Sharp reductions in credit card bad-debt and total expenses, and increased use of private-label cards, helped lift Target Corp.'s credit card segment in its fiscal first quarter.
The segment had revenue of $355 million in the quarter, which ended April 30. That was down 18.4% from the quarter that ended on May 1 of last year. The segment's profit rose 74.8%, to $194 million.
"In our credit card segment, we continued to benefit from strong execution and disciplined underwriting by our team, combined with an improving credit environment," Gregg Steinhafel, Target's chairman, president and chief executive, said in a conference call Wednesday. "As a result, portfolio-risk levels continued to decline, leading to a strong improvement in expenses and profitability compared to last year."
Bad-debit expense fell 93.9%, to $12 million. Total expenses fell 52.8%, to $142 million.
Operations and marketing expenses rose 25%, to $125 million. Loyalty program discounts are recorded as reductions to sales in Target's U.S. Retail Segment. With the October nationwide launch of a REDcard Rewards loyalty program that provides 5% discounts on purchases made with the Target-branded debit and credit cards in Target stores, the Minneapolis company changed the formula under which the U.S. credit card segment reimburses the U.S. retail segment. In the April 30 quarter the reimbursed amounts were $49 million, versus $17 million a year earlier.
REDcard penetration, which represents the percentage of Target store sales paid using Target's credit or debit card, rose 270 basis points, to 7.6%. Credit card penetration rose 150 basis points, to 5.9%; debit card penetration rose 120 basis points, to 1.7%.
The credit card segment's finance-charge revenue fell 16.6%, to $292 million, while late fees and other revenue fell 28.8%, to $42 million. Third-party merchant fees fell 19.2%, to $21 million.
Brian Riley, senior research director for bank cards at TowerGroup, said in an email that Target Visa cards "experienced a high burn-off rate of losses in excess of 10% before most other issuers during the beginning of the recession, so there is no surprise that losses have improved after the credit purge." In April 2010 Target stopped offering its cobranded Target Visa to new customers.
Riley also questioned Target's decoupled-debit strategy with its REDcard debit card.
Two early proponents, HSBC and Capital One Financial Corp., have backed off on decoupled debit, and uncertainty remains over whether the Federal Reserve Board will include them when it finalizes its debit card interchange caps and transaction routing rules, Riley noted.
Target reported overall net earnings of $689 million, up 2.7%.
Its revenue for the quarter rose 1.9% year over year, to $15.9 billion.
