Target Corp.’s U.S. credit card segment churned out a $143 million third-quarter profit, up 10% from $130 million a year earlier. But it could be the unit’s last such profitable quarter for a while, an executive for the retailer warned analysts on Wednesday.
Because Target’s credit card losses triggered by the recession have abated, year-over-year comparisons in future quarters will lack the benefit of significant reductions of large loan-loss reserves. Such reductions in recent quarters have helped to “turbo-charge” Target’s credit card segment results, Doug Scovanner, Target chief financial officer, said during a conference call to discuss the quarter’s earnings.
“As we cycle against prior-year periods in which our results were greatly enhanced by accounts receivable allowance reductions, we are very unlikely to continue to report increases in segment profit,” he said.
Target has been trying to sell its card unit for years, putting the portfolio back on the sale block in January. It anticipates selling the unit by early next year (see story).
The Minneapolis-based retailer’s loan-loss reserves during the quarter ended Oct. 29 were $40 million, down 63.6% from $110 million a year earlier. The charge-off rate on loans deemed uncollectible plunged 520 basis points, to 5.7% from 10.9%.
Revenues from the credit card unit declined 8.2%, to $348 million from $379 million, while operating and marketing costs rose 25.4%, to $143 million from $114 million.
Total credit card receivables at the end of the period declined 8.8%, to $6.14 billion from $6.73 billion a year earlier.
The effect of the 5% discount Target began offering customers a year ago on purchases made with its “REDcards,” including its private-label and cobranded Visa credit card and proprietary debit card, continues to be positive, Scovanner said.
Purchase-volume growth was “about evenly split” between credit and debit cards during the quarter, Scovanner said. Target did not disclose total purchase volumes.
The percentage of total Target store sales initiated with Target-branded credit cards was 6.9% during the quarter, up 200 basis points from 4.9% a year earlier. Store sales initiated with Target’s proprietary debit card that deducts funds directly from customers’ accounts also rose 200 basis points, to 2.6% from 0.6%, the company said.
