Department Store Credit Card Conundrum: Macy’s, Kohl’s, Nordstrom, and the Looming Threat to Revenue Streams

In an era of retail upheaval, department stores face a new existential challenge: the potential erosion of a once-stalwart revenue source—their store-branded credit card businesses. Recent regulatory proposals, notably from the Consumer Financial Protection Bureau (CFPB), aim to curtail excessive late fees, a move that could significantly dent profitability for retailers reliant on credit card income.

The proposed rule seeks to cap late fees at a fraction of their current levels, potentially reducing the maximum penalty from $41 to a mere $8 per missed payment, with the initial missed payment fee dropping from $30. While this measure aims to protect consumers from punitive charges, its impact on department store finances looms large. Analysts warn that if implemented, these changes could reshape the financial landscape, posing particularly acute challenges for Macy’s, Kohl’s, and Nordstrom.

Credit cards have emerged as a vital lifeline for department stores, augmenting their top lines and bolstering profits. Estimates from BofA Global Research suggest that credit income accounted for approximately 49% and 44% of Macy’s and Nordstrom’s operating income, respectively, in 2022. For Kohl’s, the reliance on credit income is even more pronounced, with credit revenue surpassing operating income—a dynamic that underscores the pivotal role of credit card operations in sustaining retail viability.

The significance of credit card revenue is further underscored by its growth trajectory amid broader retail headwinds. While overall revenue excluding credit cards saw marginal declines, credit card income surged, signaling a fundamental shift in revenue composition. However, this growth has not been without consequences; heightened delinquencies, particularly pronounced at Macy’s, signal potential storm clouds on the horizon.

Macy’s, in particular, has already felt the reverberations of shifting consumer credit dynamics. Declines of 41% and 31% in credit-card income during consecutive fiscal quarters underscore the vulnerability of department stores to evolving credit market dynamics. As delinquencies rise, retailers are forced to reassess risk management strategies, with Macy’s leading the charge in recalibrating its approach.

While Macy’s adopts a proactive stance, adjusting reserves based on delinquency trends, Kohl’s and Nordstrom face immediate revenue shocks from escalating charge-offs. This divergence underscores the nuanced challenges confronting department stores, with each retailer navigating a unique path forward amid regulatory uncertainty and shifting consumer behaviors.

In this turbulent landscape, investors are advised to exercise caution and prudence. The symbiotic relationship between department stores and their credit card businesses, once a cornerstone of retail success, now stands at a crossroads. As regulatory winds shift and delinquency rates climb, the resilience of department store finances hangs in the balance, prompting investors to reevaluate their investment strategies in light of evolving market dynamics.