Credit Card Improvements Drive Target’s Q1 results

Target Corporation (NYSE: TGT) reported marginal growth of 2.7% in Q1 profit as strong earnings from its credit card segment offset the weaker-than-anticipated sales in the retail segment. The credit card segment reported a bad debt expense of $12 million in Q1 2011 down from $197 million in 2010. This was driven by improved trends in key measures of risk. Target competes mainly with Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY), Macy’s (NYSE:M), Sears (NASDAQ:SHLD), and Costco (NASDAQ:COST).

We maintain a $55.74 price estimate for Target’s stock, roughly 20% above the current market price.

Credit cards segment

In Q1, the credit card segment reported $194 million in profit compared with $111 million in Q1 2010. Credit card revenues are comprised of finance charges, late fees, and third party merchant fees, or the amounts received from merchants who accept the Target Visa credit card.

Average receivables decreased 14.4% to $6.5 billion in 2011 from $7.5 billion in 2010. Target has expanded its food offerings and given discounts, the move has also affected its gross margins, which dropped to almost 1 percentage point to 30.4%.

The segment reported profits due to a substantial reduction in bad debt expense. The improved economic conditions resulted to increased sales and prompt credit card payments by the consumers.

Target is looking to sell of its credit card segment. In January 2011, Target hired an advisor to pursue the sale of its $6.7 billion credit-card receivables portfolio. Target will receive some part of cash from the deal and balance will go to JPM that owns a 47% interest.

Target’s PFresh remodel program and 5% REDcard Rewards loyalty program continue to deliver incremental traffic and sales.

See our full analysis and $55.74 price estimate for Target.