Credit Commentary

Target Corp. Posts Modest Quarterly Drop

By Zarana on Friday, August 21 2009

Discount retailer Target Corp.'s (TGT) fiscal second-quarter profit fell 6.4%, eighth consecutive quarterly profit decline, but the results were well above expectations as the discount retailer continued to focus on controlling expenses and declining crude oil prices, which lowered transportation costs.

Even the credit-card business, though still suffering from high charge-offs, delivered fee revenue of $500 million, about the same as the prior year but above the first quarter by about 6%.

Profit in Target's credit card business dropped to $63 million for the quarter from $74 million a year earlier, 15% decline YOY, on the company's reduced investment in the segment and lower interest rates. Bad-debt expenses rose 19%. The allowance for doubtful accounts was flat sequentially at $1 billion. The business has struggled in recent months with surging net charge-offs and delinquencies.

Net write-offs in the quarter were $304 million, in line with expectations. The annualized default rate spiked to 14.5% compared to 8.7% a year ago. In addition, the accounts at least 60 days behind rose to 5.8% of receivables from 4.5% a year earlier, and the 90-day delinquency rate rose to 4.1% from 3.1%. However, the delinquency rate has inched down from previous quarter, in line with the industry trend

Average credit card receivables in the quarter decreased $150 million, or 1.8%, from the second quarter of 2008, and quarter-end receivables decreased $349 million, or 4.0%, from the same period a year ago.

Target has been reducing staff, tightening consumer credit card underwriting and freezing senior managers' salaries. It's also expanding further into food sales, which it believes will help drive customer traffic.