Target Corp., the second-largest U.S. discount retailer, suspended the planned sale of its credit card portfolio and agreed to pay JPMorgan Chase & Co. $2.8 billion to retire 2008 financing.
Discussions with potential partners will be revived later this year, the Minneapolis-based retailer said today in a statement. The payment to JPMorgan, along with a make-whole premium, will reduce fourth-quarter earnings per share by 8 cents, Target said.
Chief Executive Officer Gregg Steinhafel announced plans to sell the credit-card portfolio in January 2011 to use the cash to buy more stock and pay down debt. Target’s gross credit card receivables totaled $6.1 billion as of Oct. 29, according to Eric Hausman, a Target spokesman.
“Given it’s been a year since Target put the division up for sale, the inability to secure a buyer suggests that management may be over-valuing the business,” Charles Grom, a New York-based analyst for Deutsche Bank AG, said today in a note to clients.
The suspension may lead to a worse deal while also reducing the capital available to invest in adding more fresh groceries and expanding into Canada, said Grom, who recommends holding Target shares.
Target was little changed at $49.87 at the close in New York. The shares declined 15 percent last year.
Target sold almost half its credit-card loans to JPMorgan for $3.6 billion in 2008. The retailer said retiring the JPMorgan financing will help it market the portfolio, and anticipates recouping some or all of the cost of the make-whole premium through lower expected interest expense this year and in 2013.
“Our desire to sell the portfolio on appropriate terms remains the same today as it was when discussions began, but we believe that now is not the time to finalize a transaction,” Chief Financial Officer Douglas Scovanner said in the statement.
Scovanner will retire on March 31 after more than 15 years with the company, which was named Dayton Hudson Corp. when he joined. It’s also discouraging that a possible sale of the credit unit won’t occur under his guidance, given his knowledge of the business, Grom said.
Credit Driving Profits
The delay in selling the receivables might be a blessing in disguise because it will help reduce the gross margin pressure Target has been under, according to Michael Keara, an analyst for Morningstar Inc. in Chicago. Gross margin, or the percentage of sales left after costs of goods sold, has declined at Target for six straight quarters.
“The credit card business softens the impact,” Keara said in an interview. “Plus, it’s a better return business.”
Profit in the retailer’s credit card unit advanced 10 percent to $143 million in the third quarter as bad debt expense fell 64 percent to $40 million. The penetration of its REDCard rewards program that offers discounts rose to 9.5 percent of sales from 5.5 percent, according to a statement Nov. 16.
Target’s December same-store sales rose 1.6 percent while analysts projected a gain of 3.3 percent. The company boosted sales last year by adding PFresh grocery sections, and offering shoppers 5 percent off purchases made with company-issued credit and debit cards.
Last week, Target announced plans to buy back as much as $5 billion of its shares as the retailer forecasts it will generate more cash than needed to invest in its stores. Target said the pace of share repurchases will likely increase after capital investments to introduce stores in Canada decline. The stores in Canada are expected to open in 2013.