How much should department stores worry about rising credit card delinquencies?

As credit card debt climbs to record heights, department stores have been feeling the crunch.

In its second quarter earnings report, Macy’s said its credit card revenues declined $84 million year over year, a 4.1% drop, making a notable impact on its results for the quarter and leading the company to cut its annual forecast by $80 million. COO and CFO Adrian Mitchell said on the department store’s earnings call last month that the increase in delinquencies was “faster than planned.” Kohl’s also reported last month its other revenue, consisting largely of its credit business, dipped 3% in the second quarter.

• Nordstrom, meanwhile, said on its earnings call its credit card revenues rose 10% in the first half of the year, noting “lower-than-expected” losses. CFO Cathy Smith still cautioned that the retailer has seen gradually rising delinquencies surpassing pre-pandemic levels and potentially leading to larger losses to come.

According to data from the Federal Reserve Bank of New York, Americans’ credit card debt surpassed $1 trillion, jumping $45 billion in the second quarter. This has led to increasing delinquencies—credited to rising inflation and interest rates—hitting retailer-branded cards whose payments consumers don’t always prioritize, experts told Retail Brew. They could be a bellwether for further economic decline—and certain retailers in particular should be planning ahead.

Wild card: Retailer-branded cards are the ones that “consumers tend to lose sight of a little bit more,” particularly because they’re not using them consistently, Katie Thomas, who leads Kearney’s Consumer Institute, said.

“[Delinquencies are] a nasty and inevitable byproduct of a consumer economy that’s got a little superheated, that’s now cooling off. And now we’re looking at the hangover,” Mark Cohen, director of retail studies at Columbia Business School and former CEO of Sears Canada, said.

This trend has been hitting Macy’s a bit more than Nordstrom as a result of the “death of the middle” or the “mushy middle,” Thomas said, as consumers have tended to turn to retailers with either a more premium set of brands or a big-box retailer since the pandemic.

This could be tough news for Macy’s and Kohl’s, Cohen noted. He said department stores often use credit to drive customer demand, and retailers like these that attract customers “whose credit capacity is marginal” are “right on the cutting edge of downturn.” These department stores cannot continue to use credit as a “siren call,” Cohen said, and must be careful with consumers who can’t sustain their credit.

• Credit issuers will also likely be cutting credit limits, he noted. Mitchell noted Macy’s is working with its credit partner Citibank to “target higher-risk segments to surgically reduce exposure.”

With Nordstrom’s offerings attracting more of an “affluent customer,” it’s “insulated…but not completely,” Cohen said. Smith noted on Nordstrom’s earnings call that the company has “a little higher-quality credit consumer” who is “more resilient.”

Zoom out: Currently at around 3.8%, overall credit-card delinquency rates have still not nearly reached the high levels of around 7% around the 2007–2008 recession—though they’ve beaten pandemic levels, which peaked at about 3.3%—and US job growth continues to grow, so Thomas said she’s “still not alarmed.”

With inflation somewhat stabilizing but not subsiding, and interest rates rising, credit card delinquencies are still something retailers need to monitor, especially as CPG prices that go up don’t necessarily come down, and if they do, they do so pretty slowly. This is especially true as the cycle of boom-bust can be seen in retail before it’s seen in the larger economy, Cohen noted.

• Consumers may begin to really pull back on spending around the holiday season going into spring 2024, Cohen said.

Retailers should plan for credit card delinquencies to continue, Cohen noted, and think of next year “in a very conservative, careful way,” Cohen noted. “The storm clouds are gathering and the markers for slowdown are out there and inflation is not all over.”