Rising numbers of Target's credit card holders are falling behind or defaulting on their Visa payments, a situation that some analysts predict will snowball in the months ahead and continue to weaken the Minneapolis-based retailer's profitable $8.7 billion credit-card portfolio.
Target reported Wednesday that net writeoffs of uncollected credit card bills, as an annualized percentage of receivables, were 10.1 percent in September, up from 9.9 percent in August. For the second quarter, ended in July, annualized writeoffs were 8.7 percent.
Like other credit companies, Target in recent months has tried to reduce its losses from unpaid bills by changing card terms, aggressively reducing credit lines and tightening underwriting.
William Ryan of Portales Partners said Target's attempt may be "too little, too late," and predicted credit card write-offs could hit 11 to 13 percent this year. Earlier this year, Target predicted writeoffs wouldn't be higher than 7 percent, a number it increased in August to between 8 and 9 percent.
With all eyes turned on how consumers will spend during the key holiday season, Target and other retailers are in a bind, Ryan said.
"If you tighten credit, you'll lessen sales. But if you overextend, you may end up writing it off down the road," he said. "Pick your poison."
Analyst Mark Miller of William Blair & Co. lowered Target's full-year earnings estimates on the news by 2 cents, to $3.33. His report noted that Target's delinquency rate is worsening compared to other credit card issuers he covers -- Capital One, J.P. Morgan Chase, Bank of America, Citibank, Discover and American Express.
Delinquencies are climbing at the fastest rate among cardholders who have missed four or more payments and are at least 90-days past due. Target begins taking charge-offs at 180 days, Ryan said. Delinquencies totaled about $668 million in September.
Target spokeswoman Lena Michaud said that credit card write-offs "pose a meaningful challenge," but the biggest near-term challenge continues to be the pace of sales.
Jackie Crosby • 612-673-7335