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Cabela’s $4.6 billion credit card portfolio makes up big chunk of its revenue

The third-largest Nebraska bank is one many Nebraskans might never have even heard of.

It has no traditional branches to speak of, and the only credit you’ll get from it comes on a card.

But it’s through more than 1.8 million of those cards that World’s Foremost Bank has propped up profitability at its parent company, Sidney-based Cabela’s, as the World’s Foremost Outfitter has struggled with sales at its stores.

The credit card business, which is administered by Cabela’s-owned World’s Foremost Bank, contributed more than $430 million in revenue to the retailer’s bottom line last year. That was a gain of 15 percent from 2013 and was a big help in a year in which overall revenue fell by $5 million.

That profitability is just one factor that makes the segment a lucrative target for acquisition or a possible spinoff as a stand-alone company if activist investor Elliott Management gets its way, said Robert Hammer, owner of Thousand Oaks, California-based RK Hammer Investment Bankers.

After Elliott disclosed its 11.1 percent stake in Cabela’s in October, the activist investor and Wall Street analysts suggested a sale of Cabela’s credit card unit could be on the table. Selling the card business would bring in a rush of cash and allow Cabela’s management to focus more fully on running the retailer, analysts say.

Hammer himself has brokered scores of such deals in the last 25 years, and he says the motivations for such a deal are obvious.

“Cards represent the highest-performing asset of most banks in America today in terms of returns,” Hammer said. “The risk-adjusted return for cards is better than for any other product in banking.”

And Cabela’s $4.6 billion credit card portfolio is the envy of the industry, analysts say.

The median FICO score of Cabela’s cardholders is an eye-popping 795 out of a possible 850.

“That’s a really high median score. I can pretty much promise that the median for most retailers is not that high,” said Matt Schulz, senior industry analyst at CreditCards.com.

Cabela’s cardholders also carry balances on their accounts; the average outstanding cardholder balance grew 59 percent to more than $3,900 from 2010 to 2014.

By contrast, Schulz said industry data show a general trend of more and more cardholders paying off their balances in full each month.

Meanwhile, Cabela’s 1.8 percent rate of charge-offs — that is, so-called “bad debt” that is uncollectible and written off — at midyear was more than an entire percentage point below the 2.86 percent average rate posted by the 100 largest banks in the country at that time, according to data from the Federal Reserve Bank of St. Louis. Only American Express, with a charge-off rate of 1.4 percent at the end of the second quarter, did better.

Accordingly, Hammer said, “The value of this portfolio has got to be enormous. Given anything else that’s out there on the market today, it’s one of the top, if not the top, portfolios available.”

Hammer said a theoretical sale of the company’s card business could fetch a hefty premium of as much as 20 percent over the value of its $4.6 billion portfolio. That would amount to around $5.5 billion.

Calls to officials with Cabela’s and World’s Foremost Bank were not returned.

Analysts familiar with Cabela’s say the importance of the retailer’s financial services segment can’t be overstated.

Last year, it made up 13.4 percent of the company’s total revenue, up from 9.4 percent in 2010. The average number of active accounts grew 7.5 percent from the previous year and the median FICO score also improved.

The card business also accounted for “at least one-third” of Cabela’s $201.7 million in 2014 profits, according to stock analyst Jim Chartier of Monness Crespi Hardt in New York. He expects that share will grow to nearly 50 percent of profits in 2015.

That’s because even if Cabela’s loyal customers are buying less of its merchandise, they’re still using the CLUB Visa card to buy other products like gas and groceries.

About 30 percent of goods sold by the Sidney-based retailer in 2014 were purchased using the loyalty card, but those purchases made up only 4 percent of card use, bank President Sean Baker told analysts and investors earlier this year.

The card traces its history to 2000, when Cabela’s took over the former First Commerce BankCard processing center in Lincoln after Wells Fargo Bank acquired First Commerce Bancshares, parent to Lincoln-based National Commerce Bank and the card business.

Until then, First Commerce had issued a co-branded Cabela’s Visa card, meaning the financial institution handled all the behind-the-scenes work. After the Wells Fargo-First Commerce acquisition, the retailer bought the co-branded card and then formed World’s Foremost Bank in 2001. The bank reported to regulators it had about 450 employees as of Sept. 30.

Today, the card business is a differentiator for Cabela’s, said Nathan Yates, stock analyst and director of research at Forward View Consulting in Clintwood, Virginia.

“Without the incredibly profitable finance segment, Cabela’s would be a relatively average retailer,” Yates said.
With it, however, Cabela’s stands out as the only U.S. retailer that owns a bank for the express purpose of issuing credit cards.

To be sure, the bank itself is what’s known as a limited-purpose bank by regulators. Its offerings are limited to credit card issuing and the issuance of time deposits, or CDs, greater than $100,000. In other words, customers can’t do their day-to-day banking at World’s Foremost.

Seattle-based Nordstrom was the only other retailer that owned its own bank to issue credit cards. That changed on Oct. 1, when it sold its $2.2 billion credit card portfolio to TD Bank.

Sarah Hoisington, a financial services industry consultant also based in Seattle, said retailers have been pushed to peel off credit-card businesses over the years to let them focus more closely on their core retail sales segments.

She includes names like Sears, Macy’s, Federated Department Stores and Eddie Bauer as among those that “weren’t able to manage the credit card business and the risks associated with it.”

That isn’t to say Cabela’s runs a sloppy card business, though.

“Cards are in a highly regulated industry, so regulators don’t look favorably on companies that aren’t financial services experts being in the business,” Hoisington said. “They’re experts in the business of selling merchandise.”

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