September 24, 2008
Target Card Holders Having Trouble Making Payments
Target sold nearly half of its credit card loans to J.P. Morgan Chase last spring and now it may be wishing it sold the whole thing. The retailer reported on Monday that a growing number of its cardholders are failing to pay their debt while many that continue to make payments are sending in lower amounts, according to the Minneapolis Star Tribune.
According to documents filed with the Securities and Exchange Commission, Target wrote off 9.86 percent of its $8.7 billion credit card business in August. As a point of comparison, Target wrote off 5.66 percent of its portfolio in August of last year.
Todd Slater, an analyst with Lazard Capital Markets, changed his rating on Target from “buy” to “hold” based on the news.
“Delinquencies as a percentage of receivables increased to the highest level we have seen, while charge-offs increased to the highest level since the bankruptcy law changed in October 2005,” Mr. Slater wrote to investors.
William Ryan, an analyst at Portales Partners, believes Target could see its charge-off rate go as high as 12 percent over the next six months.
The write-off numbers and economic uncertainty increase the likelihood Target will tighten its credit standards for the upcoming holiday season, according to analysts.
Discussion Questions: What do the write-offs mean for Target’s business now and going forward? Is Target especially hard hit in this area or do you think that other merchants are having similar experiences?
[Author’s Note] The Star Tribune article referenced a bulletin written by Piper Jaffray analyst Jeffery Klinefelter in which he noted that Target had one-fourth of its stores in states (Arizona, California, Florida and Nevada) particularly hard hit in the housing downturn.
BrainTrust
Recent Discussions
Discussion Questions
Poll
It would be interesting to know if retailers that are catering to a higher income segment are experiencing the same kinds of payment problems. As for Target, I don’t think this should be coming as a huge surprise, seeing the US economy is in the state it is. Combine that with how easy it is to get a store credit card, and it’s easy to see how any retailer could get into this kind of mess.
In the end though, I think what’s important is that positive cash flow be maintained. And if this means selling off some potentially bad debt, then so be it.
Welcome to the risk of operating your own credit card. After years of fee and interest income the next few years will likely wipe out these profits. Couple this with little if any sales increase and all does not bode well for retailers.
This year’s Christmas is projected at one percent growth over last year. Credit card payments will be slow pay for at least a year. Consumers are simply going to reduce shopping and pay down debt, but the good times will roll again.
Cash is king when credit gets tight. Tightening credit is on the way, and must needs trickle down to private label credit cards. I could definitely see discounts for cash payments.
The issue is–what business retailers are in? Selling merchandise or selling credit? The more heavily they are invested in selling credit, the harder hit they will be. Look at all the financial instruments offered at Walmart, Tesco and others. Sure, Walmart is in good shape, but are their customers? What about gas credit cards? It’ll be an interesting ride.
I see half the store being devoted to gift cards. Target will be the Hallmark Cards of PPP (pre-paid purchases). The stores will be the destinations of choice for shoppers who are indecisive, insensitive, or procrastinative (is that a word?). The chain’s forward-buy department will become the “casino-buy department,” betting that the under-redemption factor of gift cards will preserve the house wagering advantage. This will be TV, Target Vegas-style.
Is Target in the speculation bidness? You bet. And so is every seller of every product. Is it a short hop from retailing to a Vegas-style line on business success? Of course, and it’s called the stock market. Stockholders want returns on their bets. When you see headlines such as “GM Lost $1.2 Billion Last Quarter,” it’s not that a burglar pilfered that amount out of a safe somewhere. Those losses are really in stock value, and are spread among the millions of GM stockholders.
Target stockholders are smart, and I predict they will stay the course. The Target retail model has proven to be simultaneously au courant and prescient. They will live to kick bohunkus another day.
If nothing else, the turmoil in the US financial markets playing out on Capitol Hill this week demonstrates that there is no longer going to be much of a vehicle left where retailers and other corporations can sell off their credit card debt to willing banks. It is theirs to deal with. And going forward available credit for consumers and businesses is going to be very tight.
Target Corp is being upfront and honest about their situation in a way that many other retailers have not been so far. But it is a huge problem out there. For so many retailers who aggressively pushed the store brand credit cards in order to reap revenue from higher interest, and ostensibly to generate customer loyalty, the real test is here and now. How will they manage the delicate balance between generating needed sales to move their existing inventory and respecting their current customers–while closing down or freezing existing accounts and tightening requirements for new credit accounts that may still be opened?
Will register discounts for cash purchases perhaps be the marketing mantra for the coming season?
Years ago Sears used to boast that their credit cards generated as much profit as their sales. Sears doesn’t boast about anything now. One wonders if the retailers take their eyes off the ball when they start emphasizing credit cards.
Last year I bought a bunch of clothes at Banana Republic. It was probably the first time I bought anything in a clothing store in more than 10 years. When I went to the checkout, I was told that if I opened a credit card account, I could get 30% off. The obvious strategy is that if I have a Banana Republic credit card, I will shop more at Banana Republic. But, underlying that, it also suggests that Banana Republic will make up that loss in top line revenue with the gain in interest payments and financing fees.
Part II happened just a few weeks ago. I needed some shorts. I bought a couple of pair at Banana Republic. When I got home my wife said she had a card she got in the mail that would have given me another 20% off good only to Banana Republic credit card holders. So I went back to get credit for my purchase. Since I shredded their card when they mailed it to me a year ago, they looked up my account. I gave them the 20% off card and charged the whole thing to the account they looked up.
It strikes me that there is not a thorough examination of the business of private label credit cards. It is probably one that should be done in financially hard times. Short payments in the credit card business are just as damaging as losses in inventory on the floor.
Specifically, I see Target as a good proxy for the economy. Not too upscale, not too downscale. If so, we are only standing on the tip of the financial iceberg.
It’s hard to feel sorry for retailers that make their credit cards so easy to get that they have to know they are encouraging this type of performance. If they want to continue to encourage this risky business then they need to plan to write off this and even higher losses in the future. If they can factor these losses in and it is still a good business decision for them, more power to them. The way the economy looks right now, they need to plan for higher failures in the short term in my opinion.
Obviously it’s bad, and going to get worse as the heating season comes on in the snowbelt. I don’t think Target is all that out of line with other similar retailers, who pestered you to take credit cards on every visit, with significant incentives. Up here in the frozen north country, agencies are already overwhelmed with requests for help with heating bills that they can’t come close to meeting. As another indicator, fire departments all around here are going into overdrive offering people help with making sure their wood stoves are operating safely and efficiently. We expect people to rig up unsafe heating devices, burn green wood (that causes creosote buildup and fires) and to use old cracked chimneys that will also cause fires. Net-net, it’s a scary scenario when people can’t afford to heat their homes. When they have a choice of heat or the credit card bill, I suspect they’ll choose heat.
If my memory serves me correctly, W.T. Grant and their Grant City stores also pushed their credit cards, and when the hard times of the early 1970s occurred, their credit card holders also stopped or curtailed their minimum payments, causing hardship on the company, and eventual bankruptcy and closure.
Not that the same thing will happen to Target, but it is definitely reason for concern.
Target needs to set up reserves to cover these anticipated losses. Hopefully this too will pass. But Target should not follow the path taken by W.T. Grant decades ago. They should have more stringent credit card application review policies to weed out unqualified credit card applicants.
This is a business that Target should clearly not be in. Target should be farming this out to a Visa/MC bank and getting credit for their customers this way. Although these credit payments will have an impact on Target’s short term business, they are clearly looking at off loading this business in the long term. This represents a failed business attempt in the short term, nothing more.
During the last 3-4 years, I have noticed more and more discussion at retail trade shows about “the decline of the middle class” in the USA during the last 25 years or so. According to these discussions, this trend has resulted in the rise of discounters like Target, Costco, Walmart, etc. and the decline of traditional department stores like Marshall Field’s, Robinson-May, Macy’s, etc.
This easy-credit approach by Target and other retailers is a stopgap, at best. Smart retailers like Target know that consumer purchasing power among middle-income people is being eroded by the escalating cost of college tuition, housing, health care and borrowed capital. Plus, it is no secret that since the last boom economy in the 1990s, the U.S. economy has failed to create the same level of good-paying jobs for middle-income people in their prime earning years.
For retailers, the solution to these long-term trends is not to extend ever-increasing credit lines to financially challenged shoppers. The solution is for retailers to press elected officials to craft economic policies that create more solid, middle-income jobs.
Unless this happens, retailers in the USA, along with the middle-class itself, face a shaky future. Credit is not the solution to retail’s woes. Credit is the problem.
More Discussions
As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…Is Supply Chain Volatility Here To Stay?
Can we expect an ongoing volatility to remain in terms of retail supply chain?Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?
It would be interesting to know if retailers that are catering to a higher income segment are experiencing the same kinds of payment problems. As for Target, I don’t think this should be coming as a huge surprise, seeing the US economy is in the state it is. Combine that with how easy it is to get a store credit card, and it’s easy to see how any retailer could get into this kind of mess.
In the end though, I think what’s important is that positive cash flow be maintained. And if this means selling off some potentially bad debt, then so be it.
Welcome to the risk of operating your own credit card. After years of fee and interest income the next few years will likely wipe out these profits. Couple this with little if any sales increase and all does not bode well for retailers.
This year’s Christmas is projected at one percent growth over last year. Credit card payments will be slow pay for at least a year. Consumers are simply going to reduce shopping and pay down debt, but the good times will roll again.
Cash is king when credit gets tight. Tightening credit is on the way, and must needs trickle down to private label credit cards. I could definitely see discounts for cash payments.
The issue is–what business retailers are in? Selling merchandise or selling credit? The more heavily they are invested in selling credit, the harder hit they will be. Look at all the financial instruments offered at Walmart, Tesco and others. Sure, Walmart is in good shape, but are their customers? What about gas credit cards? It’ll be an interesting ride.
I see half the store being devoted to gift cards. Target will be the Hallmark Cards of PPP (pre-paid purchases). The stores will be the destinations of choice for shoppers who are indecisive, insensitive, or procrastinative (is that a word?). The chain’s forward-buy department will become the “casino-buy department,” betting that the under-redemption factor of gift cards will preserve the house wagering advantage. This will be TV, Target Vegas-style.
Is Target in the speculation bidness? You bet. And so is every seller of every product. Is it a short hop from retailing to a Vegas-style line on business success? Of course, and it’s called the stock market. Stockholders want returns on their bets. When you see headlines such as “GM Lost $1.2 Billion Last Quarter,” it’s not that a burglar pilfered that amount out of a safe somewhere. Those losses are really in stock value, and are spread among the millions of GM stockholders.
Target stockholders are smart, and I predict they will stay the course. The Target retail model has proven to be simultaneously au courant and prescient. They will live to kick bohunkus another day.
If nothing else, the turmoil in the US financial markets playing out on Capitol Hill this week demonstrates that there is no longer going to be much of a vehicle left where retailers and other corporations can sell off their credit card debt to willing banks. It is theirs to deal with. And going forward available credit for consumers and businesses is going to be very tight.
Target Corp is being upfront and honest about their situation in a way that many other retailers have not been so far. But it is a huge problem out there. For so many retailers who aggressively pushed the store brand credit cards in order to reap revenue from higher interest, and ostensibly to generate customer loyalty, the real test is here and now. How will they manage the delicate balance between generating needed sales to move their existing inventory and respecting their current customers–while closing down or freezing existing accounts and tightening requirements for new credit accounts that may still be opened?
Will register discounts for cash purchases perhaps be the marketing mantra for the coming season?
Years ago Sears used to boast that their credit cards generated as much profit as their sales. Sears doesn’t boast about anything now. One wonders if the retailers take their eyes off the ball when they start emphasizing credit cards.
Last year I bought a bunch of clothes at Banana Republic. It was probably the first time I bought anything in a clothing store in more than 10 years. When I went to the checkout, I was told that if I opened a credit card account, I could get 30% off. The obvious strategy is that if I have a Banana Republic credit card, I will shop more at Banana Republic. But, underlying that, it also suggests that Banana Republic will make up that loss in top line revenue with the gain in interest payments and financing fees.
Part II happened just a few weeks ago. I needed some shorts. I bought a couple of pair at Banana Republic. When I got home my wife said she had a card she got in the mail that would have given me another 20% off good only to Banana Republic credit card holders. So I went back to get credit for my purchase. Since I shredded their card when they mailed it to me a year ago, they looked up my account. I gave them the 20% off card and charged the whole thing to the account they looked up.
It strikes me that there is not a thorough examination of the business of private label credit cards. It is probably one that should be done in financially hard times. Short payments in the credit card business are just as damaging as losses in inventory on the floor.
Specifically, I see Target as a good proxy for the economy. Not too upscale, not too downscale. If so, we are only standing on the tip of the financial iceberg.
It’s hard to feel sorry for retailers that make their credit cards so easy to get that they have to know they are encouraging this type of performance. If they want to continue to encourage this risky business then they need to plan to write off this and even higher losses in the future. If they can factor these losses in and it is still a good business decision for them, more power to them. The way the economy looks right now, they need to plan for higher failures in the short term in my opinion.
Obviously it’s bad, and going to get worse as the heating season comes on in the snowbelt. I don’t think Target is all that out of line with other similar retailers, who pestered you to take credit cards on every visit, with significant incentives. Up here in the frozen north country, agencies are already overwhelmed with requests for help with heating bills that they can’t come close to meeting. As another indicator, fire departments all around here are going into overdrive offering people help with making sure their wood stoves are operating safely and efficiently. We expect people to rig up unsafe heating devices, burn green wood (that causes creosote buildup and fires) and to use old cracked chimneys that will also cause fires. Net-net, it’s a scary scenario when people can’t afford to heat their homes. When they have a choice of heat or the credit card bill, I suspect they’ll choose heat.
If my memory serves me correctly, W.T. Grant and their Grant City stores also pushed their credit cards, and when the hard times of the early 1970s occurred, their credit card holders also stopped or curtailed their minimum payments, causing hardship on the company, and eventual bankruptcy and closure.
Not that the same thing will happen to Target, but it is definitely reason for concern.
Target needs to set up reserves to cover these anticipated losses. Hopefully this too will pass. But Target should not follow the path taken by W.T. Grant decades ago. They should have more stringent credit card application review policies to weed out unqualified credit card applicants.
This is a business that Target should clearly not be in. Target should be farming this out to a Visa/MC bank and getting credit for their customers this way. Although these credit payments will have an impact on Target’s short term business, they are clearly looking at off loading this business in the long term. This represents a failed business attempt in the short term, nothing more.
During the last 3-4 years, I have noticed more and more discussion at retail trade shows about “the decline of the middle class” in the USA during the last 25 years or so. According to these discussions, this trend has resulted in the rise of discounters like Target, Costco, Walmart, etc. and the decline of traditional department stores like Marshall Field’s, Robinson-May, Macy’s, etc.
This easy-credit approach by Target and other retailers is a stopgap, at best. Smart retailers like Target know that consumer purchasing power among middle-income people is being eroded by the escalating cost of college tuition, housing, health care and borrowed capital. Plus, it is no secret that since the last boom economy in the 1990s, the U.S. economy has failed to create the same level of good-paying jobs for middle-income people in their prime earning years.
For retailers, the solution to these long-term trends is not to extend ever-increasing credit lines to financially challenged shoppers. The solution is for retailers to press elected officials to craft economic policies that create more solid, middle-income jobs.
Unless this happens, retailers in the USA, along with the middle-class itself, face a shaky future. Credit is not the solution to retail’s woes. Credit is the problem.