Target Corp. and U.S. retailers may lose almost $9 billion in holiday sales as banks rein in lending to cash-strapped consumers before a new credit-card law takes effect.
Sales in November and December may fall 1.2 percent to $436.7 billion from the same period in 2008, said Britt Beemer, chairman of consumer polling firm America’s Research Group. If lenders weren’t cutting customer spending limits and rejecting more credit-card applicants, sales would gain about 0.8 percent to $445.5 billion, he said in a Dec. 21 interview.
Target Chief Financial Officer Douglas Scovanner says the credit-card legislation is exacerbating a spending slump just as consumers begin to consider more discretionary purchases they would usually buy with credit. Items such as clothing, jewelry and home goods suffered steeper declines during the recession and are among the most profitable sales for retailers.
“It will mute the impact of the rebound that would have otherwise occurred,” Scovanner said. “Diminished availability of credit equals diminished spending.”
Reduced lending may shave at least half a percentage point off sales at stores open at least a year once more of the Credit Card Accountability, Responsibility and Disclosure Act goes into effect in February, Scovanner said in a Nov. 17 interview in Minneapolis, where the chain is based. In November, Target’s comparable-store sales declined 1.5 percent.
‘Tighten Up’
The act bans so-called universal default, the practice of raising interest rates based on a missed payment with another lender. The rules are already causing lenders to “tighten up,” said Brad Jolson, senior director for risk management solutions at Fair Isaac Corp. FICO, as the company is known, is the Minneapolis-based provider of the credit-scoring formula most widely used by lenders.
Available credit to U.S. consumers through cards fell to $3.6 trillion this year from a peak of $4.7 trillion last year, according to a study released in July by TowerGroup, a Needham, Massachusetts-based financial research and advising firm.
“We’re scared to death of what this law is going to do,” said Edward Record, CFO at Stage Stores Inc., the Houston-based operator of 759 stores including the Bealls and Peebles chains. “It’s definitely going to hurt consumer spending.”
Store-Brand Cards
About a third of Stage Stores’ sales comes from store-brand credit cards, and as much as a quarter from other issuers, Record said in a Dec. 17 telephone interview. He said he expects the general-purpose cards will be more affected because Stage Stores was “pretty conservative” with its own cards.
Stage Stores added 8 cents to $12.42 in New York Stock Exchange composite trading yesterday and has advanced 51 percent this year. Target fell 54 cents to $48.79 in trading yesterday. The shares have gained 41 percent this year.
Target also offers its own branded credit cards through a portfolio it funds mainly with JPMorgan Chase & Co. Writeoffs for loans deemed uncollectible rose to 14.99 percent in November on an annualized basis, up from 13.49 percent in October and 11 percent a year earlier, Target said in filings.
Proponents of the credit-card law say the rules protect consumers and put more cash at their disposal, benefiting shoppers and retailers. Some issuers may have hurt sales between the law’s passage and enactment by raising rates in anticipation of the coming restrictions, said U.S. Representative Carolyn Maloney, a New York Democrat and a sponsor of the law.
“Much of the damage was and is self-inflicted,” she said in a Dec. 16 telephone interview. “Virtually all of the consumers I’ve talked to like my card reforms.”
Managing Risk
The law will reduce lenders’ flexibility to manage risk, said Peter Garuccio, a spokesman for the American Bankers Association, a Washington trade group representing about 95 percent of U.S. banking assets. That leaves them the options of “not making cards available or doing so at higher prices,” he said in a telephone interview on Dec. 21.
JPMorgan Chase and Bank of America Corp., the two largest issuers, referred questions on the law to the American Bankers Association. Bank of America decided not to raise card interest rates before the law goes into effect except in instances where customers miss at least two payments within 12 months, Betty Riess, a spokeswoman, said yesterday by telephone.
Less credit hurts larger sales disproportionately, according to Beemer, the consumer researcher.
“Credit drives purchases over $50,” he said. He estimates that half those transactions were made with credit cards before access diminished this year.
Applications Rejected
This year, 22 percent of the consumers that Beemer’s Charleston, South Carolina-based firm surveyed said they had credit-card applications rejected, compared with 12 percent last year. More than 37 percent said their credit limits had been reduced in the past year. That means fewer sales of items such as appliances, Beemer said.
The National Retail Federation, which hasn’t taken a stance on the credit-card law as a whole, has said proposed rules under the law threaten stores’ ability to grant so-called instant credit at checkout.
The Federal Reserve’s proposed guidelines would require retailers to ask customers for information on income and other assets, according to the industry group. That may all but eliminate merchants’ ability to issue store cards or raise borrowing limits at the register, Mallory Duncan, general counsel of the Washington-based federation, said in a telephone interview. The current practice is to use credit scores, purchasing history and other credit-bureau information, he said.
“It’s going to have quite a chilling effect on our ability to initiate new accounts,” Duncan said.
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