New Credit Card Deal For Home Depot

Home Depot is America’s second biggest retail merchant, after Wal-Mart. It also boasts one of the most extensive consumer credit card programs of any US retailer. Recently, Home Depot renewed its agreement with New York financial giant Citigroup, Inc. Citigroup has provided Home Depot with the credit cards that the retailer, in turn, offers to its consumers since 2003.

In exchange for the new 8-year agreement, Citigroup has agreed to pay Home Depot $220 million. According to an anonymous insider, the payment of $220 million is in primarily exchange for the Home Depot’s continued decision to offer Citibank’s MasterCard as part of its line of credit cards. This card, which can be utilized in the manner of a regular MasterCard, will serve to advertise Citibank’s other MasterCard credit cards to the millions of Home Depot shoppers nationwide.

Additionally, Citibank has agreed to lower the percentage of the profits it will demand from Home Depot’s Citibank-provided private-label credit card. In the past, Home Depot was paying between $0.02 and $0.04 for every dollar of credit it earned from customers using its private-label card. Following the new agreement, Home Depot will only pay between $0.01 and $0.015 per every dollar of credit.

Approximately 30% of Home Depot’s $77.4 billion (as of 2007) in annual sales goes through the store’s Citibank-provided private-label card.

The analysts at Lehman Brothers predict that Home Depot stands to earn over $200 million more per year as a result of the lower percentages of the retailer’s credit-card profits that will go on to Citibank. Lehman Brothers predicts that this deal–scheduled to come into effect at the beginning of 2009– could cause Home Depot investors’ profits to increase by between $0.08 and $0.25 per share.

In his written report on Home Deport, Michael Lasser of Lehman Brothers concluded that, “we think the company is improving its position for an eventual market rebound… next year, the company’s earnings power should benefit from reduced credit costs.”

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