Credit Card Spending Surges, Retailers Slump

Today MasterCard [[ma]] raised its long-term net income growth to 20%-30% annually up from a previous 15%-20% and that revenue may grow an average 12%-15% annually, up from a previous 8% to 10%. This growth takes place as more consumers switch to credit card spending and away from cash or checks. It is now estimated that 55% of all US transactions will be done using cards, up from 40% in 2005.

Visa [[v]] is the other big beneficiary of this growth, and as neither of them assume the credit risk of customers, they both seem to have a fairly low-risk, high growth business business model. The current economic crisis has done nothing but boost these company’s growth as consumers struggling with higher prices and lower incomes are forced to make payments on credit.

Retailers on the other hand, especially those in the mid-end range are suffering from higher prices and lower spending. Sears [[shld]] reported an unexpected net loss of $56 million, or 43 cents per share in Q1, vs a profit of $223 million, or $1.45 a share last Q1 and analysts’ expectations of a 15 cents per share profit.

What went wrong? A lot of things. Revenue fell by 6%, US same store sales were down 9.8% for Sears and 7.1% for Kmart, gross margins dropped to 27.3% from 28.2% last year as the company slashed prices, and sales and administrative costs rose 6%. It seems Sears is experiencing what many of their consumers are going through, a time of higher costs and lower income.

At least for today, the higher cost of living is continuing to rise as oil jumped back up to above $132 a barrel after government data showed a surprise decline in stockpiles last week.

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Comment by Plastica

2008-05-29 10:36:58

Both mastercard and visa have a bright future it seems. Should have gotten visa shares at IPO.

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