Capital One Financial stock slides after Walmart sues to end credit card pact (updated)

Capital One Financial (NYSE:COF) stock dropped 3.3% in Monday premarket trading after Walmart (NYSE:WMT) filed a lawsuit seeking to end the companies' credit card contract. At midafternoon, the stock had erased the loss and rose 0.2%.

The suit, filed last week in the Southern District of New York, alleges that Capital One (COF) didn't live up to certain terms of their pact. Specifically, the giant retailer accused the credit card issuer of falling short on its customer care practices, such as delivering replacement cards to customers within five days and promptly posting transaction and payment information to customers' accounts, according to media reports.

As of Dec. 31, 2022, the card program consisted of $8.3B in ending outstanding loan balances and the allowance for credit losses related to the card program portfolio was ~$314M. For 2022, the card program produced ~$214M in net income, Capital One said in a filing.

If the court allows Walmart (WMT) to end the card program early, Capital One (COF) expects that resulting transfer of its card portfolio to a new issuer to occur no earlier than January 2025.

"Walmart’s (WMT) 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 Capital One (COF) spokesperson told Seeking Alpha in an emailed statement. "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. Capital One disputes that Walmart has any right to change the terms of the existing partnership mid-stream, and we will vigorously protect our contractual rights in court." (Added at 9:28 AM ET.)

The credit card partnership agreement requires that Walmart (WMT) or one or more new card issuers pay to Capital One (COF) a purchase price that is equal to par for the private label accounts and equal to fair market value for the co-branded accounts, Capital One said. COF is entitled to retain any premium above 1.5% of the par value of the co-branded accounts upon sale, it added.

A Walmart (WMT) spokesperson told Seeking Alpha via email that the company is looking foward "to bringing our customers a new credit card option that provides meaningful benefits and rewards soon. In the meantime, cardholders should not experience any disruptions in service and can continue to use their existing Capital One Walmart credit cards." (Added 1:58 PM ET.)

The retailer "ended our agreement due to Capital One's failure to meet a number of contractual obligations," the spokesperson said.

Capital One (COF) won the Walmart card deal in 2018, after the retailer decided to not renew its credit card deal with Synchrony Financial (SYF).

Credit card stocks are in the green in afternoon trading. American Express (AXP) gained 0.9%, Discover Financial (DFS) +1.0%, Bread Financial Holdings (BFH) +3.1%, Synchrony Financial (SYF) +0.7%.