Target’s private-label portfolio may or
may not ultimately be up for sale, but that hasn’t slowed
speculation as to who would lead the bidding for one of the largest
and most tantalising prizes in a saturated US cards market.
Charles Davis reports.

Retailer Target’s $7 billion portfolio, which the company is
reviewing for a possible divestiture, is sure to attract a who’s
who of the cards business, as befits an 18.4 million-plus
cardholder base with national reach and a well-seasoned risk
profile. Few, if any, such portfolios will come on to the market in
the years to come, offering the potential for one of the US giants
to leapfrog the competition.

Target announced in August that it wanted to weigh the “direct
ownership” of its credit card receivables against “other possible
ownership structures”.

Doug Scovanner, Target’s chief financial officer, said in a message
announcing the review that, even though the company is “committed
to maintaining the core operations of Target Financial Services and
its team”, it feels “it is appropriate to approach the capital
markets to determine whether Target or a financial institution is
best suited to own our receivables”.

Unlike other retail credit card portfolios, Scovanner said,
Target’s assets “include strong double-digit growth, a consistently
high yield and unprecedented integration with our retail
operations. Regardless of whether or not our review results in a
receivables sale, we intend to maintain our core financial services
operation and to build the Target financial team.”

The announcement came after the high-profile shareholder William
Ackman disclosed in July that he controls a 9.6 percent stake in
Target through his hedge fund, Pershing Square Capital. Ackman told
reporters at the time that he intended to discuss with Target
managers ways to improve its stock price, and the review followed
shortly thereafter.

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Target, the country’s eighth-largest issuer, issues two types of
cards: Target-branded products, which can be used only at its
stores, and a Visa-branded general-purpose card. Target says that
the general-purpose cards make up about 90 percent of its

It’s sure to attract a number of significant players, but the deal
would not be without risk in an environment in which credit quality
is paramount in the minds of many issuers.Target’s card business
has grown steadily, driven by its Visa credit card, which boosted
receivables by 14 percent in the first half of this year compared
with the same period a year ago. In the 53-week period ending 3
February 2007, revenue from Target’s card business rose almost 19.5
percent from a year earlier, to $1.6 billion. The company reported
that its earnings for its fiscal second quarter, which ended on 4
August, rose 14 percent to $686 million, while card revenue rose 17
percent to $453 million.

It hasn’t been immune to the same economic factors plaguing the
rest of the US cards market, however. A portion of Target’s
cardholders have FICO scores of 660 or lower, suggesting many also
hold subprime mortgage loans. Target charged off $90 million in
credit card receivables during its second quarter, up 32 percent
from $68 million in the same quarter last year. Accounts 60 days
past due plus those that have been charged off have risen from 7.07
percent of receivables in February that year to 9.35 percent this

Despite concerns over the subprime market and credit quality,
Target is too big a portfolio not to attract major bidders.
Already, analysts have tabbed HSBC, JPMorgan Chase, Bank of America
and Citi as would-be suitors.

There is precedent for such a sale. Giant retailers Sears, Macy’s
and Kohl’s all sold their card businesses at strong premiums
between 2003 and 2006. Target and Nordstrom are the last major
retailers to underwrite their own card portfolios – others such as
Wal-Mart contract with banks, which manage the cards and hold the


Wall Street welcomed the news that Target is putting out feelers to
sell its credit card receivables. But there is an undercurrent of
scepticism that the Minneapolis-based retailer’s timing might be a
little off, as the current uncertainty over credit woes may dampen

“In recent years the chorus has seemingly grown louder for Target
to sell off its credit card receivables, given the wave of
department store credit business sales that proliferated over the
past four years,” Neil Currie, an analyst with UBS Securities,
wrote in a note to investors. He added that Wall Street would
“react favourably to a review of Target’s credit ownership

On the other hand, Michael Exstein, a Credit Suisse analyst, wrote
in a research note that a sale was a long shot at best. “We would
be very surprised if the strategic review ended in a transaction,”
Exstein wrote. “We believe management is likely undergoing the
review to finally put to bed the issue of whether the credit card
business should and even could be sold.”

If it does ultimately go on the market, analysts have speculated
that a deal could bring $1 billion to $2 billion to the

Even in a tight credit market with rumblings of the subprime market
fresh on issuers’ minds, the Target portfolio is a jewel. Its
credit card customers, by and large, pay their bills on time, which
has allowed the retailer to keep its delinquencies at a manageable