Tim Arango

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Saks Sells Card Business to Household International

Tim Arango

Saks (SKS Quote) is leaving the credit business.

The upscale retailer said Friday it was selling the majority of its private label credit card accounts to Household International (HI Quote), a consumer finance company, in a deal valued at roughly $1.4 billion. Household will pay Saks more than $300 million in cash and assume about $1.1 billion worth of Saks' securitized liabilities.

As part of the deal, the two companies struck a 10-year alliance, in which Household will own most new accounts and balances during the period, with Saks performing customer service. Saks will receive a fee from Household for such services, and said the deal would be neutral to its earnings in 2003 and modestly accretive in 2004.

The aim of the deal, Saks executives said on a conference call, was to reduce the company's risk from operating a credit business and instead focus on the core retail business. The company boasts a relatively high-quality credit portfolio compared with many other retailers that run their credit businesses, but executives said on the call that they've seen a "modest uptick" in defaults over the last year. Meanwhile, the credit card stocks have been pummeled in recent weeks amid reports of rising delinquencies.

"This is a unique opportunity to join forces with one of the most highly regarded, well-established consumer finance companies in the world, while leveraging our core competency of customer service," said Saks CEO Brad Martin, in a statement.

Saks shares were off lately 6 cents at $10.20, but shares are still up about 10% this year, a solid performance given the pummeling that the major averages have taken. Household International stock was off $1.13 at $37.67.

Saks, which operates the Saks and Saks Fifth Avenue chains, has been in a steady decline in recent years, and the shares are still off about 35% from their 52-week high. The stock had traded below $5 last fall, when worries spread that the company could go under, says Jeff Stinson, who follows the company for Midwest Research.

Exiting the credit business is a key part of the company's turnaround, Stinson says. "I think the reason to get out of it is to focus on the core retail business," says Stinson, who said that running the credit business became a "distraction" to management. "It allows them to raise some cash and solidify the balance sheet," he says. (Stinson has a neutral rating on the stock, and his firm does not have an investment banking business.)

Saks said it would use the proceeds to buy back stock and pay off debt.