Target: Merchant Retailer or Financial Institution?

Target (TGT) announced slightly better results than anticipated and management is rightfully encouraged despite the very tough economic circumstances. (Call Transcript)

The company claims to continue “delighting” its customers with bargains. But yet same store sales are dragging, however when you include new stores sales overall revenues are up.

Target needs to decide if it’s a merchant retailer or if it’s a financial institution. Credit card losses are becoming a major factor in explaining earnings. When you look at the balance sheet, investment in credit card receivables equals the investment in inventories. Inventories you understand for a retailer. The target credit card is not something you will fight hard for if a consumer runs into difficulty. You have to believe they will deal with Visa and MasterCard first.

We know that JPMorgan Chase (JPM) has made non recourse investments in the credit card receivables but is it enough for Target to be considered a true merchant? The conundrum is in the margin play. Target wants to delight customers with compelling differentiated merchandise at low prices. In order to make back the profit opportunity the company needs the credit card debt to skate it back onside.

As any business knows or will soon find out you need to monetize. That’s when cash goes in the bank.