Credit Card Deal: Dream or Nightmare for Target
Target management is using words to suggest it’s dreaming. Others, Reuters reports, wonder if the retailer has been asleep and is about to be wakened by a nightmare of a business arrangement that has JP Morgan Chase holding 47 percent of the retailer’s credit card business.
Dough Scovanner, chief financial officer for Target, described the deal to sell to JP Morgan Chase as a proposition with no downside.
“We expect to get hundreds of millions of dollars from profit from this venture unless we really screw it up. Personally, I think this is what Dire Straits had in mind in the 1980s anthem, ‘Money for Nothing.’ I think this is wonderful,” he said.
Deborah Weinswig, an analyst with Citigroup, said that Target struck a deal that amounted to it selling shares of its business at a seven percent discount.
“While this deal provides Target with liquidity to implement business plans such as capital investment and share repurchases without accessing term debt markets this year, the remainder of Target’s credit portfolio continues to expose the company to weak credit conditions,” Ms. Weinswig wrote in a note to investors.
Target announced earlier in the week that it expected to write off roughly seven or eight percent of its credit card receivables as bad debt. Mr. Scovanner said the chain was looking at higher numbers in four states – Arizona, California, Florida and Nevada.
The retailer, which originally opposed the idea of selling off any portion of its credit card portfolio while being pushed by activist investors, appears content to move ahead with JP Morgan Chase.
“I’d far rather live for the moment with the happy ideas of what’s going to happen on this honeymoon than worry about how to unwind this deal,” Mr. Scovanner told Reuters.
Discussion Questions: Was the decision to sell a portion of its credit card business to JP Morgan Chase a good or bad strategic move by Target? Will other retailers now jump in and follow Target’s lead?