It’s been a very hectic three years for retailers. Back in 2008, discretionary spending was down amid greater concerns of a failing economy. Target felt this uncertainty, as seen on their “bad debt expense.” As the retailer saw its third-quarter earnings fall a whopping 24%, it attributed the loss to a higher bad debt expense. Its annual reports stated that the figure, which estimates the amount of uncollectable write-offs it would encounter in the next period, increased about three-fold from 2007 to 2008. Posing a bedeviling problem, the bad debt expense seemed it would linger for as long as the industry-wide credit deterioration would.
It wasn’t until 2010 that Target would see the bad debt expense go down–by nearly 90%. After clearing out its cadre of not-so-receivable receivables, cardholders began to pay down their unpaid credit. This resulted in a decrease of bad debt expense from $138mil in 2009 to $15m in 2010.
Retail consultant at AT Kearny Laura Gurski also attributes the drop to retailers like Target now learning how to manage inventories and delay markdowns. By keeping their inventory priced higher for longer, Target, among other retailers, can retain higher margins. Obviously, the downside to that practice can be the price-sensitive customers who refuse to buy items not on sale.
Furthermore, relying on customer solvency (and therefore credit solvency) to rescue Target’s receivables was a risky move in and of itself. Had the consumer credit crisis lasted longer than it had, Target’s writeoffs would only be exacerbated. There simply cannot be enough said for the effect that the recovery in customer sentiment had on earnings, regardless of how well the firm manages their inventory.
Source:
http://media.corporate-ir.net/media_files/irol/65/65828/AP_Hi.pdf
http://ftalphaville.ft.com/2008/11/18/18331/more-us-retailers-report-grim-results/
http://www.ft.com/intl/cms/s/0/b2d837c4-c8e1-11e0-aed8-00144feabdc0.html#axzz2OIHY6KgV
