SAN FRANCISCO -- Retailers that jumped into the credit card business have found themselves questioning whether they belonged there at all.
Several chains, including
, have dropped their credit card businesses after realizing the difficulties in maintaining them. Now
mulling a sale of its credit card business, which has $7 billion in receivables.
"The credit card business is a very different kind of a business," says Kurt Barnard, president and chief economist for Barnard's Retail Consulting Group in New Jersey. "It requires its own structure, its own way of doing business. Most retailers are beginning to find that while from afar the credit card business looks very interesting and very profitable, once they get into it, it loses its glamour, and all that remains is the cost and manpower."
Target, for one, had repeatedly asserted the value of its credit card business prior to announcing its possible sale. But investors applauded the potential move to unload the business, sending shares up $1.98, or 3.2%, to $64.70 Thursday.
"Within the constraints of maintaining our commitment to our brand, our guests and our team members, we feel it is appropriate to approach the capital markets to determine whether Target or a financial institution is best suited to own our receivables," finance chief Doug Scovanner said in a recorded message.
In the second quarter, the discount chain's pretax earnings from its credit card business shot up 34% from the year-earlier period, which Scovanner has pointed to as a testament to its strength. Overall, the business represented 24% of Target's profits in the quarter.
Nonetheless, worries about the current credit market, coupled with pressure from activist hedge fund shareholder Pershing Square Capital, may have influenced Target's decision to seek out alternatives.
Christine Augustine, an analyst for Bear Stearns, said the company may be forecasting turbulent times ahead in its credit business. She pointed out that in its second-quarter earnings report, Target indicated a small portion of its late fee income represented an "acceleration," a possible sign that customers are feeling some pressure.
"The most opportune time for Target to sell its portfolio may have passed, in our opinion, but recent macro issues may have led management to reconsider its stance on owning the business," she wrote in her research.
Augustine noted that a number of retailers had sold their credit card businesses in the last few years at a premium.
In 2003, Sears sold its card business to
for about $32 billion, representing a 10% premium of its $29 billion domestic credit card receivables. In 2005, Macy's, then Federated Department Stores, sold its credit card business to Citigroup for $4.5 billion, an 11.5% premium. Kohl's, which sold its business for $1.5 billion to
, was one of the few to not receive a premium.
David Robertson, publisher of the
, a consumer credit card trade journal, says that many retailers have realized they cannot keep up with the big players such as banks and card giants like Visa and MasterCard.
Although Target is the 10th-largest issuer of credit cards in the U.S., with close to $7 billion in receivables, it is still tiny in comparison with No. 1
Bank of America
, which has $146.5 billion in receivables.
"They are so big that their scales of operation dwarf their competitors'," Robertson says of the banks and credit card companies. "They offer rich rewards programs, making it difficult to compete."
He adds that there are only a few retailers left who still issue their own credit cards, including
and Sterling Jewelers. Most of the big names, including industry behemoth
, now leave the business to third parties.
"It's a matter of looking forward and saying the program is not going to get much bigger," Robertson says. "Growth is now coming down to levels to reflect a maturing program. You're not going to see the same type of growth, so you'll want better economies of scale."
Ed Weller, an analyst for ThinkEquity Partners, says that retailers choose to stay or get out of the card business for different reasons.
Sears, for instance, saw an opportunity to sell its credit card portfolio and make a tidy profit from its decision, he says. Department stores like Macy's may simply figure the credit card business is not worth all the expenses connected to it, especially when customers are putting small sums of money on their cards relative to how much it might cost a company to collect from delinquent payers.
Weller says he still sees value in Target's credit card business, and he's skeptical about whether it will be sold.
"I don't think they'd sell it off to a bank and not have that relationship with their customers," he says.