Sears is one of the world’s largest retailers. It is also a huge provider of credit through its Sears credit card. Revenue generated from credit operations was $4.6 billion in 1998 from 30 million Sears cardholders. The rate of interest Sears earns on outstanding receivables varies from 10% to 21% in the United States to up to 28% in Canada. In some instances, to acquire cash when needed, the company will sell its receivables. At December 31, 1998, Sears had sold $6.63 billion of its receivables.

The following information (in millions) was available in Sears’ 1998 financial statements:

Instructions

(a) Discuss whether the sale of receivables by Sears represents a significant portion of its receivables. Why might Sears have sold these receivables? As an investor, what concerns might you have about these sales?

(b) Calculate and discuss the receivables turnover ratio and average collection period for Sears for 1998 and 1997.

(c) Do you think Sears provided credit as a revenue-generating activity or as a convenience for its customers?

(d) Compute the ratio of bad debts expense to merchandise sales for 1998 and 1997. Did this ratio improve or worsen? What considerations should Sears make in deciding whether it wants to have liberal or conservative credit-granting policies?
A GLOBAL FOCUS

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1998 1997 1996 Accounts receivable (gross) $18,946 $20,956 $22,371 Allowance for doubtful accounts 974 1,113 808 Merchandise sales 36,704 36,371 33,751 Credit revenues 4,618 4.925 4,313 Bad debts expense 1,287 1,532 971