Target Sheds Credit Card Portfolio

Zacks

Target Corporation (TGT) recently announced the completion of the sale of its credit card portfolio to TD Bank Group at the gross value of $5.7 billion.

As earlier announced, Target entered into a 7-year agreement with TD Bank Group under which the latter will underwrite, fund and own the future Target Credit Card and Target Visa receivables in the United States. The company stated that its 5% REDcard Rewards program will not be a part of the deal.

As per the deal, TD will cater to the policies related to risk management and comply with the regulatory issues. On the other hand, Target will manage the account servicing functions.

Target expects to use 90% of the proceeds from the sale to reduce its debt burden and channel the rest toward share buybacks. The company is hopeful of earning sizeable profits from the Target Credit Card and Target Visa portfolios, under the profit sharing arrangement.

We believe that the transaction will augur well for Target as the segment has long been grappling with declining revenues. Sustaining the business might prove detrimental for the company’s financials as the requirement for bad debt provisions would be higher, which implies reduced growth capital for future expansions.

During fiscal 2012, Credit card revenues declined 4.1% to $1,341 million year over year, while revenues plunged 12.8% year over year to $1,399 million in fiscal 2011.

Concurrently, TGT announced that Terry Scully, the current President of its Financial and Retail Services division will retire in Mar 2014. Apr 1, 2013 onwards, Scully will take over as the strategic advisor for the company.

Going forward, Target intends to focus on its core businesses. The company plans to sustain its remodeling program at existing general merchandise locations by the addition of an expanded food section along with a greater assortment of dry dairy and frozen items, improved store layout and enhancement of in-store shopping experience across departments, such as apparel, home, beauty, shoes and baby.

Alongside, Target is seeking promising expansion opportunities in international markets such as Canada and Latin America and revealed its plans to introduce smaller-format stores called CityTarget, similar to that of its biggest rival, Wal-Mart Stores Inc. (WMT).

Moreover, Target announced its year-round price matching policy with the aim of offering its patrons the facility to match the prices being offered by online retail giants.

The company will match prices with Amazon.com Inc.’s (AMZN) Amazon.com, Wal-Mart’s Walmart.com, Best Buy Co. Inc.’s (BBY) BestBuy.com, and Toysrus.com. Target believes that its price matching policy coupled with the REDcard reward program would provide it an edge over its competitors.

Currently, Target holds a Zacks Rank #3 (Hold).

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