Target Corp.’s first-quarter performance exceeded the company’s expectations, including its credit card segment’s rise in profitability.
The Minneapolis-based retailer’s credit card segment posted a 185% increase in net income for the quarter ended March 31, to $111 million from $39 million during the same period last year.
Target’s credit card segment saw a “sharp increase in all measures of profitability and returns on capital, a direct result of a rapid improvement in several key risk areas, including favorable trends in delinquencies,” Doug Scovanner, Target executive vice president and chief financial officer, told analysts yesterday during the company’s earnings conference call.
The annualized net write-off rate was 15% of average receivables, up from 13.9% a year earlier. Bad-debt expenses decreased 33.4%, to $197 million from $296 million, and they should continue to decline throughout the year, Scovanner said.
Asked whether the spread of the charge-off rate versus bad-debt expense is sustainable, Scovanner explained that “Target’s net write-offs per quarter will be closer to $200 million than $300 million beginning in the second quarter.”
New requirements under the Credit Card Accountability, Responsibility and Disclosure Act, which went into effect in February, likely will halve the company’s late-fee income, though the new law should provide the company “a better write-off and bad debt-expense experience,” Scovanner said.
Indeed, “a tightening of underwriting statements and recent changes to credit card terms could continue to improve Target’s credit card portfolio’s profitability,” Barclays Capital Inc., the New York-based investment banking division of Barclays Bank Plc, reported in a recent research note.
Also within the credit card segment, Target last month launched its own private-label credit card and stopped all offers of Target Visa cards to new card applicants (see story).
However, the company will continue to “service the 5 million active Target Visa accounts currently outstanding, as these accounts will most likely continue to make up the vast majority of our receivables portfolio,” Scovanner explained.
Target developed its own card based on the results of tests it conducted over the past several months suggesting customers with private-label Target credit cards visit the store more frequently and buy more Target merchandise than do customers with a Target Visa card.
Regarding recent legislative efforts to reduce debit card interchange rates, Scovanner surmised “we and other retailers would benefit if that legislation were to pass.” But the legislation is a long way from being law at this point, he noted.
