Target’s credit card business is making news again as the Minneapolis-based retail giant ups the ante against Wal-Mart and other competitors by offering a 5 percent everyday discount to shoppers using their Target-brand credit cards in hopes of boosting store traffic.
Coming off weak September same-store sales growth of only 1.3 percent, Target (NYSE:TGT) is looking to its “REDcard Rewards” promotion to help kick-start the year-end holiday shopping season.
The promotion differs from other branded store cards by giving an immediate discount on most purchases made in the store on or its website, not just purchases made the day an account is opened or when cashing in “frequent shopper” points. To date, other retailers have not followed Target’s lead.
The program, announced last June, kicks in nationwide this weekend, following a successful trial run in the company’s Kansas City-area stores last year.
Speaking with analysts and investors after Q2 earnings, Chief Financial Officer Doug Scovanner said he expects the promotion to add “about a full percentage point to fourth-quarter sales and between 1 and 2 full points to sales next year.” He said that households increase their spending with Target by about 50 percent, once they acquire a Target branded credit or debit card.
Target CEO Gregg W. Steinhafel also told analysts to “expect to see some fairly dramatic and impactful” advertising and marketing of the program leading in to the holiday shopping season, as reported by SeekingAlpha.com.
Target’s credit card business had previously brought it into the sights of shareholder activist William Ackman, whose firm, Pershing Square Capital Management, acquired nearly 10 percent of Target in 2007. Ackman failed in a high-profile attempt to oust the Target board and force the company to sell off its credit card business, though the company did sell off a portion of the receivables for more than $3.5 billion.
In the depths of the recession, bad-debt write-offs plagued retailers’credit-card operations. Target’s bad-debt write-offs ballooned from $481 million in 2007 to $1.25 billion in 2008 and $1.19 billion last year.
As a result, profits on credit card operations plunged from $797 million in 2007 to $155 million in 2008. Earnings have slowly climbed back to $291 million last year and $260 million for the first half of 2010.
While consumer spending has not fully rebounded, Target is breathing easier today. For the first half of this year, bad debt is down to $335 million. CFO Scovanner said the company looks forward to “a healthier risk profile in the fall than we experienced last fall. We expect net write-offs to stabilize at about $200 million plus or minus in each of the next two quarters.”
Scovanner also told analysts that late-fee income will decline by about one-third in Q3 as Target complies with new federal credit card regulations which he described as “somewhat less onerous [than] our previous expectations.”
Revenue on credit card operations has bounced from $1.9 billion in 2007 to more than $2 billion in 2008 and back to $1.9 billion last year. It totaled $841 million the first six months of 2010. While most of Target’s credit card revenue is made up of finance charges, late-fee income had grown from $422 million in 2007 to $461 million in 2008 and then backed off to $349 million last year. So far this year, Target recorded late-fee income of $113 million.
Earlier this spring, Target said it will no longer offer its co-branded Visa credit card but now will issue just its store-branded card product, which can only be used at Target stores and on its website. Target is also planning on bringing its online store in house, moving it away from Amazon.com, which had been managing it for Target.