Target sold nearly half of its credit card loans to J.P. Morgan Chase last spring and now it may be wishing it sold the whole thing. The retailer reported on Monday that a growing number of its cardholders are failing to pay their debt while many that continue to make payments are sending in lower amounts, according to the Minneapolis Star Tribune.
According to documents filed with the Securities and Exchange Commission, Target wrote off 9.86 percent of its $8.7 billion credit card business in August. As a point of comparison, Target wrote off 5.66 percent of its portfolio in August of last year.
Todd Slater, an analyst with Lazard Capital Markets, changed his rating on Target from "buy" to "hold" based on the news.
"Delinquencies as a percentage of receivables increased to the highest level we have seen, while charge-offs increased to the highest level since the bankruptcy law changed in October 2005," Mr. Slater wrote to investors.
William Ryan, an analyst at Portales Partners, believes Target could see its charge-off rate go as high as 12 percent over the next six months.
The write-off numbers and economic uncertainty increase the likelihood Target will tighten its credit standards for the upcoming holiday season, according to analysts.
Discussion Questions: What do the write-offs mean for Target's business now and going forward? Is Target especially hard hit in this area or do you think that other merchants are having similar experiences?
[Author's Note] The Star Tribune article referenced a bulletin written by Piper Jaffray analyst Jeffery Klinefelter in which he noted that Target had one-fourth of its stores in states (Arizona, California, Florida and Nevada) particularly hard hit in the housing downturn.