UPDATE: Target To Again Suspend Efforts To Sell Credit-Card Receivables

Target Corp. (TGT) said it will again suspend its efforts to sell its credit-card receivables until later this year and outlined plans to pay J.P. Morgan Chase & Co. (JPM) about $2.8 billion, along with a make-whole premium, to retire financing it received in 2008.

The move comes as large banks have expanded their own private-label card operations through portfolio acquisitions or restructuring, spurred by improving loan performance and consumers' increased willingness to use credit cards again.

"We believe a pause in discussions until later in 2012, combined with repayment of the Chase Card Services financing, will enable Target to reach an agreement with a high-quality financial partner on acceptable terms," Chief Financial Officer Doug Scovanner said in a press release.

Target, which operates its own banks, issues a private-label credit card that customers can use to make purchases in its stores and on its website, receiving a 5% discount in return. Most other retailers that offer a store card do so through an outside bank that issues the card and performs the underwriting.

The company had unveiled plans to pursue a sale of the credit-card receivables last January, and had expected a sale last year or early this year. The company now sees the sale coming late this year or early next year.

The credit-card business has improved dramatically since the recession as consumers have worked to pay their bills on time and cautiously taken on new debt. That trend has held true for store credit cards, which traditionally have incurred higher losses than general-purpose cards because their users tended to have shakier credit.

The write-off rate, or percentage of loans deemed uncollectible, for retailer credit cards was 8.4% as of December, down from a peak of more than 14% in July 2010, according to credit bureau Equifax.

Late payments at Target have declined significantly since the recession, and its expenses to cover soured loans have also shrunk.

"We don't feel like we have to do a deal [now]," Target spokesman Eric Hausman said. "The portfolio is performing very well. We are certainly capable of continuing to fund this business."

Target has "laid out certain terms that we think are really important and we're not going to do a deal that we don't think meets our requirements," Hausman said, adding the company is looking to sell its outstanding loans while retaining "operational control" over its program.

Target's card receivables totaled $6.1 billion as of the fiscal third quarter, down from $6.7 billion a year ago.

The reason Target pulled back was likely price, and the announcement could increase the desire for certain investors to "throw in the towel," J.P. Morgan analyst Christopher Horvers said.

There was been patience in the second half of last year as Target lost Michael Francis, chief marketing officer, to J.C. Penney Co. (JCP); Chief Financial Officer Douglas Scovanner, announced his retirement; and the holiday season produced lackluster same-store sales. The patience of value investors in particular could be wearing thin, Horvers said.

The retailer's credit card program had come under fire in recent years. It had announced a review and potential sale of the business in the fall of 2007, but the looming credit crunch made the move undesirable. In 2008, it agreed to sell a stake in its credit card receivables to J.P. Morgan following the urging of such a deal by activist investor Bill Ackman.

Banks including Citigroup Inc. (C) and Capital One Financial Corp. (COF) have been bulking up in the private-label card market.

In October, Citi said it would keep a portfolio of more than $40 billion of private-label cards after having tried to sell the business. The New York lender cited improving performance of the business for the decision and has since renewed partnerships with several retailers.

Capital One is in the process of acquiring the U.S. credit-card business of HSBC Holdings PLC (HBC). The business includes about $30 billion in card loans, a larger portion of which are private-label cards. Capital One last year acquired a $3.7 billion portfolio of Kohl's Corp. (KSS) credit cards from J.P. Morgan Chase.

Wells Fargo & Co. (WFC) has also said it is considering entering the business.

"I have a very positive outlook for private-label" cards, said Megan Bramlette, a director with Auriemma Consulting Group who helped run store-card programs while working at Citi. "It's a great tool. The customer appeal for those products is increasing."

Target said 6.9% of its store sales were made with its credit card in the fiscal third-quarter, up from 4.9% from a year ago.

Target, the nation's second-biggest retailer by sales behind Wal-Mart Stores Inc. (WMT), said it expects fourth-quarter earnings will be reduced by about 8 cents a share due to financing retirement. The company expects to recoup some or all of the cost of the premium through lower expected interest expense this year and next year.

Target said Chase provided last year an option to retire the financing, which expires at the end of the month. The move will allow Target to market the portfolio when it resumes partner discussion later this year.

Target had previously indicated it liked the idea of freeing up the receivables, which are listed as assets on its balance sheet. The accounting ties up capital that Target could use for other investments, such as reducing debt or buying back shares.

Investors are generally not fond of retailers owning card operations because it is not a core competency for them and in bad times can be a big money drag.

Target reported in November its fiscal third-quarter earnings rose 3.7% as same-store sales grew and the retail giant's bad-debt expenses declined. The company's performance has been aided by giving shoppers 5% off when they use Target's credit, debit or Visa cards.

Target's shares were recently down 0.9% at $49.42.

-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; [e-mail]

-By Tess Stynes, Dow Jones Newswires; 212-416-2481; [e-mail]

--Karen Talley contributed to this report