From merchandising and advertising to real estate and technology, business reporters offer insight into the latest trends and people that define today’s top retailers.

Target does things its way--for better or worse

Posted by: under Retail, Target Updated: January 25, 2012 - 5:42 PM

 

 

If Target Corp. felt any sense of panicked urgency, the Minneapolis-based retailer sure isn't showing it.

Last week, Target said it would delay the sale of its credit card receivables business for a year, despite telling Wall Street for most of last year that it was "on track" to do so in December or January.

"Our desire to sell the portfolio on appropriate terms remains the same today as it was when discussions began, but we believe now is not the time to finalize a transaction," CFO Doug Scovanner said in a statement.

The company also just came off a lackluster holiday shopping season, including a weak December performance that forced it to reduce its fourth quarter profit forecast. But Target officials see no reason for to correct course, analysts say.

"While management is not pleased with the season, it is chalking it up to a promotional holiday and does not plan any major changes to marketing or price strategy," Daniel Binder, an analyst with Jefferies & Co., wrote in a research note.

There are two ways to look at Target's actions, or shall we say inactions.

The first is that Target knows what it's doing and will not base its strategies on the short-term whims of the stock market. That's certainly how the company sees itself.

The second perspective is that Target's lack of decisive action might come back to haunt the retailer.

There are ample arguments to support either theory.

Staying the course is certainly prudent. Take Target's weak holiday sales. One bad holiday season does not make a retailer. If Target tried to goose sales with more discounting, that would inevitably damage its profit margins.

As for the sale of its credit card receivables, Target officials think they can fetch a better price if they wait until the end of 2012 or the beginning of 2013.

"We believe a pause in discussions...will enable Target to reach an agreement with a high-quality financial partner on acceptable terms," Scovanner said.

Senior vice president of finance John Mulligan will replace Scovanner as CFO in late March.

Glenn Johnson, a portfolio manager with Mairs & Power in St. Paul, which owns 2.7 million shares of Target stock, thinks there's merit to this approach.

As the economy grows stronger (and the amount of bad debt continues to fall), the value of the credit card portfolio will only rise, Johnson said.

To demonstrate its commitment to selling the receivables, Target said Terry Scully, the president of Target Financial and Retail Services will report directly to CEO Gregg Steinhafel.

But Target's strategy is not risk free.

Though the economy is showing signs of life, plenty can go wrong. Unemployment is still high and Europe still faces a debt crisis. Any of these factors could actually reduce the value of the credit card receivable by the end of the year.

 

 

Target wanted to get out of the credit card business for a number of reasons. It needs the money from a sale to help fund its expansion into Canada.

Plus company officials say they rather focus on what they know best: retailing. Running a credit card portfolio is an entirely different business and Wall Street tends to value financial services firms differently from retailers, Johnson of Mairs & Power said.

Stretching out the credit card portfolio sale for another year adds uncertainty to Target's stock. Most analysts had already priced in the sale at this point.

Target's decision "is likely to undermine patience among investors who have been willing to look through pressure from Canada expenses and credit card profits in 2012 given the quality of the brand and management team," Christopher Horvers, an analyst with JP Morgan, wrote in a research note.

Even before November and December last year, Target's store traffic numbers had been falling, despite efforts like its PFresh grocery initiative and REDcard 5 percent program.

Target's holiday sales were also considerably weaker than what it and Wall Street expected, less than two percent in both November and December.

Target's "'do-nothing different view' will likely be met with some concern given that this is the third month of disappointing sales results," Binder of Jefferies wrote.

Continued same-store sales weakness will squeeze Target's margins even if it avoids discounting because the company is spending a good deal of money on its expansion into Canada..

Executives often say they don't pay attention to stock prices and instead like to focus on the company's long-term welfare. Whether or not that's true in Target's case, the company has certainly earned some faith from Wall Street.

But how long that will last is anyone's guess.

"This series of events is likely to diminish the urge of investors to provide the benefit of the doubt," Horvers of JP Morgan wrote.

ADVERTISEMENT

Connect with twitterConnect with facebookConnect with Google+Connect with PinterestConnect with PinterestConnect with RssfeedConnect with email newsletters

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT

ADVERTISEMENT