Walmart argues Capital One has failed to meet the terms of their partnership.
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Walmart
is suing
Capital One Financial,
its credit-card issuer, in a bid to terminate the companies’ partnership. The move could mean the loss of about $8 billion in credit-card balances for Capital One, but Wall Street seems unbothered.
Since 2018, Capital One (ticker: COF) has been the exclusive issuer for Walmart’s (WMT) private- label and co-branded credit card program in the U.S. But last week, America’s largest retailer filed to end the partnership, arguing that Capital One had failed to meet certain terms of the contract.
“Unfortunately, Capital One was consistently unable to meet the customer-service
standards required by the Contract,” Walmart alleges in a suit filed in the Southern District of New York. A Walmart spokesperson told Barron’s that Capital One failed to meet a number of contractual terms.
The company says it has a right under the contract to terminate the agreement if the terms aren’t met. Capital One disputes the retailer’s authority to do so. It said in a filing to the Securities and Exchange Commission that it would “vigorously defend” its contractual rights in court.
“Walmart’s lawsuit is an attempt to renegotiate the economic terms of the partnership it agreed to just a few years ago, or end the deal early,” a spokesperson told Barron’s over email. “These servicing issues were immaterial and cured by Capital One pursuant to the terms of the agreement, without harm to customers, the program, or Walmart.”
Walmart stock was off 0.2% on Monday, while Capital One was up 0.1%. The
S&P 500
was down 0.4%.
As of December 2022, the card program had outstanding loan balances totaling about $8.3 billion, according to Capital One’s filing.
If the court sides with Walmart, Capital One expects the credit-card program would roll over to a new issuer “no earlier” than January 2025, and that Walmart or the new issuer would compensate it for the accounts.
While $8.3 billion isn’t exactly spare change, analysts aren’t too concerned. Walmart’s credit-card program was a “modest” contributor to Capital One’s business, accounting for about 3% of the company’s net income in fiscal 2022, estimated Evercore ISI analyst John Pancari.
He rates Capital One stock at Outperform.
“In our view, efforts to renegotiate could also be linked to expected further weakening in broader consumer credit trends, as well as heightened competition from peer card players willing to strike more favorable agreements for WMT,” Pancari wrote.
For Jefferies’ John Hecht, the potential damage to earnings from losing Walmart’s business could be offset by buybacks and expense reductions, among other initiatives.
“We see little, if any, impact to earnings over time,” he added. He maintained a Hold rating on Capital One stock.
Write to Sabrina Escobar at [email protected]
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