Target’s Credit-Card Sale

As recently as last November, Target ( TGT ) steadfastly said it had no intention of selling its $7 billion credit-card portfolio, one of the last ones held by a retailer. That changed late on Sept. 12, when the trendy discounter disclosed it would explore letting it go. The trouble is, Target is a little late to put out the for-sale sign.

Target’s portfolio, which consists largely of its Target Visa receivables, has shown some of the most serious deterioration in credit quality of any major card company over the last year and a half. That will weaken the price Target can command, particularly as worries about a consumer-led recession grow. At the same time, the turmoil in the overall credit market sparked by the subprime mortgage meltdown will dampen what potential buyers are willing to pay.

Target may have gotten a higher price just six months ago, says Nathon Powell, a credit analyst at the Center for Financial Research and Analysis (CFRA). What changed Target’s mind was the entrance of activist investor William Ackman. In July, his hedge fund Pershing Square Capital Management disclosed it had taken a 9.6% stake in the Minneapolis-based discounter and that it would prod management to boost shareholder value.

Target and Nordstrom ( JWN ) are the last major retailers to underwrite their own card portfolios others such as Wal-Mart Stores ( WMT ) contract with banks, who manage the cards and hold the risk. Target’s portfolio has been a profit machine. For Target’s fiscal quarter ending Aug. 4, operating profits from credit rose 34% over the same quarter a year ago. Credit accounted for just more than a third of Target’s overall 11% increase in operating profits for the quarter.

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