Target posts 13 percent drop in 1st-quarter profit

Target Corp. defended its board of directors on Wednesday while touting initiatives like expanding its grocery offerings and relaunching its store brand of basics in an attempt to satisfy its critics and reverse sagging sales.

The discounter saw first-quarter earnings fall 13 percent. Though that beat Wall Street expectations, Target is still vulnerable to pressure from key shareholder William Ackman, who is fighting to change the board. The company said Wall Street profit expectations for the current quarter "seem achievable," but it will be a challenge given the poor economy.

The struggle between Target and Ackman's Pershing Square Capital Management, which owns a 7.8 percent stake in the company, has lasted for months ahead of next week's shareholder meeting.

Target Chairman and Chief Executive Gregg Steinhafel said Pershing Square's proposal to change the company's board would "diminish the strength and talent of our board and impair its ability to continue to generate lasting and substantial value for all shareholders."

While Target says it's committed to maintaining its innovative edge, it is turning to a humdrum category - groceries - to drive growth and help it compete again Wal-Mart Stores Inc., which has gained ground in the recession through its strength in food and necessities.

Target began testing a new food format at its discount general merchandise stores late last year that offers pre-packaged perishable food like bananas and bagged lettuce. The company said Wednesday that it plans to expand the concept to 100 new and remodeled stores by the end of the year, with the goal of adding this format at most of its new and remodeled stores in the next three years. Target also vowed that its food prices will be equal to or better than at Wal-Mart.

The company said it was relaunching its store label products now called Target Brand as up & up; the introduction began in March with sunscreen lotion and the line will span 40 categories when the marketing push begins this summer. Target also plans to upgrade its Target.com site in August to include trailers, audio clips and book reviews.

Other discounters have benefited during the downturn from consumers switching to cheaper stores. BJ's Wholesale Club Inc. said Wednesday that its first-quarter profit rose nearly 42 percent as shoppers flocked to its stores for necessities, leading the company to raise its 2009 profit guidance. Wal-Mart, the world's largest retailer, posted flat first-quarter earnings last week but said it is taking market share away from rivals.

But at Target, where more than 40 percent of revenue comes from nonessentials such as trendy fashions and home goods, the cheap-chic formula that once was its strength became a drag as shoppers cut their spending overall.

Target earned $522 million, or 69 cents per share, for the three months ended May 2, down from $602 million, or 74 cents per share, a year earlier. That topped the 60 cents per share analysts expected, and Target shares rose 3.6 percent, or $1.50, to $43.44.

Revenue was little changed at $14.83 billion, compared with $14.80 billion a year earlier. Sales at stores open at least a year, known as same-store sales, fell 3.7 percent in the quarter. Same-store sales are considered a key indicator of a retailer's health.

While Target officials said the company is seeing better sales of some discretionary items like toys, sales in nonessentials are generally still weak.

Steinhafel said cost-controls and strong sales at established stores in necessities like food helped results. He called results from the company's credit card business, which have dragged down its performance in the past because of a rise in delinquencies, "stable, profitable and consistent" with expectations.

Profit from the credit card business dropped to $39 million for the quarter from $181 million last year as a result of lower earnings on the overall portfolio and Target's lower investment in the division's average receivables. Target sold 47 percent of its credit card receivables to JPMorgan Chase in May 2008.

Since Target rejected Pershing Square's proposal to separate its stores and distribution centers from the land it owns underneath, Ackman has tried to shake up the board. He claims his slate of candidates - which includes himself - would bolster Target's board's expertise in retail - particularly selling food - and in credit cards and real estate.

Target has asked shareholders to vote against Ackman's picks and said they are best served by re-electing the four directors whose terms are expiring.