Target Won’t Break Out Credit Card Segment Separately In Upcoming Earnings

by Trefis Team
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As Target‘s (NYSE:TGT) Q1 fiscal 2013 earnings approach later this month on May 22, one change will be that the retailer will not report its credit card division as a separate segment beginning this quarter. Instead, the income earned through this business will be recognized as an offset to SG&A expenses. This arrangement comes following Target’s sale of its credit card portfolio to Toronto-Dominion (TD) Bank towards the end of 2012, to focus more on its core operations.

The two companies agreed upon an amount equal to the gross value of the outstanding receivables at the time of closing. [1] They also entered a seven year agreement, wherein TD bank will finance, underwrite and own future Target credit card and Target Visa receivables in the U.S. However, Target will continue to earn substantial portion of the credit card division’s profits.

We will make the corresponding changes to our pricing model once the results are reported. Nevertheless, it is important to understand the company’s motive behind this move.

See our complete analysis for Target

What Motivated Target For The Sale?

Most of the retailers outsource their store branded credit cards due to the risks associated with this business. Managing a credit card business can be difficult, and thus outsourcing it can ensure smooth operations and enable the retailers to focus on their primary businesses. Target had kept this operation in-house since 1995, with its Target National Bank. [2] In 2010, the retailer limited the use of the credit card to its stores in order to reduce the associated risk and made known its interest in selling the portfolio. [2]

What Will Target Gain From This?

The Credit Card division constitutes less than 5% of Target’s value making the implied value less than $2 billion, according to our estimates. Therefore, we believe that the deal is a smart one for Target as the retailer has received $5.7 billion in cash from the sale of its credit card portfolio. [1] It plans to use 90% of this amount to pay off a portion of its long term debt and the remaining amount for share repurchases. [1]

Toronto-Dominion is the sixth largest bank in North America, and this deal provides Target with a strong partner for its credit card operations. Target believes that TD bank will provide its customers with new and innovative financial products and help the portfolio’s growth. In addition to what TD bank has to offer, Target’s customers will continue to enjoy its REDcard rewards program, which has been quite successful. The company has stated that its REDcard customers tend to visit twice as often as its regular customers and spend about 50% more. [3] REDcard penetration increased by about 3% in fiscal 2012, and has nearly tripled in the last two years.

Our price estimate for Target stands at $72, implying a discount of about 5% with the market price.

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  1. Target Announces Closing of Credit Card Portfolio Sale to TD Bank Group, Target Press Release, Mar 13 2013 [] [] []
  2. Other Retailers Will Probably Copy The Target Credit Card Model, Business Insider, Sept 14 2011 [] []
  3. Target’s Q4 fiscal 2012 earnings transcript, Feb 27 2013 []
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