BofA slashed its profit estimates and price targets for Nordstrom and Kohl's on Tuesday, citing rising financial stress on households amid higher interest rates. Those higher rates are driving increased delinquencies (see BofA charts below) and could potentially lead to more charge-offs on department store credit cards soon.
"We expect KSS and JWN will see a decline in credit revenue in the coming quarters as rising delinquencies turn into charge-offs," BofA analyst Lorraine Hutchinson said in the note to clients.
Store credit cards — with interest rates in some cases above 30% — have long been a pure profit center for department stores.
Credit card sales made up about 87% of operating profits at high-end department store Nordstrom in 2022, according to experts. In 2021, that number was 79%.
Meanwhile, credit card sales generated the majority of operating profits at Kohl's in 2022, pros estimated.
BofA's Hutchinson now sees fair value for Nordstrom stock at $13, down from $14 previously. Kohl's stock is being valued at $22 a share by Hutchinson, down from $25.
Hutchinson added she expects a "worsening credit cycle" in coming quarters.
The negative narrative around department store stocks, in large part due to credit cycle worries, took center stage during the second quarter reporting season in August.
Macy's (M) said its second quarter credit card sales tanked 36% from the prior year to $150 million. The reason: Excess balances on Macy's Citibank-powered credit cards were met with a rising interest rate environment.
Cash-strapped consumers — enduring an almost 25% annual percentage interest rate on the Macy's card — haven't been able to pay off their bills. Macy's has opted to write off those balances and could keep doing so in the quarters ahead.
"While we have seen an increase in revenues as interest rates have risen, that has been more than offset by higher bad debt assumptions and write-offs," Macy's CFO Adrian Mitchell said on a call with Wall Street at the time. "These bad debt assumptions and write-offs are the result of rising delinquencies, which leads to higher net credit losses over time and contributes to increased bad debt within the portfolio."
Execs added that Macy's is seeing the most acute pressure among households earning $75,000 and under. Year to date, Macy's credit card sales are down about 24% from a year ago.
Nordstrom echoed Macy's on its earnings call too.
"We have seen delinquencies rising gradually, and they are now above pre-pandemic levels, which could result in higher credit losses in the second half and into 2024," Nordstrom CFO Cathy Smith said.
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