Target's Bad Credit-Card Debts On the Rise

Amid declining comparable store sales resulting from a decrease in consumer spending, discount retailer Target is also being adversely affected by rising bad debt expenses as consumer creditworthiness continues to deteriorate, according to the third-quarter 2008 10-Q regulatory filing:

• Credit card receivables are recorded net of an allowance for expected losses. The allowance, recognized in an amount equal to anticipated future write-offs, was $765 million at November 1, 2008, $570 million at February 2, 2008 and $532 million at November 3, 2007. Substantially all accounts continue to accrue finance charges until they are written off. Total receivables past due ninety days or more and still accruing finance charges were $336 million at November 1, 2008, $235 million at February 2, 2008 and $197 million at November 3, 2007. Accounts are written off when they become 180 days past due.

For the third-quarter ended November 1, average receivables increased 19.4% to $8.7 billion, up from $7.3 billion in 2007. On the positive side, credit receivables directly funded by Target declined 27 percent to $3.3 billion, from $4.5 billion in 2007, reflecting JPMorgan Chase’s purchase of a 47 percent stake in the receivables portfolio last May. Nonetheless, Target wrote-off $314 million in consumer bad debt, up from $130 million last year.

As it confronts increasing default rates, Chief Financial Officer Doug Scovanner told investors on the November earnings call that the retailer is further tightening finance terms for its card holders, including the approval of fewer new accounts (with lower average credit lines) and aggressively reducing open credit lines on many existing accounts.

Looking forward, managing receivables will be somewhat akin to walking a tightrope — awkwardly balancing the need to protect profits and reduce write-off rates — while trying not to dampen customer spending. The company reported a two percent increase in year-on-year revenue in the October-end quarter to $15 billion, driven by a seven percent growth in credit card revenue (as comparable same store sales fell 3.3 percent).

Scovanner did warn investors, however, that credit card risks — which had been more heavily concentrated in Florida, Arizona, Nevada and parts of California — are now spreading to other parts of the country. Management expects a write-off rate for the full year slightly above nine percent, up from 5.9% in 2007. Given the economic climate, net write-offs as a percentage of average receivables could trend closer to 10 percent, in my opinion.

This post first appeared in the BNET Insight blog 10-Q Detective.