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Target Takes Credit for Strategy But Things May Change

Selling off the Target credit card business â€" or the half Target still owns â€" is part of William Ackman's master plan for the retailer, one based on placing a slate of five candidates on the company's board, himself included, but Gregg Steinhafel, Target's CEO, took time in the company's first quarter conference call yesterday to refute the investor's claims that dumping that operation would boost shareholder value.

First quarter results bolster Steinhafel's argument, but the future might not support his case as certainly.

Steinhafel asserted that the credit card business had generated about $2.4 billion in profits since 2004 and that the sale of the half of that business Target still owns after last year's spin off would not have generated any more shareholder value than had been realized through operations. The fact that Target turned a profit on credit cards in the first quarter helped Steinhafel stick his point. In the conference call, he noted:

While it is a fact that our credit card segment processing fell sharply in 2008, this decline was due in part to paying JP Morgan Chase for the credit risk they agreed to bear in our May 2008 transaction. It is also a fact that no bank was willing to pay us more than we earned during this period for the privilege of controlling or owning this portfolio. In summary, we believe there was no executable transaction that would have created more shareholder value than the course of action we chose.
Ackman launched his proxy fight as Target's results tumbled with the recession. With delinquencies rising, credit cards seemed a dubious prospect, but the other points he attacked, the sluggishness in expanding the food business among them, looked like vulnerabilities at the time. Now, Target has been able to spin them into strengths in part because of its first quarter performance.

Oddly enough, it may turn out that Ackman's move was premature. For example, even if it comes late this year, a slow recovery will be accompanied by rising job losses and an end to some unemployment benefits. Credit card delinquencies could become a bigger issue down the road.

Then there's food. As the Financial Times recently pointed out, the first quarter comparable store sales spread between Wal-Mart â€" Walmart U.S. stores up 3.6 percent -- and Target â€" down 3.7 percent -- is significant, and food contributes substantially. Target's reluctance to commit to the supercenter format -- it has 245 versus Wal-Mart's more than 2,600 -- is particularly problematic and the expansion of perishables in discount stores could be regarded as a stopgap measure to make up for a missed opportunity. Kmart tried adding produce along with self-service meat and seafood to discount stores reconfigured as mini-supercenters but abandoned the format. Wal-Mart has tried providing basic produce items to at least one discount store, in White Plains, N.Y., but hasn't rolled out the initiative broadly. Target's plan to expand food in its discount stores isn't a sure bet.

Even Ackman's idea of spinning off part of Target's real estate portfolio into a trust, which may seem like his zaniest notion to investors who fret about the state of the real estate market generally, might seem more attractive as recovery solidifies.

That's all speculative, of course, and, given Ackman's losses on his Target investment, time really isn't on his side. Yet, circumstances change, as the retailer's first quarter results demonstrate. Ackman has made a point of some Target shortcomings and vulnerabilities. The May 28 annual meeting and the board of directors election that is the point of the proxy fight may not turn out to be the last challenge the retailer faces from investors.

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