Target Corporation Won't Sell Credit Operations

Sometimes you see a trend developing within a company as its earnings grow and become very visible and sustainable. This is what has happened with Target Corporation (TGT). The recent April quarter saw Target earn $650 million with its credit card operations contributing $415 of that total.

I wrote on June 6th that Wal-Mart (WMT) is a trade and Target (TGT) is an investment. Since that article was published, Target's stock has traded up nearly 10% while Wal-Mart has been essentially flat. The principal reason that I stated Target is an investment is because of its opportunity to double its store base over the next decade and commensurately grow its credit operations.

Credit card operations are very profitable once its low expenses are covered. Interest profits amass and add up quickly. Looking at Target's April quarter, the 1,502 stores contributed about $235 million of merchandise profits, while the credit card operations yielded $415 million. Very high margin business!

Target can expand its credit operations to generate over $1 billion in profits in about 4-5 years. The spread between credit card profits and general merchandise profits will spread-out even more as the years go on.

Target's cash flow provides the capital necessary to open more store units. Taking on debt to expand the base will not be necessary. The credit card operations uses very short-term debt to fund the receivables.

Rumors circulated that an "activist" shareholder was going to try and force Target to sell the credit operations. The company's management has vociferously denied any intentions of selling the division. It would be suicidal to its earnings growth not too mention its $56 billion market capitalization.

Target knows that to achieve a $100 billion market valuation, the combination of new, profitable stores and its growing credit card division are critical components. New customers to the store base feed more to the credit card operation and the rest as they say...is music..

TGT 1-yr chart:

Disclosure: none.