Target's Credit-Card Problems Could Lead To JPMorgan Role
Tuesday November 18th, 2008 / 23h44
By Karen Talley Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Target Corp.'s (TGT) big drop in credit-card profit in the third quarter has raised questions about whether the retailer may ultimately turn certain parts of the operation over to partner JPMorgan Chase & Co. (JPM). Target in May sold 47% of its stake in the card unit to JPMorgan Chase for $3.5 billion and, under terms of the sale, the portfolio's performance must remain "sufficiently strong." If "substantial unanticipated portfolio deterioration" occurs, JPMorgan Chase would gain the right to direct Target's credit-card team to put in place alternative underwriting and risk-management practices until sufficient improvement is seen. While it isn't clear whether JPMorgan will eventually take over management of certain parts of Target's credit-card portfolio, the portfolio's deteriorating performance since May shows how quickly the economy's woes have rattled even recent financial plans. Target on Monday posted a 24% drop in net income on reduced profit from the credit-card division. Bad-debt expense more than doubled to $314 million from a year earlier as more customers defaulted on card bills. The deteriorating economy hurt the card division's performance. JPMorgan Chase didn't respond to requests for comment. A Target representative provided comments by the company on Oct. 23, when Terry Scully, president of Target Financial Services, told analysts the company has been tightening underwriting standards and increasing its collection "intensity," with measures that include adding resources and acting more quickly when customers founder. But given the current condition of the economy, along with uncertainty about what lies ahead, Target's vulnerability does come into question. JPMorgan Chase will likely take into consideration what is going on with the rest of the retail industry before taking any action, said Jefferies retail analyst Daniel Binder. There is the issue of whether JPMorgan Chase would even want a fuller hand in the operation, given the banking industry's own difficulties. Credit-card receivables can be a lifeblood for retailers, with proceeds from payments being employed to help pay back factors, or suppliers, for inventory. "Certainly a credit-card asset would seemingly be desirable to use," said Craig Rowley, vice president of the global retail sector for Hay Group. "Usually it's a fairly predictable event, but this is a very difficult environment." Target's overall credit-card performance "is troubling," said analyst Charles Grom, who covers the retail industry for JPMorgan Chase. Target earned $95 million via its credit business, down from $243 million a year ago, driven primarily by a much higher than expected bad-debt accrual of 14.4%. The company continues to boost its reserve to cover mounting write-offs that came to 9.6% in the third quarter, according to JPMorgan Chase data. The card unit is a drag that has helped position Target as "by no means out of the woods," Grom said. Even "bottom-fishers" should wait until charge-off rates and customer traffic trends stabilize, according to Grom, who said "in this environment" he prefers shares of rival Wal-Mart Stores Inc. (WMT). -By Karen Talley, Dow Jones Newswires; 201-938-5106; karen.talley@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=ca%2BNpgo7zosg6xjniF472A%3D%3D. You can use this link on the day this article is published and the following day.
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