3/13/2008

Target Shops Itself
By Brian Sozzi

On March 12, Target Corp. (ticker: TGT) announced it was nearing an end to the review of its credit card portfolio.  Since September of last year, bowing to pressure from activist investor William Ackman, Target’s management reluctantly began exploring the feasibility of selling its credit card receivables.  The move is designed to minimize risk from rising delinquencies as the U.S. economy moderates.  Although the business has been an integral contributor to Target’s financial results in recent years, there were signs a more aggressive extension of credit to Target guests by management was starting to take a toll on risk metrics.  Net write-offs ballooned 33.0% year over year in 4Q`07, and accounts with three or more payments 60 to 90 days past due as a percentage of receivables rose noticeably. 

The press release issued on March 12 stated Target’s intention to sell $4.0 billion of its approximate $8.0 billion receivable portfolio, an interesting decision in the sense that the Company would still have exposure to credit write-off risk.  Despite the color from management, we are maintaining our underweight recommendation on Target shares given continued deterioration in business fundamentals (margins and comparable store sales).  Cash from any proposed sale of receivables will more than likely be used to pay down debt, invest in new store openings, and repurchase shares.  However, one must keep in mind the Company would essentially be removing a major piece of earnings growth from the business.

Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.