Tickers in this Article: TGT, GS
The pressure is on at well-known retail chain Target (NYSE:TGT). Amid turmoil in the general credit market, the company announced it is thinking of unloading its credit card business.

On September 12, Target announced it is considering selling $7 billion in credit card receivables related to the Target Visa Card and the Target Card, and speculation is this move is being pushed by activist investor Bill Ackman. Ackman heads up the Pershing Square hedge fund which owns a 9.6% stake in Target. (For related reading on these ruthless investors, see Activist Hedge Funds.)

Goldman Sachs (NYSE:GS) has been retained to help the company review the business and the potential alternatives.

Ackman's Angle
It's only speculation that Ackman is behind the move in the first place. However, if true, I would assume that he's worried about credit risks, particularly with subprime meltdown issues still swirling. (For a one-stop shop on subprime mortgages and the subprime meltdown, check out our Subprime Mortgage Feature.)

In addition, the company could use any proceeds generated to do things to enhance shareholder value.For example, the company could use some of the cash generated from such a sale to repurchase shares in the open market. Or it could use some of the funds to pay down long-term debt or to acquire land for new stores.

Some might ask, "why is there such a rush to bail on the credit card business now?" Very simply, with a growing number of defaults on credit cards, mortgages and other loans, the sentiment is that it might make sense to bail from that business now. It's possible the business could present a risk to Target in a slowing economy, because it doesn't enjoy the same variety and cross section of borrowers that some of the other well-known credit card companies do.

Short-Term Pain on the Horizon
I think Target is a well-run company that has held up remarkably well despite intense retail competition. It's also done a terrific job in my opinion with its merchandise mix and telling its story to Wall Street.

However, while I think that the sale of this business, or the prospect of a sale, could cause the stock to pop, I think the stock could be in for some tough times in the short-term.

The biggest problem I have with the company right now is its valuation. Target trades at about 20-times the current year's EPS forecast of $3.61 per share and at about 18-times the current 2008 forecast of $4.10 per share. I think that is too pricey, given that the company is expected to grow at a roughly 14% pace in the next year, and at 14.75% annually in each of the next five years.


Conclusion
If Target managed to sell its credit card assets for a huge price, or if it said definitively that all of the proceeds of such a sale will go back into repurchases or into a dividend, I might consider investing. Right now, however, I think it's too early to speculate.

I like Target, and the possible sale of its credit card business is a net positive for the company. Nevertheless, it's shares seem a tad too risky at current levels.

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