Friedman's Inc. - Credit Operations 2004 - 2008

2008

When new management took over in 2004, Friedman’s replaced its credit operation team. The new team brought in a third party credit provider to attract a better credit customer, while keeping their own in-house program for the near- and subprime borrowers. Changes were made to the credit underwriting, and collections were centralized. Changes to the underwriting, however, were only allowed to go so far. A modern revamping initiative of the underwriting process was not allowed or budgeted for in spite of ambitious proposals and designs by the new credit operation team. Instead, only limited changes were allowed to Friedman’s in-house credit issuance policies, due in large part to the executive management’s underlying fear of a potential impact on sales. However, the longer the broader changes were not implemented, the harder it became for the company to sacrifice risky credit sales in exchange for more sound underwriting policies.

Although the company was able to transition from recency to currency reporting because of vast improvements from the centralizing of collections, charge off still remained a glaring issue as the board and investors called for better results. Nobody outside of credit operations, however, was willing to sacrifice any sales in order to make improvements in charge off results. During 2007 in particular, there was an aura of desperation among sales operations to procure any sale they could.

Facing an inconvenient reality, Friedman executives and some board members would continually dismiss the fact that the coexistence of low charge offs and high risk credit deals issued through a poorly designed model was a theoretical and practical impossibility. Insistence and suggestions for revamped and improved credit issuance measures by members of the credit operation team were largely ignored and would ultimately give way to sales operation’s need for favorable comparable store sales.

It is widely speculated that similar attempts at underwriting reforms made at Crescent Jewelers (who ran more of a decentralized credit approval operation than even Friedman’s at this point) were met with protests from sales operations and resistance from the same Freidman executives (Crescent became a subsidiary of Friedman’s in 2006). A persistent sacrificing of best credit business practices and a healthier bottom line gave way to the company acting out of desperation for sales volume. In some instances, a company officer would undermine credit operations and override credit decisions at the behest of store personnel.

In fact, many within sales operations of both companies, beginning at the store level, had convinced themselves that a major cause of sales falloff was a tightening of credit. One analysis, however, provided to an interim CFO regarding this claim at Crescent Jewelers, showed that if the Credit Department had approved every credit deal presented to them, those sales would have only made up 10% against what was a $12 million sales drop year over year at the time. Unfortunately, such information fell of deaf ears and it did not stop sales operations management at the executive level to become myopically focused on credit denials. This sort of irresponsible leadership chose to ignore factors such as an enormous decline in the average sale amount, as well as a noticeable drop in credit limit utilization (which translated to sales associates using less of a consumer's approved credit limit).

This constituted a failure in company leadership as store level excuses dictated how and what sales operation's leadership focused on. Instead of looking internally, sales operations wanted to find a reason for which they felt they had no control over (even though, at least in case of Crescent Jewelers, 85% of the credit approvals happened at store level). This was an echo of the prior Brad Stinn era in how company leadership ignored potential problems with merchandising, marketing and sales abilities, and instead looked to in-house credit as an almost singular reason for the company's failures.

Although some look at Friedman’s as a reason for why a company should not do their own credit, others would point to another national chain, Kay Jewelers, as an example of a company that centralized its credit and collections operations in 1994 and has been very successful.

In spite of what happened at Friedman's and Crescent, in-house credit operations for a business is not something that should necessarily be avoided…it is the influence, input and any participation whatsoever of sales operations in terms of its structure, policies and procedures that needs to be avoided. Unfortunately, Friedman’s Jewelers never had executives or board members that allowed that sort of separation.