With the market clearly signaling US recession, and unemployment spiking at a rate many perhaps thought impossible, we think the day of reckoning is coming as it relates to retail's risk to the consumer credit cycle. In this deck we aim to explain how these programs work, the magnitude of earnings risk across as many relevant retailers we can find, and how we think it all plays out in terms of timing and magnitude.
Relevant Tickers: KSS, JCP, M, GPS, TGT, JWN, SIG, WMT, DDS, LOW, COF, SYF, among others.
Call Details (Add to Your Calendar CLICK HERE)
Date/Time: Tuesday, April 7th 2020 at 10am EDT
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UK: 0
Confirmation Number: 13699480
Live Video Link: CLICK HERE
The Financials Take
- Surging initial jobless claims numbers have transformed the unsecured revolving consumer credit quality outlook practically overnight.
- We’ll contextualize the employment environment as it stands and various future scenarios from a loan loss standpoint and give a framework for evaluating losses and earnings power impairment.
- Private label card operators are in a curious position relative to their general purpose counterparts due to the risk-sharing and economics-splitting nature of these relationships. On the one hand, these arrangements serve to insulate the issuer, but on the other hand this risk-sharing may catalyze a liquidity event on the part of the retail partner.
- Synchrony (SYF) and Capital One (COF) have both private label and considerable subprime consumer credit exposure putting them on the front lines of this Covid-19 downturn. We’ll consider the impact to both companies and the knock-on effects that may arise from their various retail partnerships.
The Retail Take
- The retailer credit card powder keg is now tipping towards an open flame. For some greater industry context, the US retail industry was already in a precarious situation for several years as retail had entered its next megacycle (#Retail5.0, HedgeyeRetail 2017). The industry was long built upon apparel retail and the US consumer appetite to wear it. Over time it became overexposed and overly dependent on massive amounts of unit inventory and the associated square footage needed to display those inventory units (the oversimplified term being "overstored"). Now the prior retail disruptors (off mall community/strip shopping centers) are being rapidly disintermediated by accelerating ecommerce penetration. And the implied square footage of ecommerce sales is applying rapid pressure on brick and mortar sales productivity and therefore retailer profits, hence the accelerating retail bankruptcies in the last few years at the same time the consumer sentiment and spending was ramping beyond decade highs. Covid-19 is going to immensely hasten the decline that was already in motion.
- And then there's credit. While the industry was building its strip malls and huge national store bases, many retailers starting bolstering the profits of customer acquisition by offering private label credit cards to the customers found within new store markets, either self-underwritten or by partnering with a major card issuer. It was great, it drove comps by extending credit to its customers that could only be used in its store, and it made more money off finances charges and late fees with the customers' desires to consumer beyond their means.Over the last couple decades the exposure to credit has grown from tiny to massive as credit profits have flourished, and retail profits have dwindled. Compared to the last recession 2008 the private label credit card penetration in sales is 20 to 50% higher, and the percentage of EBIT generated from credit is up 1 to 3x. Several retailers even see credit as more than half of EPS.
- With the market clearly signaling US recession, and unemployment spiking at a rate many perhaps thought impossible, we think the day of reckoning is coming as it relates to retail's risk to the consumer credit cycle. In this deck we aim to explain how these programs work, the magnitude of earnings risk across as many relevant retailers we can find, and how we think it all plays out in terms of timing and magnitude.
