Target Corporation‘s (TGT) recent announcement of halting its efforts to sell the credit card receivables portfolio momentarily, reminds us of the famous game show Deal or No Deal by the Dutch producer Endemol.
So far, it is No Deal for the company, as it failed to find a potential buyer for its card receivables portfolio on appropriate terms. Thus, Target decided to temporarily suspend its talks with the buyers and expects the transaction to take place late this year or in early 2013.
Further, Target promised to pay $2.8 billion to Chase Card Services – a subsidiary of JPMorgan Chase & Co. (JPM) – to retire the receivables financing received in 2008.
As per Target, the payout along with a premium, will negatively impact the fourth-quarter 2011 earnings by about 8 cents per share. With lower interest expense in 2012 and 2013, the company expects to recover some or all of the cost of the premium paid.
A Brief History
Target, the operator of general merchandise and food discount stores in the United States, announced almost a year ago to sell its credit card receivables portfolio and expected the deal to occur in late 2011 or early 2012.
However, nothing materialized for the company as its desires to sell the receivables portfolio on appropriate terms did not bode well with the buyers.
Last quarter, the Credit Card segment’s revenue tumbled 8.2% to $348 million. However, Target was quick to indicate that the segment profit rose to $143 million in the quarter from $130 million delivered in the prior-year quarter driven by a decline in bad debt expenses.
Outcomes
Target believes that retiring the financing of Chase before the payoff date in late 2013, will facilitate the company to market the portfolio better, thus gaining a high-quality buyer on favorable terms.
Moreover, Target only intends to sell the debt portion (to be paid by cardholders) while keeping control on its credit card operations.
We believe that it can also be a healthy option for Target to retain its credit card receivables portfolio, as the segment has positively supplemented its operating margins. The company’s credit card penetration increased 200 basis points to 6.9%, whereas debit card penetration expanded 200 basis points to 2.6% during the third quarter of 2011. Total store REDcard penetration climbed to 9.5% from 5.5% in the year-ago quarter.
However, sticking on to the business might bring in financial crunch for the company as the requirement of bad debt provisions would be higher, which implies reduced growth capital for future expansions.
The company is eyeing opportunities in the international markets, such as Canada and Latin America. We believe store openings outside the United States will definitely boost the company’s top and bottom lines while improving its cash flow generation capability.
However, the company’s dismal holiday performance and the lingering economic woes continue to annoy. Consequently, Target holds Zacks #4 Rank that translates into a short-term Sell recommendation. However, considering the fundamentals of the company, we maintain a long-term Neutral rating on the stock.
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