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Target's Credit Card Boost Misses Mark


In expanding consumer lending, retailer also expands risk.


Target (TGT) is expanding its consumer lending operations right into the teeth of a recession.

The Wall Street Journal
reports the big box retailer saw outstanding credit card loans jump 29% from a year ago, even as most financial firms scale back consumer lending. By comparison, Capital One's (COF) U.S. credit card business shrank by 2.8% and Discover Financial (DFS) grew its domestic lending by a mere 5%.

While some analysts point to the company's track record of responsible lending and good risk management, others wonder if expanding loans to struggling American consumers is prudent. Furthermore, since new loans are less likely to default than older ones, the recent increase in lending could skew delinquency statistics. An analyst cited in the Journal estimated that an adjustment for this lag in late payments may put actual credit losses at 8.1%, rather than the company's reported 6.4% figure.

Last September, Target announced plans to sell its credit card business amid pressure from activist investors to increase shareholder value. The plans were scuttled in December, and analysts questioned whether the decision was strategic or driven by a lack of potential buyers.

The discussion of Target's questionable recognition of credit losses is nothing new in the 'Ville. In his inaugural article, Minyan Peter described the way a company can massage loan loss reserves to manage earnings. Peter found it odd that in a default environment, with credit card balances growing faster then sales, Target would decrease its loan loss reserves.

This latest data supports the belief that Target is supporting weak sales by effectively buying its own products - something which didn't work out that well for the likes of Merrill Lynch (MER) and Citigroup (C).

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