Well, not any more. This week, TGT announced it will no longer issue cards with the Visa logo and instead encourage shoppers to sign up for its own plastic “REDcard.” It’s a disturbing trend that could sap revenue away from credit card stocks Visa (V), Mastercard (MA) and American Express (AXP).
Credit card companies certainly don’t need any more headaches right now as they look to put the recession behind them. American Express is up a hefty 21% in the past two months and is one of hte best performers since the 2009 lows. Visa has seen its earnings per share improve in each of the last consecutive three quarters, and judging by recent upward revisions to estimates should post strong earnings again on Wednesday, April 28. Last but not least, MasterCard (MA) just launched an ambitious online retail venture MasterCard marketplace to pad its bottom line, and could reshape the industry by providing credit card companies a direct line to sales.
All this good news is what makes the Target announcement so troublesome. Credit card companies had hoped the penny pinching was over, and that clear skies were ahead. The loss of store brand cards is a step backwards.
In the specific case of TGT, Target’s move alone will admittedly not sink Visa. Target credit cards accounted for about 1% of payments Visa processed in the U.S. last year, according to industry analysts. But if this trend picks up across other stores, it could really erode the company’s bottom line – and mean trouble for similar American Express and MasterCard operations. AXP has recently been one of investors’ favorite financial stocks, but that could change if this trend gains momentum.
Target is the second-largest discount chain in the U.S., behind retail behemoth Walmart (WMT), so when Target moves, the rest of the sector often follows. And while Visa’s cash flow may not be severely impacted, it’s sign-up rate surely will be — Target is the third-biggest issuer of Visa credit cards, with 23.9 million cards outstanding, and represents the 15th-biggest issuer overall by purchases, according to the Nilson Report.
Granted, those numbers are a bit slippery since Target Visa cards could be used anywhere, and the branded credit cards Target will be using now can only be swiped at Target stores or at Target.com. Still, the impact is not to be overlooked — especially considering that consumers aren’t swiping the plastic as much as they used to.
It’s worth noting that the door swings both ways on the consumer credit front. Bad credit card debt remains a problem for many financial companies, and Target is not just taking on the benefits of greater credit card issuance but also the risk.
If Target can lure more shoppers, giving Visa the boot could really help the retailer maximize its profits in the months ahead. And if other retailers follow the lead of Target , Visa could start to see the impact on shares.
- 5 Must-See Earnings Next Week – BSX, CAT, GMCR, DD, NSC
- Toyota TM Stalling Before May Earnings Report
- Indicators Show Market is Dangerously Overbought
Every one of these stocks carries a huge risk of cutting or even completely eliminating their cash dividends. Sell these 30 losers now — and buy the six top picks that are handing investors huge, safe dividend payments instead. Get your FREE copy of this report here!