House of Fraser to profit from store card deal

House of Fraser, the department store chain, is set to gain a surprise profits boost this year from its Recognition store card operation.

House of Fraser, the department store chain, is set to gain a surprise profits boost this year from its Recognition store card operation.

The company could announce as early as its half-year results at the end of September that profits from the card will start to flow in the current financial year, much earlier than many investors had expected.

The store card is currently run for HoF by GE Capital. However, under the terms of the deal, agreed in 1991 by its former owner, Mohamed al-Fayed, HoF does not share in any profits generated by its card, unlike most of its retail rivals such as Marks & Spencer.

Last week, some analysts upgraded their expectations for the HoF share price in anticipation of a new store-card agreement. Gillian Hilditch, the Arbuthnot retail analyst, said a new agreement could add up to 89p to the company's share price, which closed last week at 118p. She said the store card could represent an extra £207m of value to HoF shareholders.

However, analysts now believe that the company, led by John Coleman, the chief executive, is on the verge of telling the market that a new agreement is close to being signed and that earnings from the operation will start to make an impact in plenty of time for the company's final results, due to be announced in March. A spokesman for HoF refused to comment yesterday.

Talks have been held with several potential financial partners about operating the card on behalf of HoF, including the incumbent GE Capital. Financial services groups are keen to partner HoF because the retailer's store card is one of the most successful in the country. It has more than 1 million customers, and analysts believe that up to a third of all HoF transactions are made using the store card.

When Mr Fayed sold the rights to operate the store card to GE in 1991, he received a £150m payment from GE but did not secure a share in the future profits. A new agreement would seek to rectify this and give the retailer a share of the upside from operating the card.

What makes the HoF Recognition card attractive for financial services companies is that as well as having more than 1 million customers, its incidence of bad debts as a proportion of customer balances is comfortably below the industry average, with its cardholders generally coming from the AB demographic group.

Generally, store card agreements between retailers and specialist financial services groups have been either a straight profit-sharing agreement on a 50-50 basis or an upfront payment by the financial services company plus the payment of ongoing commissions based on achieving certain targets, such as the number of cards issued and average transaction sizes.

The fact that speculation is mounting that the store card could soon start making a positive contribution to HoF - the retailer currently makes a loss on the service - has led some observers to believe that GE is the favourite to win the contract.

However, competition among financial services groups for providing store card services has increased. HSBC acquired HFC in 2003 which includes the John Lewis contract with 1.8 million cardholders, while M&S recently announced it would sell its M&S Money division to HSBC while retaining a profit share as part of the agreement.