MINNEAPOLIS--(BUSINESS WIRE)--May 5, 2008--Target Corporation
(NYSE:TGT) today announced an agreement under which JPMorgan Chase
would invest in Target's credit card receivables. At closing Target
would sell an undivided interest in its credit card receivables to
JPMorgan Chase (NYSE: JPM) for cash proceeds of approximately $3.6
billion. This interest would represent approximately 47 percent of the
principal amount of Target's outstanding receivables at that time.
This transaction is expected to close before the end of May.
"This unique agreement accomplishes the goals set forth in the
review of receivables ownership that we initiated on September 12,
2007," said Doug Scovanner, EVP and Chief Financial Officer of Target
Corporation. "It provides significant liquidity to Target from a
single source unrelated to debt capital markets, provides an
appropriate sharing of the portfolio benefits and risks between Target
and JPMorgan Chase, and allows our guests to continue to benefit from
the creativity and expertise of the world-class team at Target
Financial Services. Most importantly, this innovative transaction
marks the beginning of a long-term credit card relationship between
Target and JPMorgan Chase, which we believe will create substantial
financial and strategic rewards for both of us over time."
This transaction is expected to provide Target with sufficient
liquidity to implement its business plans, including previously
announced capital investment and share repurchase activity, without
the need to access term debt capital markets again this year.
Additionally, this transaction was expressly designed to have no
impact on Target's guests and the Target team members who provide
financial products and services to them.
Transaction Structure and Economics
Under the terms of the agreement, Target and JPMorgan Chase have
agreed to share the expected profits from this arrangement pro rata to
their respective ownership interests, subject to a cap. To the extent
that the cash-basis portfolio yield continues to exceed the cap,
profits from the entire portfolio in excess of the cap will be
retained by Target. The cap is initially set at an annualized yield of
approximately 3.4 percent of the principal amount of JPMorgan Chase's
interest in the receivables, and will vary over time with changes in
one-month LIBOR. JPMorgan Chase will earn an additional return over
the initial five-year term of the transaction as a result of accretion
from an agreed-upon initial purchase discount of 7 percent of the
gross amount of principal receivables sold. Unless extended by mutual
agreement, repayment of JPMorgan Chase's invested capital is scheduled
to begin on the fifth anniversary of the transaction closing. Subject
to portfolio performance, repayment is expected to be completed by the
sixth anniversary of closing.
The actual payments received by each party over time will be
solely determined by, and funded from, the performance of Target's
credit card portfolio. Similar to its other outstanding
receivables-backed financings, this financing is non-recourse to
Target Corporation. However, unlike its other receivables-backed
financings, Target is transferring all layers of risk in this
transaction and is not retaining a subordinated interest. As such,
Target and JPMorgan Chase would each bear a pro rata share of net
portfolio losses, if any were to occur in the future.
At Target's option, JPMorgan Chase has agreed to fund
approximately 47 percent of Target's expected receivables growth in
the near term, subject to an aggregate limit of $3.9 billion of
JPMorgan Chase's capital invested in Target's receivables. In the
unexpected event of a decrease in receivables, Target and JPMorgan
Chase would receive pro rata payments of principal such that JPMorgan
Chase's ownership interest would not rise above approximately 47
Target will continue to control all aspects of creating and
implementing its financial services strategy, provided that future
portfolio performance remains sufficiently strong. Alternatively, in
the event that substantial unanticipated portfolio deterioration were
to occur in the future, JPMorgan Chase would gain certain rights to
direct Target's credit card team to implement alternative underwriting
and risk management practices, until portfolio performance improved.
For reference, Target's 2008 performance outlook envisions cash-basis
portfolio yields more than 500 basis points above the level at which
these rights would be triggered.
Standard & Poor's and Moody's have rated one or both of Target's
outstanding receivables-backed financings AAA and Aaa, respectively.
The closing of this transaction is conditioned upon both agencies
reaching the conclusion that the transaction would not adversely
impact these existing ratings.
Accounting for the Transaction
Accounting for this transaction will be consistent with Target's
current accounting treatment of its outstanding receivables-backed
financings. As a result, all of Target's credit card portfolio will
remain on its consolidated financial statements, even in light of the
occurrence of this sale and the related transfer of risks of
ownership. The alternative of structuring this transaction as an
off-balance sheet arrangement under FAS140 was rejected after careful
consideration of the uncertainty created by the current review of
FAS140 by the Financial Accounting Standards Board, as well as the
inherent complexity of its application.
The initial purchase discount of 7 percent approximates Target's
current allowance for doubtful accounts as a percentage of accounts
receivable. Consistent with the accounting treatment of Target's
existing accounts receivable securitization transactions,
portfolio-related income and expense will remain on Target's
consolidated financial statements and the financing will be reflected
on Target's Consolidated Statement of Financial Position as
non-recourse, long-term debt. No gain or loss will be recorded at
closing, and the aggregate costs of this financing are expected to
exceed Target's variable-rate unsecured borrowing costs by an
annualized after-tax amount that approximates 3 to 4 cents per share,
or approximately 1 percent of Target's projected 2008 earnings per
2008 Full-Year Outlook for Target's Credit Card Portfolio
Expectations for full year 2008 growth in both accounts receivable
and credit card profits remain consistent with prior guidance.
Specifically, in the near term we expect substantial year-over-year
receivables growth as a result of the sequential growth that occurred
in the second and third quarters of 2007. In contrast, sequential
quarterly receivables growth in 2008 is expected to reflect typical
seasonality in conjunction with annual underlying growth consistent
with likely growth in Target's retail sales. For the year, Target
continues to expect that the beneficial impact on profits from average
receivables growth will exceed the adverse impact from the expected
decline in portfolio yield.
Additionally, for the full year, the beneficial impact from recent
terms changes are expected to fully offset the adverse impact of
slightly poorer-than-expected credit card losses. Specifically, we now
expect net write-offs as a percentage of receivables to lie in the
range of 7 to 8 percent for the year, and we continue to expect that
delinquencies as a percentage of receivables will remain stable at
approximately 4 percent.
"We are excited to enter into this agreement with JPMorgan Chase,
whose vast financial services experience and proven track record of
innovation have produced superior credit card results over time," said
Gregg Steinhafel, Chief Executive Officer of Target Corporation. "We
expect that the unique relationship we have forged with this agreement
will benefit both companies and their shareholders over time."
"Chase is pleased to partner with Target, one of the world's best
brands," said Gordon Smith, CEO of Chase Card Services. "We believe
this relationship will be quite successful over time for both
Financial Reporting Matters
Concurrent with the appointment of Gregg Steinhafel as Chief
Executive Officer of Target Corporation on May 1st, the company
engaged in a re-evaluation of its reportable business segments. As a
result, beginning with its first quarter 2008 reporting, Target will
begin reporting two segments: Retail and Credit.
In addition, during the first quarter, the company reviewed its
Consolidated Statements of Operations cost classification policy,
primarily related to distribution and other supply chain costs that
were previously classified within Selling, General & Administrative
Expenses (SG&A). The review was prompted by changes within Target's
supply chain processes and infrastructure, primarily related to the
operation of its own food distribution network. As a result of this
review, the company has changed the classification of distribution
costs from SG&A to cost of sales.
Neither of these reporting changes affects Target Corporation's
consolidated results. Previously presented consolidated results will
be reclassified to conform to the current year presentation with
respect to both of these changes, and Target intends to furnish this
information on its website (www.target.com/investors) prior to the
release of its first quarter earnings results on May 20, 2008.
Target Corporation will webcast a conference call at 9:00am CDT on
May 6, 2008, in which Doug Scovanner and Terry Scully, President of
Target Financial Services, will answer questions pertaining to this
release. Investors and the media are invited to listen to the call
through the company's website at www.target.com/investors (click on
"webcasts"). A telephone replay of the call will be available
beginning at approximately 11:30am CDT on May 6, 2008, through the end
of business on May 8, 2008. The replay number is (800) 642-1687
This release contains forward-looking statements, including
statements relating to future receivables portfolio performance,
unsecured borrowing costs, and closing of the transaction, which
should be read in conjunction with the cautionary statements in
Exhibit (99)A to the company's 2007 Form 10-K.
Target Corporation's operations include large, general merchandise
and food discount stores and a fully integrated online business
through which it offers a fun and convenient shopping experience with
thousands of highly differentiated and affordably priced items. The
company currently operates 1,613 Target stores in 47 states. Target
Corporation news releases are available at www.target.com.
JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial
services firm with assets of $1.6 trillion and operations in more than
60 countries. The firm is a leader in investment banking, financial
services for consumers, small business and commercial banking,
financial transaction processing, asset management, and private
equity. A component of the Dow Jones Industrial Average, JPMorgan
Chase serves millions of consumers in the United States and many of
the worlds most prominent corporate, institutional and government
clients under its JPMorgan and Chase brands. Information about the
firm is available at www.jpmorganchase.com.
CONTACT: Target Corporation
John Hulbert, 612-761-6627
Susan Kahn, 612-761-6735
SOURCE: Target Corporation