Investors Wage a Food Fight Over Target's Strategies

MINNEAPOLIS — As Target Corp. here begins testing expanded food assortments at its general merchandise stores, a shareholder proxy fight has raised the issue of how much larger that assortment should be. The conflict in which Pershing Square Capital Management, a New York-based hedge-fund sponsor and owner of more than $1 billion in Target stock, is putting up his own slate of candidates to challenge

MINNEAPOLIS — As Target Corp. here begins testing expanded food assortments at its general merchandise stores, a shareholder proxy fight has raised the issue of how much larger that assortment should be.

The conflict — in which Pershing Square Capital Management, a New York-based hedge-fund sponsor and owner of more than $1 billion in Target stock, is putting up his own slate of candidates to challenge the four Target directors whose terms expire this year — is expected to reach a climax Thursday at the Target annual meeting.

Speaking with analysts last week during a conference call to discuss financial results for the first quarter, Gregg Steinhafel, chairman, president and chief executive officer, said the Pershing Square executives have little understanding about Target's food strategy.

“For example, [they] point to the fact the mix of food in our assortment is much lower than Wal-Mart's,” he said. “This misses the point that Target's differentiated assortment is a key aspect of our strategy that has created so much value over time.”

Other differences between Target management and the Pershing Square group involve whether the discounter should sell its credit card portfolio, Steinhafel said.

In an interview with Bloomberg News, William Ackman, principal at Pershing Square, said his nominees — including Jim Donald, former president of Starbucks and, earlier, of Pathmark Stores — bring specific expertise in retail, real estate, credit cards and corporate governance that the company's nominees lack. “These new directors will bring fresh ideas and not be afraid to challenge the status quo,” he said.

For the quarter, which ended May 2, net income slipped 13.3% to $522 million, while sales rose by 0.4% to $14.4 billion. Comparable store sales dropped 3.7%.

“Broadly speaking, economic conditions appear to be stabilizing somewhat,” Steinhafel said, “and we believe this will prompt greater discretionary spending in the months ahead.”

Food represents only about 15% of overall sales, Doug Scovanner, executive vice president and chief financial officer, noted, “but obviously it's growing faster [than some general merchandise categories].”

“Even against the backdrop of a negative 3.7% combined same-store sales experience, we were quite positive in food categories, positive in pharmacy and quite positive in over-the-counter,” he said. “So these frequency categories continue to drive very interesting, and highly and perfectly acceptable same-store sales performance.”

Steinhafel said Target is committed to maintaining an everyday-low-pricing position in food, “so we are going to be focused on ensuring that, day-in and day-out, our food prices are equal to or better than our primary competitor, Wal-Mart. And we will deploy the same kinds of promotional tactics we traditionally have in exposing and promoting food.

“We'll look at opportunities in print with our circulars or direct-mail pieces, and when we have the right kind of critical mass in certain markets, we will develop broadcast campaigns. We'll use the entire Target tool-book to promote food as we roll out P-Fresh into more stores this year and into 2010 and beyond.”

P-Fresh is the name of the expanded food formats Target will be adding to its stores “to drive frequency and sales,” Steinhafel pointed out. The sections will include broader varieties of dry, dairy and frozen foods plus high-frequency perishables.

Target will continue to test the enhanced food offerings, adding them to 60 remodeled units this year for a total of more than 100 expanded sections by the end of 2009, said Kathee Tesija, executive vice president of marketing.

“If the format continues to deliver the favorable results we have been experiencing, we plan to offer it in most new and remodeled stores over the next three years,” she said.

Tesija said Target is also relaunching its Target brand under the new Up & Up label “to create a new and more powerful brand identity.”

Up & Up represents a savings of about 30% when compared with the national-brand equivalents, she noted. Products in the line include approximately 730 items, including sunscreen, tissues, diapers, baby food and laundry detergent.

The rollout began in March in Denver; Orlando, Fla.; and select stores in Minneapolis, “and while it's still too early to gauge the impact of the test, so far guests have requested very few price adjustments,” Tesija said.

Q1 RESULTS

Qtr Ended 5/2/09 5/3/08
Sales $14.4B $14.3B
Change +0.4%
Comp-store -3.7%
Net Income $522M $602M
Change -13.3%
Inc./Share 69 cents 74 cents