Sears Canada Inc. has come down to the wire in finding a new partner to operate its lucrative credit card operations.
The retailer has been looking for a new financial services partner since last year when JPMorgan Chase & Co. said it wouldn't renew its 10-year agreement, which expires on Nov. 15.
This month, JPMorgan Chase wrote to Sears cardholders warning them their store cards would no longer be valid after Nov. 15 if Sears has no alternative deal by then.
Sears's search for a credit card operator is important for the retailer because it counts on getting fees from its financial services partner, helping bolster Sears's challenged bottom line.
"It's another headache to deal with," said David Tawil, co-founder and portfolio manager at Maglan Capital, which follows distressed companies. "It increases the challenge for management."
For years, Sears has been losing ground to rivals amid a successive array of corporate leaders to revive its fortunes. Now it needs to find a new operator or business model for its credit card program to ensure it can continue to benefit from the critical business.
Sears spokesman Vincent Power said in an e-mail the retailer continues "to work on a solution; we are committed to providing payment and financing options to our customers across Canada, and we look forward to making an announcement on this matter in the near future."
Although Sears doesn't reveal the profit it makes under its current contract with JPMorgan Chase, in the earlier years it generated more than $60-million of annual operating earnings, according to Keith Howlett, retail analyst at Desjardins Securities.
And while the operating profit has probably dipped along with Sears's sales, "the relative importance of the profit contribution of credit has increased" relative to the retailer's weak financial results, Mr. Howlett said in a report late last year.
JPMorgan Chase, which runs the Sears credit card and Sears MasterCard operation, has agreed to pay the retailer up to $174-million if a sale of the existing portfolio occurs under certain circumstances, which have not been disclosed.
In a letter to Sears card holders, dated Oct. 2 and marked "important information," Derek Johnson, vice-president and general manager of Chase card services, says it and Sears are "engaged in discussions with third parties about the continuation of the Sears credit card program with a party other than Chase."
"If the Sears credit card program does not continue with a party other than Chase, Sears cards will no longer be accepted at Sears" after Nov. 15, it says. "Therefore, Chase will be closing all of these accounts, including your Sears card account." Chase noted in a separate letter to Sears MasterCard holders that they can continue to use the cards anywhere they're accepted, including Sears.
At the same time, Sears is launching a separate rewards card on Nov. 16 to allow card holders to keep the reward points they have earned, the retailer announced on Sept. 14. "All of your current Sears Club points will be automatically transferred to the improved Sears Club rewards program," it says on its website.
Jim Danahy, managing principal at retail consultancy CustomerLab, said Sears has left the decision to find another credit card partner "more 11th-hour than you would expect," raising questions about whether there will be a deal.
He said Sears may now be looking at taking the credit card operation in-house to try to cash in on it, partly by eventually selling its valuable customer list. "Maybe something bigger is in the wind and it's not just about the credit card," said Mr. Danahy, who also is program director at York University's Centre of Excellence for Retail Leadership.
Industry insiders say Sears had a very attractive deal with JPMorgan Chase, which was keen to come to Canada a decade ago. "No one will replicate those terms, so any deal made now will be much less lucrative," one industry source said. "The ongoing profits will really shrink."
Many major retailers team with financial services companies to run their credit card operations. Canadian banks have shown growing interest in the partnerships.
Sears's credit card deadline looms as its new leader, executive chairman Brandon Stranzl, works on a turnaround plan for the retailer, including shaving expenses and selling non-core assets.
In past years, the retailer has raised money by selling some of its top store leases, sometimes making way for U.S. rival Nordstrom Inc. The retailer will even consider downsizing some stores, Mr. Stranzl said last month.
The stakes are high for Sears. Mr. Howlett predicted recently it has less than two years to prove itself. "The next seven quarters are 'make it or break it' for Sears Canada," he said in late June.