Co-Branded Credit Card Partnerships: A Minefield for Retailers – Why Dillard’s Lawsuit Signals Risk Ahead

The retail sector’s reliance on co-branded credit card partnerships is under scrutiny following Dillard’s Inc.’s (DDS) May 2025 lawsuit against Wells Fargo (WFC), which alleges the bank’s abrupt exit from their decade-long co-branding deal caused tens of millions in losses. This case exposes a critical vulnerability for retailers: the existential risks posed by unstable financial partnerships. For investors, the lawsuit underscores a compelling opportunity to short Dillard’s stock or hedge against broader sector instability, as retailers’ revenue streams increasingly hinge on opaque, high-stakes agreements with banks.

The Strategic Minefield of Co-Branded Partnerships

Co-branded credit cards are a double-edged sword for retailers. While they drive customer loyalty, reward programs, and incremental sales, these partnerships also create dependency on external entities—banks with shifting priorities. Dillard’s lawsuit reveals the peril of this reliance: Wells Fargo’s abrupt decision to abandon the co-branded card market in 2024 left the retailer scrambling to transition to Citigroup (C) in a rushed, costly process.

The fallout? Dillard’s claims it was blindsided by Wells Fargo’s “bad-faith conduct,” including a lack of communication and actions that exacerbated financial harm. The lawsuit highlights two systemic risks:
1. Termination Triggers: Banks may exit partnerships without notice, disrupting retailers’ revenue from card fees, customer incentives, and data-driven marketing.
2. Operational Chaos: Transitioning to a new partner requires reissuing cards, renegotiating terms, and rebuilding customer trust—all while bearing hidden costs.

Dillard’s Financial Vulnerability: A Fragile Foundation

Dillard’s reported a net income of $593 million on $6.59 billion in revenue for its 2024 fiscal year, but this masks critical weaknesses. The lawsuit’s “tens of millions” in alleged losses—likely tied to the Wells Fargo exit—could compound existing risks:

• Revenue Concentration: Co-branded card programs often contribute disproportionately to retailers’ margins. A sudden loss here can destabilize profitability.
• Litigation Uncertainty: The case, still unresolved, introduces a wildcard. Even if Dillard’s wins, the prolonged legal battle could divert resources and dampen investor confidence.

Meanwhile, Dillard’s stock has underperformed peers amid sector-wide headwinds. Its valuation—trading at just 0.5x sales—already reflects some pessimism, but the lawsuit’s unresolved exposure suggests further downside.

Broader Implications: A Sector-Wide Vulnerability

Dillard’s case is not an outlier. Retailers like Macy’s (M), Kohl’s (KSS), and Nordstrom (JWN) rely on similar co-branded partnerships, often with major banks. If Wells Fargo’s actions set a precedent, other banks could follow suit, destabilizing retailers’ cash flows. Consider:

• Bank Priorities: Financial institutions facing regulatory scrutiny or strategic shifts may abandon partnerships without warning, leaving retailers exposed.
• Regulatory Risk: Dillard’s lawsuit cites Wells Fargo’s 2016 and 2018 consent orders with regulators as a catalyst for its “inability” to partner effectively. Future regulatory actions could trigger similar abrupt exits.

Investment Playbook: Short Dillard’s, Hedge the Sector

For investors, this is a “sell-side” opportunity:

1. Short Dillard’s (DDS):
2. Why: The stock’s valuation hasn’t priced in the lawsuit’s full financial impact or the reputational damage from Wells Fargo’s conduct.

3. Risk: A sudden settlement or reversal could boost DDS temporarily, but the long-term risks to its revenue model remain.

4. Hedge Against Retail Sector Instability:

5. Short the Retail ETF (XRT): Use inverse ETFs or options to bet against the sector if co-branding risks ripple outward.

6. Long Wells Fargo (WFC) Put Options: If litigation drags on, WFC’s reputation—and stock—could suffer.

7. Look for Diversified Alternatives:

8. Retailers with multiple co-brand partners or in-house payment solutions (e.g., Amazon (AMZN)) may offer safer bets.

Conclusion: The Write-Off Play

Dillard’s lawsuit is a wake-up call for investors to reassess retailers’ dependency on co-branded credit card partnerships. With the retail sector already struggling against inflation and e-commerce pressures, the added risk of sudden financial partner exits could accelerate margin erosion. For now, shorting Dillard’s and hedging sector exposure offers a high-conviction strategy to capitalize on this emerging vulnerability.

The writing’s on the wall: in an era of unstable alliances, retailers without diversified financial partnerships are sitting on a fiscal fault line. Act now.