How’s Target’s Credit Card Portfolio Faring After Sale?

How’s Target’s Credit Card Portfolio Faring After Sale?

New owner TD Bank expects “no significant change” to the portfolio’s value in wake of Target’s data breach.

Minneapolis-based retailer Target Corporation has spent the past month dealing with the tumultuous fallout from a massive data breach of customer payment card data. The breach has taken a bite of the retailer’s sales, prompted outrage and lawsuits, and drawn national scrutiny from lawmakers who are slated to hold Congressional hearings.

Target announced the closing of the sale of its own credit card portfolio on March 13, 2013, for $5.7 billion to Toronto-based TD Bank Group. Target has now acknowledged that sales and use of its own cards have dipped in the wake of the breach. But what’s happened to the value of the credit card receivables portfolio?

In a statement emailed to Twin Cities Business, Rebecca Acevedo, a spokeswoman for TD Bank, said: “We expect no significant change.”

On January 10, Target announced revised financial guidance for its fourth quarter of 2013 and is now projecting a 2.5 percent decline in comparable store sales for the quarter. The company noted that it saw “meaningfully weaker-than-expected sales” in the wake of the announcement of the breach.

But at the same time the company said that, while use of Target’s own branded cards has felt a pinch, Target card users are still accounting for a higher percentage of sales than seen a year ago: “Prior to the announcement of the payment card data breach, fourth-quarter REDcard penetration was in line with year-to-date trends. Since the announcement, penetration growth has moderated but remains hundreds of basis points stronger than a year ago.”

According to Target’s most recent annual filing with the U.S. Securities and Exchange Commission, customers using Target REDcards—including the Target credit card, Target Visa, and Target debit cards—accounted for 13.6 percent of all store sales in fiscal 2012. That percentage has been climbing: up from 9.3 percent in 2011 and 5.9 percent in 2010.

Asked how the breach has affected TD Bank, Acevedo responded as many other card issuers have since news of the breach hit: “We are working closely with Target on identifying customers impacted. It would be inappropriate to comment on anything outside of this right now.”

On Thursday morning, Target spokeswoman Molly Snyder declined to comment on the credit card portfolio now owned by TD Bank.

Target initially acknowledged that the data breach affected 40 million customers. On January 10, the company said that subsequent investigation revealed that personal data for up to 70 million people had also been stolen. The total number of people affected remains unclear.

Too Soon to Know?

Brad Smith, managing director and senior financial services analyst for Toronto-based Stonecap Securities, Inc., follows TD Bank. He said that in the immediate wake of the Target breach, he asked TD Bank about how it would impact the credit card portfolio and was told that it was too soon to know.

“I think it’s complicated,” Smith told Twin Cities Business. “For me as an analyst, the real question is what impact this has for future growth in the portfolio of credit cards.”

Smith said that he does not know all of the details of the arrangement between Target and TD Bank, but said: “It’s almost like it’s a joint venture between Target and TD. . . . They share in the profitability going forward. I don‘t know what the arrangement is with respect to credit losses.”

The agreement between Target and TD Bank was filed as an exhibit with Target’s quarterly filing in May 2013. The voluminous document contains many sections that Target has requested remain confidential. One section notes that both parties indemnify the other from losses.

But one section notes: “The foregoing limitations shall not apply to claims for breach of the obligations of confidentiality (which includes misuse of company guest data and cardholder data) . . .”

Asked about the indemnification clauses, TD Bank’s Acevedo declined comment.

Smith said that for the moment, no one has any answers about the ultimate financial impact of the breach.

“I don’t think it’s going to put a hole in the ship,” Smith said of the potential impact to TD Bank’s portfolio of Target receivables. “But I think everybody’s going to have to stay tuned and see.”

Smith noted that he has a “sell” recommendation on TD Bank’s stock: “They’ve launched this very capital intensive U.S. growth initiative,” Smith said. “They’re earning very subpar returns on it.”

Part of an Industry Trend

Target announced the deal to sell its receivables to TD Bank in October 2012. At the time, the portfolio had a gross value of $5.9 billion. By the time the deal closed in March 2013, the number had dipped to $5.7 billion.

Target financial filings show that leading up to Target’s sale of its credit card receivables, the value of the portfolio had been declining. At the end of the company’s fiscal 2009, it stood at roughly $8 billion. In 2010 it was $6.8 billion and at the end of fiscal 2011 it was $6.4 billion.

Bob Hammer, founder and CEO of the Thousand Oaks, California-based R.K. Hammer Investment Bankers, has been involved in the sale or acquisition of more than 150 credit card portfolios. Hammer notes that Target is part of an industry trend in which retailers are getting out of the financing business.

“Most retailers have sold their portfolios to other issuers,” Hammer said.

In its January 10 announcement, Target also announced plans to close 8 U.S. stores “after careful consideration of each location’s financial performance.”

Target previously announced four store closings in early November. The previous closings were announced before the data breach hit and did not receive much notice. None of the 12 stores are located in Minnesota.

As challenges mount for Target, there has been some speculation that the company could announce more layoffs soon. A Target representative could not be reached Thursday morning for comment on speculation about job cuts. In October, Target laid off 150 of its corporate employees.