acknowledged this is the fourth time in eight years that Sears has floated the idea of selling its credit card business. There's also some speculation Sears may only sell the Gold MasterCard business it launched two years ago. The company said any transaction would not take place until the second half of 2003.

The announcement gave Sears' stock a much-needed boost. Its price per share rose $2.69 on March 26 to close at $24.14, an increase of nearly 13%. It was also well received by most analysts.

Margaret Cannella of JPMorgan Securities noted the sale would be "a net positive for the company, since they would be exiting a problematic business." She added that the sale price would likely be "in a range of $4 billion to $5 billion."

Men-ill Lynch analyst Daniel Barry estimates that "$6 billion is likely the upper end of a $4.5 billion to $6 billion valuation for the sale." He also cautioned that Sears would miss the buffer its credit card business has provided.

"The lack of a credit card business changes the complexion of Sears' retail business," noted Barry. 'They will have a reduced financial stake in in-store credit sales, reducing their ability to offset lower big-ticket electronics and appliances margins with contributions from credit."