Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

US department stores see higher credit delinquencies amid strained spending

Published 08/24/2023, 07:04 PM
Updated 08/24/2023, 07:06 PM
© Reuters. FILE PHOTO: People wearing protective masks shop at Macy's Herald Square following the outbreak of the coronavirus disease (COVID-19) in the Manhattan borough of New York City, New York, U.S., December 26, 2020.  REUTERS/Jeenah Moon/File Photo

By Katherine Masters and Ananya Mariam Rajesh

(Reuters) - Major U.S. department stores including Macy's (NYSE:M) and Nordstrom (NYSE:JWN) are flagging delays in store credit card repayments, another risk to revenues as consumers pull back from discretionary spending ahead of the crucial holiday shopping season.

Macy's executives disclosed on Tuesday that rising delinquencies cut credit card revenues to $120 million in the second quarter, down $84 million from the previous quarter. While Nordstrom's credit card revenues rose 10% in the first half of this year, company executives said Tuesday that delinquencies are now above pre-pandemic levels and could "result in higher credit losses in the second half and into 2024."

In an earnings call on Wednesday, Kohl's (NYSE:KSS) said "other revenue," which is primarily its credit business, declined 3% in the second quarter, sharply down from 11% in the first quarter. The company also announced a new co-branded credit card with Capital One in a bid to attract more customers to its credit segment.

U.S. department stores have long offered store credit cards, which often provide savings or points on purchases, as a way to capture sales and grow revenue. However, those cards are typically riskier than traditional credit cards, with higher interest rates and lower credit limits, according to credit reporting consultant John Ulzheimer.

Macy’s credit card, for example, has an annual percentage of 31.99% while the national average is 22.39%, according to an August report by WalletHub. Those high interest rates, combined with laxer credit score thresholds, make it more likely that higher-risk consumers will sign up for store cards, according to Ulzheimer.

While consumer spending remains relatively resilient according to U.S. retail sales data, investors and experts say rising delinquincies could signal growing pressure on some consumers. The percentage of delinquent payers rose by 23.1% to 38.2% between the second quarters of 2022 and 2023, with the biggest change among consumers in their 40s and 50s, according to data from the Federal Reserve Bank of St. Louis.

Declining payment rates could be "an early sign that consumption is getting weaker," said FRED economist and vice president Juan M. Sánchez. Delinquency rates are currently highest among young consumers in their 20s and 30s and those in more economically distressed zip codes.

© Reuters. FILE PHOTO: People wearing protective masks shop at Macy's Herald Square following the outbreak of the coronavirus disease (COVID-19) in the Manhattan borough of New York City, New York, U.S., December 26, 2020.  REUTERS/Jeenah Moon/File Photo

Defaults in credit payments mean department stores are now assuming higher bad debt and write-offs for the year as spending remains pressured in the United States.

"For stressed consumers, store cards are one of the first things they may be late or renege on before regular credit cards, car payments, and mortgages which they consider more important," said Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.