Feb 10, 2009
So Long Credit Fueled Retail Spending!
When I began this blog, I was under the impression that we’d see a difficult period for retailers and consumer spending in general. I had looked at data that showed many consumers leveraged their spending by using the easy credit provided by their home equity loans. My thinking was that if house prices declined, these guys would start feeling the hit and we might see a broader downturn. It was one of the drivers for me to invest in Fairfax Financial (NYSE:).
The deterioration did not move at the pace I expected, but it seems to be picking up now. Tara Siegel Bernard at the NYTimes has a great piece on increased losses with private label credit cards:
Losses on the cards are rising at a faster pace than the broader credit card market — reaching a three-year high of 10.51 percent in January, according to Fitch Ratings, up 44 percent from a year ago. That compares with general credit card losses of 7.5 percent, up 40 percent from the year before.
While private label cards account for only about 11 percent of all credit card loans outstanding, their troubles offer a window into the deteriorating finances of some of the most distressed Americans. And the losses may prove to be a warning of deeper problems ahead for general cards as the economy weakens and unemployment climbs.
“The higher rate of charge-offs on private label reflects the impact that the economic downturn is having on all customer classes, with a particular strain on lower and middle-class income households,” said John Grund, a partner at First Annapolis, an advisory firm focused on the payments industry. “The next 12 months, 2009 into 2010, just doesn’t look real pretty as the jobless figures escalate.”
And this may affect retail sales:
The troubles in the private label card business may also further affect sales at retailers, which have already been reeling as consumers have cut back. Mr. Grund estimated that 30 to 40 percent of department store sales went on private label cards.
“Credit-tightening will shrink the amount of private label credit outstanding over time, but it will have an immediate impact on retail sales,” he added. “Consumers need financing to buy merchandise, especially big-ticket items, and issuers can cut too far to reduce loss exposure, making the recession even more problematic.”
Of course, some retailers, especially those that cater to more affluent consumers, are experiencing fewer losses, Nordstrom among them. And while some retailers continue to offer the cards at their registers in exchange for a same-day discount, the lenders have made it more difficult to qualify, much as they have done with traditional credit cards.
Fitch, which tracks $72 billion in receivables issued by banks on behalf of retailers, expects private label card losses to surpass 12 percent by midyear and losses on general cardholders with solid credit to reach 8 percent.
I think that the likelihood of this issue affecting retail sales will be pretty big. I walk through stores all the time and see them peddling their store cards and see people sign up for them particularly during increased spending periods (Christmas, Back to School shopping, Black Friday). These are times when buyers may be doing more than their usual purchasing and may lack the cash to make the purchase on that particular day. They go ahead anyway with the hopes of paying it off later with the store’s card.
If stores stop extending these cards, they’ll surely see a contraction in spending which should continue to have a negative effect on retailers and the sectors that are affected by them. Some people are expecting consumer spending to revert back to its historical mean (about a 10% contraction). Right now, I think that one of the best ways of trying to figure out how much this is happening and to what degree, is by paying attention to its drivers. These private label cards are at least one of them.
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