KBW: Citi, Sears Step Up Credit Card Relationship

May 24, 2018         By: Steven Anderson

Recently, the folks at Keefe, Bruyette and Woods (KBW) sent word our way about an expansion in the partnership between Citi and Sears on the topic of credit cards. There’s a lot of good news for Citi in here, and at least for now, Sears will still have a credit card partner for the immediate future.

Immediately, the news is good for beleaguered Sears. The program has been extended another five years, giving Sears a credit card partner in Citi until November 2, 2025. Additionally, Sears gets an option to extend that arrangement unilaterally until 2027.

Citi agreed to pay Sears $425 million–$400 million of which has already been paid—in a payment amortized over the next several years. That will leave little change to Citi regardless; there’s only $25 million to begin with, and Citi’s earnings measure in the billions at last report.

In a move that will likely help Citi, there’s a change that comes after the current agreement. The program switches to a “performance-based” system, where “performance” is related to new account spending and total sales for the credit card portfolio. Given Sears’ declining traffic—all brick-and-mortar outlets are facing this to at least some degree—this is likely to give Citi some advantage and protect it against further decline at Sears.

Sears credit cards not enrolled in either a rewards program or Citi’s “Thank You” program are excluded from consideration, though Citi will pay Sears at least something for them. Sears also no longer has the right to purchase those assets, which is likely good news given that 70 percent of spending on Citi-Sears cards takes place outside of Sears.

KBW noted that Citi’s Retail Services portfolio, which administers this program and those like it, is kind of a mixed bag. Retailers like Home Depot and Best Buy are doing quite well, but retailers like Sears and Macy’s, not so much. So with this move, KBW asserts, Citi has better protected itself against potential losses at one of its biggest trouble spots.

Protecting yourself in investing is seldom a bad move. The worst it does is limit the profitability you might have taken by diverting resources to the hedge, generally. Here, Citi may have saved itself a whole world of hurt in the future.