Target Corp.’s Credit Card Unit Posts Q3 Profit

Citing fewer defaults and a reduction in overall outstanding receivables, Target Corp.’s credit card unit more than doubled its profit during the third quarter, the company announced Nov. 17.

The Minneapolis-based retailer said net income from its credit card operations rose 117% for the quarter ended Oct. 31, to $130 million from $60 million a year earlier, while average receivables declined 15.9%, to $6.9 billion from $8.2 billion. Credit card revenues for the quarter declined 22.2% to $379 million from $487 million a year earlier.

Fewer delinquent accounts and write-offs during the quarter were “the biggest factor” in the credit card unit’s performance, while “sequential declines” in receivables have significantly lowered Target’s bad-debt reserve, further reducing risk, Doug Scovanner, Target executive vice president and chief financial officer, told analysts during an earnings conference call.

The annualized charge-off rate on outstanding average gross credit card receivables declined 280 basis points, to 10.9% from 13.7% a year ago. Target’s loan-loss reserves totaled $775 million at the end of the quarter, down 22.5% from $1 billion a year earlier.

The 5% everyday discount program Target introduced Oct. 17 for credit and debit purchases made using its loyalty cards has been a hit with customers, Scovanner told analysts. It announced the discount plan in June as part of its strategy to increase overall store sales (see story). 

The proportion of debit transactions initiated with its loyalty card grew faster than those of credit cards during the quarter, as “the business is moving at the margin away from credit and toward debit.” Scovanner noted.

Credit card transactions accounted for 4.9% of all purchases made using Target’s loyalty card during the quarter, down 20 basis points from 5.1% a year earlier. Debit cards accounted for 0.6% of loyalty card transactions, up from 0.4%. Total credit and debit card transactions initiated with Target’s loyalty accounted for 5.5% of all Target purchases during the quarter, Target said.

Target in April announced it was no longer issuing new cobranded Target Visa cards but continues to issue customers its private-label credit and debit cards (see story). Online purchases made with Target’s proprietary debit card, which deducts payments from consumers’ checking accounts via the automated clearinghouse system, are not eligible for the 5% discount.

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