US Credit Operations

Introduction 

In the US jewelry market it is necessary for specialty retailers to offer credit facilities to the consumer. Management regards the provision of an in-house credit program, rather than one provided by a third party, as a competitive advantage for a number of reasons:

• the credit policies are decided by the US division’s management taking into account the overall impact
• on the business rather than by a third party whose priorities may conflict with those of the division;
• authorization and collection models are based on the behavior of the division’s consumers;
• it allows management to establish and implement customer service standards appropriate for the business;
• it provides a database of regular customers and their spending patterns;
• investment in systems and management of credit offerings appropriate for the business can be facilitated; and
• it maximizes cost effectiveness by utilizing in-house capability.

Furthermore the various credit programs help to establish long term relationships with customers and complement the marketing strategy by enabling a greater number of purchases, higher units per transaction and greater value sales.

In addition to interest bearing accounts, a significant proportion of credit sales are made using interest-free financing for one year or less, subject to certain conditions. In most US states customers are offered optional third party credit insurance.

Credit administration

Authorizations and collections are performed centrally at the US head office, rather than in each individual store. The majority of credit applications are processed and approved automatically after being initiated via in-store terminals, through a toll-free phone number or on-line through the US division’s websites. All applications are evaluated by the scoring of credit data and using data obtained through third party credit bureaus. Collection procedures use risk-based calling and first call resolution strategies.

Since credit authorization and collection systems were centralized in 1994 the credit terms offered to customers have been little changed.

The net bad debt charge at 4.9% of total sales during fiscal 2009 (fiscal 2008: 3.4%) was well above the tight range of the past ten years. The increase in net bad debt was partially offset by higher income from the receivables portfolio. Credit participation increased somewhat to 53.2% during fiscal 2009 (fiscal 2008: 52.6%), reflecting a higher level of applications offset by a significant increase in the level of credit applications rejected. The fall in credit acceptance rates followed management action to reduce exposure to particular customer attribute groups and a lower proportion of customers satisfying the US division’s credit requirements.

The US division continued to apply its established credit standards, while monitoring the performance of the receivables very closely. As a result, a number of customer attributes were identified where the risk/reward profile for lending was no longer economic. Therefore at various times during the year the granting of credit to those customers ceased. This, together with the deterioration in consumers’ financial position caused a material increase in the percentage of credit applications rejected. An independent consultant reviewed the performance and procedures of the US division in the first half of fiscal 2009 and suggested some incremental improvements to the collection strategies. In response to the increased credit risk among US consumers, the staffing levels in relation to the outstanding balances within the credit collection function were increased and enhanced systems and software were introduced to increase the sophistication of the collection strategies.

As at January 31, 2009, the gross US receivables stood at $886.1 million (February 2, 2008: $900.6 million). There was a bad debt allowance of $69.5 million at the fiscal 2009 year end (fiscal 2008: $60.4 million). The average level of gross receivables during fiscal 2009 was $840.5 million (fiscal 2008: $795.4 million).

In fiscal 2010, the US division will continue to apply its established credit standards, monitor the performance of receivables very closely and cease to lend to customers where it has become uneconomical to do so. New score cards, lending requirements, information technology, systems support and collection strategies are being implemented. However, management believes that consumers’ financial positions may continue to deteriorate which may lead to a further increase in the net bad debt ratio, although this may be somewhat offset by increased income from the credit portfolio.

Third party credit sales

In addition to in-house credit sales, the US stores accept major credit cards. Third party credit sales are treated as cash sales and accounted for approximately 38% (fiscal 2008: 39%) of total US sales during fiscal 2009.