Target Sees Silver Lining for Credit Cards, Unless...

Retailer Target Corp. (TGT) shouldn’t have much good news to report these days, but there were some silver linings in its outlook. The company expects to gain market share in the downturn and sees credit cards improving (with a caveat) in 2009. From Target Corp.’s Q308 conference call:

 

Only the strongest will survive:

With a strong emphasis on delivering exceptional value, we believe that Target, Wal-Mart (WMT) and Costco (COST) will be the big winners this holiday season. In addition, we recognize that some of our other retail competitors may not emerge intact from the current economic turmoil. While we do not celebrate the misfortune of others in our industry, we believe that a smaller competitive set would be to our benefit when the economy improves.

We are raising retails where the market will bear it, but we remain absolutely committed to being priced with Wal-Mart on all identical items in local markets.

Sees credit cards improving next year, hopefully:

The percentage of our sales charged on anyone's card - one that we issue together with all other cards, from VISA (V), MasterCard (MA), Discover (DFS) and Amex (AXP)- fell for the first time in many, many years in Q2 this year, and I expect that trend to continue for awhile.

We saw continued deterioration in delinquency and write-off performance during the quarter. This led to higher-than-expected bad debt expense, both due to write-offs within the period as well as in addition to our reserve of over $100 million in the quarter to accommodate anticipated write-offs in future periods.

We continue to tighten all aspects of portfolio underwriting, granting fewer new accounts with lower average credit lines, aggressively reducing open credit lines on many existing accounts, and pursuing more proactive collections.

So famous last words: I would expect that our GAAP reported financials for our Credit Card segment in 2009 would show a substantial improvement from 2008…

Certainly if unemployment were to rise hundreds and hundreds of basis points, then, of course… that would defer the point in time that we turn the corner in write-off rate.

Macro: Other states joining the terrible four:

Our sales shortfall and our credit card risks have been more heavily concentrated in Florida, Arizona, Nevada and parts of California than in the rest of the country. [Now] I'd probably add a few to that list, certainly Georgia and the Carolinas, Tennessee, are much less healthy than they once were, and Michigan, Ohio is another area that is very unhealthy from both a sales standpoint and a credit card risk metric standpoint. 

The “downside” to lower fuel costs, increased risk of deflation?

So far this year we've seen mid to upper single-digit [inflation] increases in food, CPG and home. And starting this fall season we've seen increases in the low single-digit range in apparel… Obviously we've seen some differences in commodity prices lately and fuel, which will affect transportation… We are seeing some decreases, but yet to be determined where that will head. 

e-Commerce: 

Well, in the past our online business was growing very, very rapidly and was in the double-digit growth range consistently for many years. They have and we have experienced the same kinds of softness in the number of transactions and sessions as we have in the Retail business. So it's still positive, but it is growing at a much slower rate than it was growing last year first quarter and middle of the year.