Target Corp. (TGT) said it will again suspend its efforts to
sell its credit-card receivables until later this year and outlined
plans to pay J.P. Morgan Chase & Co. (JPM) about $2.8 billion,
along with a make-whole premium, to retire financing it received in
2008.
The move comes as large banks have expanded their own
private-label card operations through portfolio acquisitions or
restructuring, spurred by improving loan performance and consumers'
increased willingness to use credit cards again.
"We believe a pause in discussions until later in 2012, combined
with repayment of the Chase Card Services financing, will enable
Target to reach an agreement with a high-quality financial partner
on acceptable terms," Chief Financial Officer Doug Scovanner said
in a press release.
Target, which operates its own banks, issues a private-label
credit card that customers can use to make purchases in its stores
and on its website, receiving a 5% discount in return. Most other
retailers that offer a store card do so through an outside bank
that issues the card and performs the underwriting.
The company had unveiled plans to pursue a sale of the
credit-card receivables last January, and had expected a sale last
year or early this year. The company now sees the sale coming late
this year or early next year.
The credit-card business has improved dramatically since the
recession as consumers have worked to pay their bills on time and
cautiously taken on new debt. That trend has held true for store
credit cards, which traditionally have incurred higher losses than
general-purpose cards because their users tended to have shakier
credit.
The write-off rate, or percentage of loans deemed uncollectible,
for retailer credit cards was 8.4% as of December, down from a peak
of more than 14% in July 2010, according to credit bureau
Equifax.
Late payments at Target have declined significantly since the
recession, and its expenses to cover soured loans have also
shrunk.
"We don't feel like we have to do a deal [now]," Target
spokesman Eric Hausman said. "The portfolio is performing very
well. We are certainly capable of continuing to fund this
business."
Target has "laid out certain terms that we think are really
important and we're not going to do a deal that we don't think
meets our requirements," Hausman said, adding the company is
looking to sell its outstanding loans while retaining "operational
control" over its program.
Target's card receivables totaled $6.1 billion as of the fiscal
third quarter, down from $6.7 billion a year ago.
The reason Target pulled back was likely price, and the
announcement could increase the desire for certain investors to
"throw in the towel," J.P. Morgan analyst Christopher Horvers
said.
There was been patience in the second half of last year as
Target lost Michael Francis, chief marketing officer, to J.C.
Penney Co. (JCP); Chief Financial Officer Douglas Scovanner,
announced his retirement; and the holiday season produced
lackluster same-store sales. The patience of value investors in
particular could be wearing thin, Horvers said.
The retailer's credit card program had come under fire in recent
years. It had announced a review and potential sale of the business
in the fall of 2007, but the looming credit crunch made the move
undesirable. In 2008, it agreed to sell a stake in its credit card
receivables to J.P. Morgan following the urging of such a deal by
activist investor Bill Ackman.
Banks including Citigroup Inc. (C) and Capital One Financial
Corp. (COF) have been bulking up in the private-label card
market.
In October, Citi said it would keep a portfolio of more than $40
billion of private-label cards after having tried to sell the
business. The New York lender cited improving performance of the
business for the decision and has since renewed partnerships with
several retailers.
Capital One is in the process of acquiring the U.S. credit-card
business of HSBC Holdings PLC (HBC). The business includes about
$30 billion in card loans, a larger portion of which are
private-label cards. Capital One last year acquired a $3.7 billion
portfolio of Kohl's Corp. (KSS) credit cards from J.P. Morgan
Chase.
Wells Fargo & Co. (WFC) has also said it is considering
entering the business.
"I have a very positive outlook for private-label" cards, said
Megan Bramlette, a director with Auriemma Consulting Group who
helped run store-card programs while working at Citi. "It's a great
tool. The customer appeal for those products is increasing."
Target said 6.9% of its store sales were made with its credit
card in the fiscal third-quarter, up from 4.9% from a year ago.
Target, the nation's second-biggest retailer by sales behind
Wal-Mart Stores Inc. (WMT), said it expects fourth-quarter earnings
will be reduced by about 8 cents a share due to financing
retirement. The company expects to recoup some or all of the cost
of the premium through lower expected interest expense this year
and next year.
Target said Chase provided last year an option to retire the
financing, which expires at the end of the month. The move will
allow Target to market the portfolio when it resumes partner
discussion later this year.
Target had previously indicated it liked the idea of freeing up
the receivables, which are listed as assets on its balance sheet.
The accounting ties up capital that Target could use for other
investments, such as reducing debt or buying back shares.
Investors are generally not fond of retailers owning card
operations because it is not a core competency for them and in bad
times can be a big money drag.
Target reported in November its fiscal third-quarter earnings
rose 3.7% as same-store sales grew and the retail giant's bad-debt
expenses declined. The company's performance has been aided by
giving shoppers 5% off when they use Target's credit, debit or Visa
cards.
Target's shares were recently down 0.9% at $49.42.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214;
andrew.r.johnson@dowjones.com
-By Tess Stynes, Dow Jones Newswires; 212-416-2481;
tess.stynes@dowjones.com
--Karen Talley contributed to this report
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