NEW YORK — Target Corp. on Monday said it had agreed to sell an interest in its credit card receivables to J.P. Morgan Chase & Co. for about $3.6 billion. The interest represents approximately 47 percent of the principle amount of Target’s outstanding receivables. The transaction is expected to close before the end of May.
The retailer said the deal should provide it with sufficient liquidity to implement its business plans, which include previously announced capital investment and share repurchase programs, without impacting Target’s customers or employees.
“This unique agreement accomplishes the goals set forth in the review of receivables ownership that we initiated on Sept. 12, 2007,” said Doug Scovanner, executive vice president and chief financial officer of Target. “[The deal] marks the beginning of a long-term credit card relationship between Target and J.P. Morgan Chase, which we believe will create substantial financial and strategic rewards for both of us over time.”
Retail analysts praised the long-anticipated development. “It’s not a good idea for a retailer to be in the credit card business,” said Walter Loeb, president of Loeb Associates Inc. “With delinquencies being higher than usual there could be lots of defaults. It’s an appropriate move at this time. They can still benefit from the profits of the [credit card business] if there are any.”
Target’s credit card operation this year will account for more than 20 percent of operating profits, or $1.15 billion before interest expense, said Robert Buchanan, a consultant for Goldman Sachs’ Vantage Marketplace subsidiary. Target’s total operating profit this year is expected to be about $5.4 billion.
Buchanan said Target wants to continue to control the credit card business and drive the marketing, but at the same time gain access to somebody else’s capital. “They approached the business a lot more strategically than some of their competition,” he said. “They were very conservative about who got credit and how much.”
According to Loeb, the J.P. Morgan Chase deal is an example of Target’s new management showing “that they’re going to restructure some things to make [Target] more profitable.” Bob Ulrich, chairman and chief executive officer, retired as of Sunday. Gregg Steinhafel, president, in January was named by the board to succeed Ulrich.
This story first appeared in the May 6, 2008 issue of WWD. Subscribe Today.
On Monday, Target stock closed at $53.19, down 72 cents on the New York Stock Exchange.