Target Corporation
(NYSE: TGT) may be a little too loose with its money after it ended the
fourth quarter with $8.62 billion in outstanding loans on its consumer
credit card division. The attitude of invincibility has many analysts
and investors worried at a time when other credit card issuers like American Express
(NYSE: AXP) are suffering from rising defaults. However, others argue
that private label cards won’t follow the same trends as pure-play
credit card companies. So, are these concerns legitimate or simply the
product of an overzealous analyst?
Target is one of the only retailers that is actually expanding its
private label credit card business during these tough economic
conditions. The company’s $8.62 billion in outstanding loans is up 29%
from its $6.71 billion outstanding a year earlier. Worse, Target relies
heavily on the division to drive revenues with $103 million of its $128
million in earnings last year coming from credit cards. These issues
have many analysts worried that the retailer has taken a far too
aggressive stance during a tough economic time period.
Many investors and analysts are concerned that the high lagged loss
rate may mean that the company relaxed its underwriting standards too
much as it pushed many of its private-label cardholders to Target Visa
cards with much greater lines of credit. As a result, many are
predicting the company’s loss rate associated with its credit card
division to be in excess of 8% for the year. Meanwhile, the company’s
high growth rate in the past makes it difficult to see any
deterioration in credit that has already happened.
Target officials, however, dismissed these claims as simply
unwarranted. Chief Financial Officer Douglas Scovanner told the Wall
Street Journal that the growth in the credit card portfolio is
absolutely not a function of a loosening of credit standards or a
lowering of credit quality in their portfolio. The executive also noted
that he expects the company report credit losses on about 7% of its
loans this year, which is up from 5.9% in the last fiscal year - but
hardly a catastrophe.
In the end, these concerns are certainly warranted given Target’s
significantly worse creditworthiness and default rates. However, the
company has already forecasted a 7% loss rate that should account for
most of these expected losses. The accurate estimate remains to be
seen, but this is definitely a situation worth watching given Target’s huge reliance on its credit card division for earnings growth!
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