Home Credit report 1 Big risk for Macy’s shareholders

1 Big risk for Macy’s shareholders

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For many years, Macy’s (NYSE: M) The store-branded credit card has made a big contribution to the financial performance of the department store giant. In fiscal 2019, net credit card revenue totaled $ 771 million, representing more than half of the company’s adjusted operating profit. Last year, Macy’s recorded $ 751 million in net credit card revenue, despite the impact of the pandemic.

however, Citigroup – the company’s credit card partner – recently exercised an option to terminate its contract with the retailer ahead of schedule. This creates a ton of uncertainty for shareholders that won’t be resolved until both parties negotiate a new deal or Macy’s pick a new credit card partner.

Why the credit card program is so important

A subsidiary of Citibank (Department Stores National Bank) issues credit cards on behalf of Macy’s and its premium brand Bloomingdale’s. These include a simple store credit card that can only be used at Macy’s and a American Express card that can be used with any merchant that accepts AmEx. Macy’s and Bloomingdale’s branded cards account for 40-50% of a retailer’s spend in a typical year.

Store credit cards tend to carry high interest rates, which makes them very lucrative for banks. Under its agreement with Citibank, Macy’s receives payments based on the amounts billed on its private label and co-branded cards, as well as bonuses for opening new card accounts and incentive payments based on them. performance of its card portfolio.

Image source: Macy’s.

These high-margin revenue streams have always contributed significantly to Macy’s earnings. However, they have become even more important in recent years as the favorable performance of the portfolio has resulted in growth in net credit card income, even as profit margins in core retail operations have declined significantly.

A change is coming

The long-term agreement with Citibank gave the bank an early termination option if sales over a 12-month period at Macy’s declined by more than 34% compared to the period July 2006 to June 2007. Due to the impact of the COVID-19 pandemic, sales for the 12-month period ending February 2021 fell enough to trigger this option.

In its latest quarterly report, the company revealed that Citibank exercised its early termination option on June 4. Macy’s has six months from that date to decide whether to purchase the credit card receivables on its own or to choose a new credit card partner to purchase them on its behalf. He then has six additional months to finalize the transaction.

Of course, Macy’s and Citibank could also choose to negotiate a new deal. Macy’s chief financial officer Adrian Mitchell recently said the two companies are still discussing a new deal.

Not a disaster, but something to watch

In his comments at recent investor conferences, Mitchell noted that the company’s credit card portfolio is very healthy and should be attractive to many financial institutions. In addition, department store sales have exploded since the start of the year.

Chart M Revenue (quarterly growth year-on-year)

Macy’s revenue (quarterly year-on-year growth), given by YCharts. YoY = year after year.

In May, Macy’s increased the midpoint of its full-year sales forecast by more than $ 1.7 billion. He now expects sales to rebound at least 25% from FY2020 levels this year. The company also nearly tripled the midpoint of its annual profit forecast.

The rapid improvement in sales and profits should give potential Macy’s partners more confidence in the sustainability of their business – and therefore, their credit card program. Yet Citibank would not have exercised its early termination option if it had not wanted to lose Macy’s credit card business. So it’s unlikely that any other credit card issuer will offer Macy’s better terms than it had under the deal Citibank just terminated.

On the bright side, Macy’s remains a large retailer and will likely generate nearly $ 10 billion in sales from its credit cards this year. This should make his credit card portfolio attractive enough that the terms of his next credit card deal aren’t too much worse than the last. But until Macy’s signs a new deal and explains the impact on its future credit card revenue, uncertainty over this important source of revenue will continue to pose a big risk to shareholders.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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