Cleaned up credit portfolio makes for attractive acquisition

Target’s credit card portfolio is looking a whole lot more attractive to potential acquirers following improvements in the delinquency rates, risk profile and strong profit growth.

Fourth-quarter operating profit in the credit card segment increased 287% to $151 million compared with $39 million in the fourth quarter the prior year. For the full year, credit card segment profits advanced 169% to $541 million compared with $201 million the prior year.

The profit growth is driven by the fact that Target has spent the fast few years weeding irresponsible users for credit from its portfolio. The result is the company takes in less in revenue in the form of finance charges and late fees, but those declines are more than offset by a significant decline in the bad debt expenses the company records when customers don’t pay their bill. For example, in the fourth quarter, finance charge revenue declined to $313 million from $353 million, while bad debt expense dropped to $83 million from $284 million.

While the numbers look pretty good at year end, the volatility of the credit business is one of the reasons Target CFO Doug Scovanner offer as a rationale for seeking a partner to acquire the business. A sale would enable the company to eliminate the volatility while retaining a portion of a profit stream.

“Probably most importantly, we believe that with the right partner engaged with our current financial services team, we should be able to either improve the performance of this portfolio or grow it faster, or both, over time, and we very much look forward to enhancing the prospects for growth and profitability in the portfolio with that partner.”

From a timing standpoint, Scovanner added that the capital markets are receptive to funding transactions of the type envisioned by Target and many banks have ample liquidity and are looking for interesting exciting place to invest. Despite the potential appeal, early indications are a transaction would no take place until later this year or in early 2012.