Credit problems

Target Corp. is beginning to give off a faint whiff of Blanche Dubois — the eccentric Southern belle in "A Streetcar Named Desire" who had always depended on the kindness of strangers.

Only in this case, it's beginning to seem as though Target has always depended upon Wall Street to make kind comparisons to strangers.

As analysts gathered late last month for their annual meeting with Target execs, many were taking a hard look at Target's credit business. Just a week earlier, Sears had issued a warning that it would not meet its annual targets due to mounting debt in its credit card business. The price of Sears' shares swiftly plummeted by 25 percent, and a securities class action lawsuit was filed against the company in the U.S. District Court for the Northern District of Illinois.

It wasn't only the Sears problem that had analysts twitchy about Target's credit program. As Target announced its annual earnings this past spring, some analysts were unsettled by the company's growing reliance on credit card income. Receivables that tallied $3.8 billion in 2001 are estimated to nearly double by the end of 2002 and to jump to nearly $7.5 billion in 2003.

At the analysts meeting on Oct. 24, Target execs stuck to their guns about credit, demonstrating that its bad debt expenses and charge-offs, while expected to grow next year, still fall below 10 percent. And most analysts walked away concluding that Target's credit business looked okay — especially compared to Sears.

In the broader scope of the investment world, so long as it was being compared to Kmart, Target has always looked stellar. This isn't to say that it's performance hasn't been very good over the past five years — it has. But when you throw Target's numbers against Kmart's numbers, Target really looks like a hero.

Now that Kmart is in bankruptcy and, in Wall Street terms, off in the Twilight Zone, analysts are increasingly comparing Target's results to Wal-Mart's — and that's a much tougher benchmark to meet, especially in a slow-growth economy. Target has belatedly embraced the supercenter format, and nearly half of the new square footage it adds next year will be in that format. Forget about the fact that by yearend Wal-Mart will operate 900 more supercenters than Target. The big challenge for Target supercenters is productivity. Although its SuperTargets churn 50 percent to 100 percent more revenue than its discount stores, analysts say, the boxes at present are no more profitable than their discount siblings.

Overall, Target is still sitting pretty in a retail dancehall full of wilting flowers. But little signs are beginning to suggest the evaluations could be growing more critical. A post-meeting analyst report from UBS Warburg noted that a deteriorating delinquency trend in Target's credit business was being partially "masked" by the launch of the Target Visa program. The planned remodel of Mervyn's? Sniffed Warburg: An "undifferentiated strategy from [Kohl's] without the execution excellence and the real estate advantage."

If this kind of thing keeps up, Target may find itself uttering another immortal Blanche Dubois line — "Don't turn up the lights!"