Dramatic reductions in credit card bad-debt and total expenses, plus gains in customer use of private-label cards within its stores driven by a 5% rewards discount launched in October, helped boost fiscal first quarter profitability within Target Corp.’s Credit Card segment.
The segment generated revenues for the Minneapolis-based retailer of $355 million during the quarter ended April 30, down 18.4% from $435 million during the same quarter ended May 1, 2010. Segment profit rose 74.8%, to $194 million from $111 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 chairman, president and CEO, told analysts during a conference call to discuss the quarter’s earnings. “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 was down 93.9%, to $12 million from $197 million. Total expenses dropped 52.8%, to $142 million from $301 million.
Net interest expense on nonrecourse debt collateralized by credit card receivables totaled $19 million, down 17.4% from $23 million, “driven by improved trends in key measures of risk,” the company noted in its May 18 earnings release. Average gross credit card receivables funded by Target totaled $2.5 billion, up 5.9% from $2.36 billion. Overall average card receivables decreased 13.3%, to $6.5 billion from $7.5 billion.
Operations and marketing expenses were up 25%, to $125 million from $100 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 (
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% from 4.9%. Credit card penetration rose 150 basis points, to 5.9% from 4.4%; debit card penetration rose 120 basis points, to 1.7% from 0.5%.
“Our PFresh remodel program and REDcard Rewards loyalty program continue to deliver incremental traffic and sales in an environment where our guests remain cautious in their spending,” Steinhafel noted in the earnings release. The PFresh remodel program involves adding grocery offerings at Target stores.
During the earnings call, he suggested the key to growth is continuing to market the program to customers who already have a strong affinity for the Target brand and have the means and the intent to spend a lot more when enabled with Target’s cards.
“If we were successful in putting one of those cards in the hands of every one of our top 10 guests who collectively today represent nearly half of our sales, we’d have a 40% or 50% sales lift on half of our base,” Steinhafel said. “We’d have an instant overnight 20% or 25% increase on our sales.”
Credit Card segment finance-charge revenue fell 16.6%, to $292 million from $350 million, while late fees and other revenue dropped 28.8%, to $42 million from $59 million. Third-party merchant fees fell 19.2%, to $21 million from $26 million.
The annualized segment pretax return on invested capital was 30.9%, up 121 basis points from 18.8%.
In comments he e-mailed to PaymentsSource, Brian Riley, senior research director for bank cards at Tower Group, noted 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.” Target in April 2010 ceased offering its cobranded Target Visa card to new customers (
“One of Target’s biggest challenges in their push for private-label rather than branded cards will be to manage the balance of credit quality versus the demand for increased sales,” he said.
In a subsequent phone interview, Riley suggested Target is “chasing rainbows” in promoting a credit card at a time many consumers are shying away from such products.
And he questioned Target’s decoupled-debit play with its REDcard debit card. Two early proponents, HSBC and Capital One Financial Corp., have backed off on decoupled debit cards, and uncertainty remains regarding whether the Federal Reserve Board will include them when it finalizes its debit card interchange caps and transaction-routing rules, Riley noted.
As a company, Target reported net earnings of $689 million, up 2.7% from $671 million. Revenues were up 1.9%, to $15.9 billion from $15.6 billion.
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