Target to Shelve Credit Card

Target Corporation (TGT - Analyst Report) recently reached an agreement with TD Bank Group to sell its credit card portfolio for the amount which equates the gross value of the total outstanding receivables at the time of the closure of the deal. The current gross value of the portfolio stands at $5.9 billion.

Moreover, the company 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 expects to close the deal in the first half of calendar 2013 and stated that its 5% REDcard Rewards program will not be a part of the deal.

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

Target, the operator of general merchandise and food discount stores in the United States, announced its decision to sell its credit card receivables portfolio almost a couple of years ago. However, nothing materialized for the company as its desires to sell the receivables portfolio on appropriate terms appeared high on valuation to the buyers.

Later in early 2012, Target promised to pay down $2.8 billion to Chase Card Services – a subsidiary of JPMorgan Chase & Co. (JPM - Analyst Report) – to retire the receivables financing received in 2008. By doing so, the company expected to market the portfolio better, thus gaining a high-quality buyer on favorable terms.

Getting back to the agreement, the company expects to use the proceeds from the sale to reduce its debt burden and for share buybacks. Additionally, the company is expected to earn sizeable profits from the Target Credit Card and Target Visa portfolios, under the profit sharing arrangement.

Our Take

During the last reported quarter, the company’s revenue from the Credit Card segment tumbled 5.1% to $328 million. Target also said that segment profit dropped to $140 million in the quarter from $171 million in the prior-year period.

The segment has long been grappling with declining revenues and sustaining the business might prove to be detrimental for the company’s financials as the requirement for bad debt provisions would be higher, which implies reduced growth capital for future expansions.

Currently, we have a long-term Neutral recommendation on the stock. Moreover, the company, which competes with Costco Wholesale Corporation (COST - Analyst Report), holds a Zacks #2 Rank, which translates into a short-term Buy rating.