A paradox? Absolutely. Lacy notes that Sears's credit card operation is an ongoing source of strength in a recession. "It's a less volatile profit stream than the retail business," he explains. The huge portfolio of receivables guarantees a continuing stream of income even as merchandising sales and profits plummet. This was made abundantly clear in the recession early in this decade, when credit card profits sustained Sears's profits while merchandising profits fell to near zero.

Not that Sears is immune to a new downturn. While that would enable the company to lower costs still further, a recession also represents a double hit to earnings. Not only would credit card charge-offs rise, but revenues would decline as fewer customers charged new items. Still, the impact of this change is likely to hit Sears far less dramatically than other retailers, including Penney's and Federated's chains. Look closer at Sears's portfolio of existing credit card debt. Its $971 average balance last year was more than three times as big as Penney's. No wonder Federated recently unveiled a new marketing campaign to increase credit card use at Bloomingdale's, Bon Marché, Burdines, Goldsmith's, Lazarus, and Rich's.

But Sears has been at it for years. And while Ronning predicts that charge-offs will rise in the next recession at all retailers, he believes Sears can most easily handle the challenge. Adding to Ronning's confidence, Sears has stepped up its collection efforts since the third quarter of 1996 to prevent more accounts from becoming and remaining delinquent, the first step toward a possible charge-off, and has tightened its criteria for new accounts. As a result, Ronning estimates that charge-offs would have to quadruple to wipe out profits. "That's not going to happen," he insists.

Think Sears is too cautious? Remember the hard- pressed consumer. "We have seen a change in society's views on personal bankruptcies," says Ronning. "More people have become aware that the stigma attached to bankruptcy is not as great as it used to be. The world doesn't end." So when financial problems become difficult, he says, "more and more people call a friendly bankruptcy lawyer, who plugs in his Chapter 7 software and starts calculating what they can come away with" after declaring bankruptcy.

POT VS.KETTLE
Of course, consumer advocates contend lenders bear some responsibility for the problem after marketing credit cards so aggressively. "It's a case of the pot calling the kettle black," says Gross of the New York Law School.

Moral issues aside, the lessons for finance executives are clear: If your business depends on credit cards that you issue, your margins better be high enough to sustain more than the normal amount of write-offs that a recession produces. And if you're not already in the credit card business, this probably isn't a great time to get in. Even in the best of times, it takes a lot of capital, a good credit rating, and considerable time to develop the expertise.

Should you get out if you're already in? That depends. Says an analyst who requested anonymity: "If you're good at running a credit card in today's environment, it's almost a license to steal." Trouble is, it isn't easy to be as good as Sears, and a new environment could make it even harder.

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