Target Corp., continuing to feel the effects of the general economic downturn, reported a sharp increase in loan write-offs within its $8 billion credit-card portfolio.
A day after Target delayed a decision about whether to sell its credit-card receivables, the company said Thursday that net "charge-offs" -- loans written off as not being repaid -- rose to 7.05 percent of receivables in November, up from 6.42 percent in October. Charge-offs have increased 25 percent since the end of August.
Another potentially risky sign is that customers are paying off their debts more slowly, which often leads to higher defaults, financial analysts said. In November, the sum of all customer payments totaled 13.95 percent of the discount retailer's receivables, down from 15.86 percent a year earlier.
"The economy is in a rough state already, and people aren't paying off their balances," said Red Gillen, senior analyst with Celent, a Boston-based financial research and consulting firm. "All the signals point in the direction of higher charge-offs."
Though a Target spokeswoman said the rise in bad debts was largely seasonal and anticipated by the retailer, it likely will make potential acquirers of the portfolio more cautious, analysts said.
Target announced a review of the possible sale of its credit-card portfolio in September, and had planned to make a decision by the end of the year. But Wednesday, it said the review is taking longer than expected because of "current market conditions." Target says it will make an announcement early next year.
"When you see charge-offs going up this quickly, you're not going to get top dollar," said William Ryan, an analyst with Portales Partners, a New York equity research firm. "At this point, they're better off cleaning this up than selling it."
However, Target officials said there is no reason for alarm. Despite the recent increase in write-offs of bad debt, the retailer's credit-card portfolio is still in better shape than it was in 2004, when write-offs as a percentage of receivables stayed above 8 percent for almost the entire year.
