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Earnings Preview: Discover to report 1Q results

Alex Veiga, AP Business Writer

LOS ANGELES (AP) -- Discover Financial Services is expected to post a smaller profit in the December-February quarter, a period that typically sees robust holiday spending before cardholders shift toward paying down debt. The credit-card issuer and payments-network operator reports before markets open Tuesday.

WHAT TO WATCH FOR: How cardholder spending and payment trends fared during the quarter, as well as an update on the company's efforts to press further into direct banking and home equity loans.

Investors also will want to know whether its cardholders' late payment rates took a hit this year after an increase in Social Security payroll taxes went into effect in January.

Sales at U.S. retailers declined a seasonally adjusted 0.4 percent in March. That followed a 1 percent gain in February and a 0.1 percent decline in January.

Still, that didn't slow spending by holders of rival credit card issuers American Express and Capital One Financial.

Earlier this week, American Express said cardholder spending rose 6 percent in the first three months of the year, while Capital One noted annual increases in revenue in its domestic card business.

Wall Street also will be seeking an update on Discover's payment-services business, which competes with Visa and MasterCard. In the fourth quarter, Discover saw dollar volume increase 13 percent.

Last summer, Discover acquired a foothold in mortgage lending after purchasing the business from Tree.com Inc. for $45.9 million. Discover also has waded into fixed-rate private student loans.

Its latest results also should provide some sense of how the new lines of businesses are paying off.

WHY IT MATTERS: Discover, which is based in Riverwoods, Ill., is best known for its namesake card and is the sixth-largest U.S. credit-card issuer. The company has been working to grow its credit card business, while also pushing further into direct banking, offering auto, personal and student loans. Last month, it announced plans to begin offering home equity loans beginning in the second half of this year.

Consumers are feeling wealthier and more inclined to spend, thanks to rising home values and stock prices that have hit records. When consumers spend more, that can help boost credit card use, benefiting card issuers like Discover.

WHAT'S EXPECTED: Analysts polled by FactSet, on average, expect Discover to report earnings of $1.12 per share on $1.98 billion in revenue.

LAST YEAR'S QUARTER: In last year's fiscal first quarter, Discover posted earnings of $1.18 per share on revenue of $1.84 billion.