US Credit Operations

Introduction

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

• the credit policies are decided by the 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;
• authorisation and collection models are based on the behaviour 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
• superior cost effectiveness by utilising in-house capability.

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

In addition to interest bearing accounts, a number of programmes offer interest-free financing for one year or less, subject to certain conditions, and these account for a significant proportion of credit sales. In most US states customers are offered optional third party credit insurance. The average outstanding balance at the year end was $997 (2006/07: $957).

Since credit authorisation and collection systems were centralised in 1994 the credit terms and performance have been relatively consistent over the economic cycle.

2007/08

In-house credit sales represented 52.6% of total US sales in 2007/08 (2006/07: 51.7%) and the monthly collection rate was 13.9% (2006/07: 14.6%), a credit portfolio turn of approximately seven months. While the credit participation was little changed, the approval rate for credit applications was lower. The bad debt charge for the year, at 6.5% (2006/07: 5.3%) of credit sales was at the high end of the tight range of the last ten years (see graph below) reflecting the deterioration of the US economy. The increase in bad debts was largely offset by additional income on the portfolio as a result of the lower monthly collection rate. The 5.3% net bad debt charge in 2006/07 was at the low end of the range of the last ten years and reflected the impact of a revision in the US bankruptcy laws implemented in late 2005 which temporarily increased bankruptcy levels in late 2005/06 and reduced them in early 2006/07. The table over the page presents data related to the in-house credit business for the past three years.

Full year receivables performance

The division continued to apply its established credit standards in 2007/08, while monitoring the performance of the receivables very closely. During 2007/08, a number of metrics deteriorated a little reflecting the downturn in the wider economy, although performance has remained within the range of the last ten years. 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. Consumers’ financial position continues to deteriorate which may lead to a further increase in the bad debt charge, although this is expected to be somewhat offset by increased income from the credit portfolio. Consequently credit authorisation criteria continue to be reviewed and outstanding balances are very closely monitored with prompt action being taken in response to changes in performance. In addition, further investment in collection systems is taking place.

At the year end the gross US receivables stood at $900.6 million (2006/07: $828.8 million). There was an impairment provision of $60.4 million (2006/07: $50.0 million). The average level of gross receivables during 2007/08 was $795.4 million (2006/07: $698.4 million).

Credit administration

Authorisations and collections are solely performed centrally at the US head office, rather than by store staff. 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 division’s websites. All applications are evaluated by the scoring of credit data and using data obtained through third party credit bureaux.

Investment in staff, training and systems to maintain or improve the quality of the credit portfolio continued in 2007/08. Collection strategies and efforts continued to include emphasis on risk-based calling and first call resolution.

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 39% (2006/07: 39%) of total US sales during the year.

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