Target Has a Card Sale Up Its Sleeve
Target executives can’t say they’re not looking at selling the company’s credit card business anymore because they are.
As a Minneapolis Star Tribune report points out, the retailer has steadfastly denied rumors in the past that it was looking to move the business. Just two months back, Target CFO Douglas Scovanner said a sale did not make sense because, in his words, “What we would receive in [a sale] … would be meaningfully lower than what we would give up.”
Apparently, the $2 billion that Target might receive is worth at least considering giving the credit card business up.
The Star Tribune report suggests a couple of possible motivators behind the action including the current state of the credit market and pressure put on the company by William Ackman, a hedge fund investor who owns roughly 10 percent of Target’s stock.
Dennis Moroney, a senior analyst for TowerGroup, said a sale makes sense because credit risk is higher than in the past.
“The same guy who has a subprime mortgage that just went into default also shops at Target. That’s what they’re worried about,” said Mr. Moroney.
According to the Star Tribune, 30 percent of those holding Target cards fit the “subprime” label. By selling now, Target could possibly avoid having to write-off large amounts of bad debt.
Howard Davidowitz, chairman of Davidowitz & Associates, told the Star Tribune that Target would have been wise to sell the business earlier.
“You’ve got the consumer at record debt. You’ve got resets on mortgages. The consumer is tapped out… If you want to sell receivables in the market, this is not a good time to do it,” he said.
Despite the volatility of the credit market, many believe that it will be hard for Target to walk away from a business that has become a cash cow for the company. Last year, Target received nearly 15 percent of its profits before taxes from the credit card operation.
“This is jumping through hoops to satisfy activist investors and make sure they’re making the right moves for shareholders,” said Patricia Edwards, a retail analyst with Wentworth Hauser and Violich.
“They probably will not end up doing a transaction, at least on the credit-card portfolio,” she said.
Discussion Questions: Do you see Target selling its credit card receivables? Beyond this case, how do you see the credit market affecting retail in the near future?