Tide has turned for credit biz

Consumer trends underlying Target’s credit business may not be improving substantially, but at least they aren’t getting any worse, and that is a good thing in terms of the profitability of the company’s receivables portfolio. Credit-card segment profit increased to $39 million from a year earlier loss of $135 million. Full-year credit card profit increased nearly 30% to $201 million compared with $155 million in 2008.

Despite the improve profitability, delinquency and write-off rates in the January are a source of concern, even though they were stable-to-improved-slightly compared with the prior month, according to information regarding the credit portfolio filed with the Securities and Exchange Commission. Delinquent account balances with two or more late payments represented 8.9% of the company’s receivables at the end of January compared with 8.82% at the end of December and 9.39% at the end of November. Meanwhile, delinquent account balances with three or more late payments represented 6.32% of receivables at the end of January compared with 6.33% at the end of December and 6.57% at the end of November.

Paying late is better than not paying at all, but, when that happens, Target writes off the balance, and in January it did so to the tune of $99.2 million, bringing the fourth-quarter total to $284 million, a 43.2% reduction from $500 million in the prior year’s fourth quarter when the company added substantially to its allowance for doubtful accounts.

Commenting on the January credit trends, William Blair analyst Mark Miller said, “Target should be well positioned to restore profitability in the credit operation as delinquencies and charge-offs improve in an economic recovery. “We believe the credit business, which represented an estimated 7% of net income in 2009, could add several percentage points to Target’s reported earnings growth in coming years.”