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Macy's big warning on credit cards a big problem for some other retailers

A warning on the health of US consumers by America's department store is likely sending quakes through the C-suites of similar retailers.

And investors in retail stocks need to pay attention because there could be aftershocks.

On Tuesday, Macy's (M) said its second quarter credit card sales tanked 36% from the prior year to $150 million. The culprit: Bloated balances on Macy's Citibank-powered credit card have been met with a rising interest rate environment.

In turn, cash-strapped consumers — enduring an almost 32% 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.


"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. "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 it's 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.

Macy's stock was slammed 14% on the warning, justifiably so.

The credit card business has long been a pure profit center for a retailer like Macy's.

Per data from Citi analyst Paul Lejuez, Macy's credit card business hauled in $863 million in sales last year — up about 12% from 2019. While that made up 3.5% of Macy's sales in 2022, it comprised an even larger percentage of operating profits.

A significant percentage, to be precise.

Lejuez's math pegs Macy's credit card business representing 49% of its operating profits in 2022, up from 35% in 2021. Pre-pandemic in 2019, the business made up 58% of Macy's operating profits.

"2Q results highlight the challenges to Macy's traffic/sales, but inventory is in better shape and expenses have been well managed," Lejuez wrote. "The more concerning issue this quarter is the more rapid-than-expected decline in credit income, which comprised ~50% of Macy's operating profits last year, and historically has been a cushion to EBIT as the retail business weakened."

A woman holds a red Macy's card.
A woman holds a Macy's card in New Orleans. (Jenny Kane/AP Photo, File) (ASSOCIATED PRESS)

With this profit center now under severe pressure due to consumers running out of money at month's end, it's no surprise investors have moved to rerate Macy's stock.

And they have begun to do the same at Macy's rivals.

Credit card sales made up 87% of operating profits at high-end department store Nordstrom (JWN) in 2022, according to Lejuez's data. In 2021, that number was 79%. Nordstrom's stock plunged 10% on Tuesday in sympathy to Macy's dreary commentary.

Credit card sales generated the majority of operating profits at Kohl's (KSS) in 2022. Shares of Kohl's cratered 10.3% during the session.

"Credit is also a significant contributor to EBIT at peers JWN/KSS," Lejuez added. "We believe challenges in credit (higher delinquencies/bad debt) could lead retailers to pull back on who they extend credit to. Those that do could see a sales hit, and this may drive more consumers to trade down to off-pricers. Faster-than-expected deterioration in credit highlights the challenges facing the consumer (which we view as bad news for sales/margins across retail)."

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email

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