With Sears, Roebuck (S) - Get Report exploring whether to sell off its credit card operation,some are wondering what would be left of the struggling retailer.

The retailer has faced scrutiny over its credit card operations formonths, due to increased charge-offs and delinquency rates. But without thecredit division -- which has supplied the majority of Sears' operating profitsin recent years -- all eyes would be on its retail operations. And investorsmight not like what they see.

"This will make it a lot more obvious that Sears needs to focus onwhat's happening in its stores," said Russell Jones, president of DecisiveRetail Technology. "They've used the positive results from their credit cardbusiness in the past to disguise their problems."

Sears officials apparently don't see the situation in the same way. Thecompany's stock price has dropped more than 50% in the last 12 months, dueto increasing questions about its credit card portfolio. Calling the stockprice "ridiculously low," CEO Alan Lacy said that byselling off the credit card operations Sears would be able to maximizeshareholder value. Investors liked the idea, and Sears ended the day up $2.69, or 12.5%, to $24.14.

"The market has had trouble valuing our retail and credit businesses,"Lacy said on a conference call with investors and analysts. "While creditwill remain an integral component of our business, owning the credit businessis no longer essential."

As the economy has turned south, the rate of personal bankruptcies hasgone up, posing problems for credit card issuers across the board.

At Sears, accounts that were 60-days delinquent rose to 7.69% ofreceivables in the fourth quarter of 2002 from 7.58% the year before. Therise at the company's Sears-branded MasterCard was even more dramatic:delinquencies rose to 3.76% of receivables in the fourth quarter from 1.97%in the year-ago period.

Charge-offs on Sears-issued credit cards increased from $1.4 billion, or5.3% of receivables, in 2001 to $1.54 billion, or 5.4% of receivables, in2002.

There's no hard-and-fast rule about at what point charge-offs ordelinquencies become a problem, said OctavioMarenzi, managing director of Celent, a financial services consulting firm.That Sears' credit operations are still profitable is a good sign, he said."It's something to keep an eye on.You don't want it to spin out of control," Marenzi said.

Sears, of course, has not been the only retailer that has faced questionsabout its credit card portfolio.

Target

(TGT) - Get Report

, for instance, has drawn similarscrutiny. And

Spiegel

recently filed for bankruptcy in large part because of troubles with its credit card operations.

But Sears' financing arm is different because of its sheer size,analysts say. With about $30.8 billion in receivables at the end of 2002,Sears' credit card operations are about the eigth largest credit cardportfolio in the nation, company officials said. Meanwhile, Sears' creditcard operations provided 56.5% of the company's operating income in 2002.

Sears is also not the first retailer to consider selling off its creditbusiness, noted Jerry Hirschberg, director of corporate ratings at Standard& Poor's.

J.C. Penney

(JCP) - Get Report

,

Limited

(LTD)

and

Saks

(SKS)

have already sold off their credit cardbusinesses or are in the process of doing so, he said.

But he added, "At none of those companies is credit as important interms of contribution and cash flow as it is at Sears."

That dependence on its credit operation raises questions about what willbe left of the retailer if it sells off the division.

Sears

has posted 18 straight months of decliningsame-store sales, which compare results at outlets open more than one year.Although the company has gotten a boost from its acquisition of Lands' Endlast year, sales at its core department stores have fallen the last twoyears.

Part of the company's problem is that it has too many stores in too manyof the wrong locations, said Ira Kalish, chief economist at retailconsulting firm Retail Forward. The company's eponymous department storesare primarily located in malls, notes Kalish. But mall-goers are typicallyshopping for clothes, traditionally one of Sears' weaker offerings;meanwhile, appliances and hardware -- Sears' strong suits -- don't usually sellwell in mall environments, he said.

"Their merchandise mix no longer conforms to the needs of a mall,"Kalish said. "If they're going to focus on being a retailer, what aspect arethey going to focus on? I don't know the answer to that."

Consumers have been increasingly willing to shop at stand-alone stores,rather than at malls, for consumer electronics, hardware, appliances andother goods, noted Jones. While appliance sales in particular areincreasing, Sears' strength in the market is coming under assault from homeimprovement retailers such as

Home Depot

(HD) - Get Report

and

Lowes

(LOW) - Get Report

, which are broadeningtheir product selection and aren't burdened by being mall-based, Jones said.

The moves by Home Depot and Lowes are "bad news for Sears," Jones said.

Sears' problems with its retail division led Standard & Poor's to issueon Wednesday two separate opinions on the potential sale of its credit cardassets. If Sears were to sell off just its MasterCard portfolio, Standard &Poor's would maintain its credit rating of BBB+ on the company's long-termdebt. Not only are charge-offs increasing at that division, but Searscompetes in that business with dozens of other MasterCard and Visa issuers,meaning that it has to have competitive interest rates and enticements,Hirschberg said.

But Standard & Poor's would view the selling of the entire creditportfolio as a negative and would lower Sears' rating to a BBB.

"The cash flow from the credit business would be gone and all they'llhave is a retail business that has the potential for improvement, but hasyet to show it," Hirschberg said.

Still, despite the company's problems with its retail division, someanalysts say the time is right for it to cut its credit card business loose.The financing operation is at the "top of the curve" right now, said RichardHastings, a retail analyst with Bernard Sands.

"It's not likely that consumer credit is going to be a fun place to beover the next few years," Hastings said. "They have to get out of this."