Stephen’s Posterous

Hedge fund guru Bill Ackman is still fighting with Target Corp. as reported by the Wall Street Journal, Mr. Ackman has called a meeting in Manahattan on May 11, 2009, to introduce his five directors, which includes him, for election on May 28.Editing a post - Posterous

Target's stock has dropped 58% from September 2008 to March 2009, and rebounded recently with other stocks, but is currently down 39% from its peak of $70 in July 2007.

Target is prepared to fight Mr. Ackman and may spend around $11 million fighting this battle. Mr. Ackman was successful in pushing Target to sell a stake in its credit card portfolio and wants the company to sell more. Mr. Ackman estimates he will spend about $15 million fighting this battle as written in the Financial Times.

The Financial Times also reported that Mr. Ackman's Pershing Square hedge fund owns about $1bn in Target common stock along with options on another $280 million. The company's fund, Pershing Square IV, consists entirely of call options on Target stock. Mr. Ackman also said in an interview with the Financial Times that his agenda is also to fix corporate elections.

Mr. Ackman was not successful earlier in convincing Target management to spin off land it owns under its stores to create a public traded real estate investment trust, REIT.

Shareholders may be somewhat receptive to Mr. Ackman's offer seeing that  Walmart has been able to have strong growth despite the recession while Target's sales have been trailing Walmart's by up to 6 percentage points. In the past, Target has trailed Walmart's sales by only 1 or 2 precentage points as pointed out in the Wall Street Journal article.

Although somewhat hipper and cooler than Walmart, Kmart, or Sears, Target is about one sixth the size of Walmart in terms of market capitalization. In the first quarter of 2009, Target had an operating margin of 4.82 percent while Walmart had an operating margin of 5.84 percent.

The Optmist by Jesse Eisinger, Portfolio.com

Bill Ackman’s friends describe him in two ways. They offer the euphemism that the prominent hedge fund manager “does not suffer from low self-esteem.” Then they observe that he is optimistic, almost clinically so. A pop psychologist might diagnose Ackman with hypomania, a condition notable for persistently elevated moods but without the self-destructiveness of true mania.

“He doesn’t register reversals and defeats and hard feelings the way other people do,” says David Klafter, a former colleague. I ask Ackman about the condition while he is driving in a car with his family. He hasn’t heard of it, but says he is an “extremely resilient person.” His 11-year-old daughter playfully chides from the backseat, “And you’re modest.”

Activist investor William Ackman is launching a proxy battle to replace five directors at Target Corp., the struggling retailer known for its trendy-but-affordable clothing and home furnishings.

Mr. Ackman, whose hedge fund Pershing Square Capital Management owns 7.8% of Target stock, says he will vie for one of the seats up for election at the annual meeting May 28. He will also propose a slate of other directors with experience in real estate, retailing and credit cards.

"We want directors with relevant expertise, who can draw from their personal experience when the board has a decision to make," Mr. Ackman said.

Target says he went public with his battle after he met with the 13-member board's nominating committee, which decided not to recommend him and two other candidates he suggested.

"We are disappointed that Pershing Square has decided to pursue a costly and disruptive proxy contest, especially in light of our previous dialogue," the company said in a prepared statement.

The New York hedge-fund manager has had some success in previous board battles. In 2007 he tried to oust the entire board of Ceridian Corp., a payroll company, and replace it with an alternative slate. Pershing Square agreed to a compromise that gave it four seats on the board; Ceridian was sold to buyout firm Thomas H. Lee Partners and insurer Fidelity National Financial Inc.

Two years ago, Mr. Ackman began amassing a stake in Target, but the Minneapolis-based retailer proved to be a bad bet. Target's stock has lost more than half of its value since then, as recession-weary consumers trade down to even less expensive stores and pull back spending on all but the most basic necessities.

In February, Target said its fourth-quarter profits sank 41% after a weak holiday season forced it to slash prices to clear out merchandise and its credit-card business lost money.

The Pershing Square fund that invests directly in Target stock and options lost 90% of its value last year. Last month, Mr. Ackman told investors in a letter that they could pull out of the fund and be paid in cash. "I apologize profusely for the fund's results to date," he wrote.

When Mr. Ackman first began investing in Target, his dealings with the retailer were friendly. Prompted by his suggestion, Target sold off a 47% interest in its credit-card business to JPMorgan Chase & Co for $3.6 billion.

Last fall, as Target's stock continued to fall amid slowing sales, Mr. Ackman proposed that Target spin off the land it owns into a separate, publicly traded real-estate investment trust. Many retailers lease most of their outlets, but Target owns 85% of the real estate for its stores so it can control store designs.

The big-box retailer ultimately rejected Mr. Ackman's plan, expressing concern about the costs, risks and loss of financial flexibility.

Two weeks ago, Pershing Square disclosed in a regulatory filing that it cut its stake in Target to 7.8% from almost 10%, but was negotiating to get its nominees on Target's board.

Mr. Ackman said he will try to elect Michael Ashner, chief executive of Winthrop Realty Trust; Jim Donald, the former CEO of Starbucks Corp.; governance expert Ronald Gilson and Richard Vague, who co-founded First U.S.A. Bank.

The company voiced its support for the current slate of directors up for reelection: Richard M. Kovacevich, chairman of Wells Fargo & Co.; Solomon Trujillo, chief executive of Telstra Corp.; Mary N. Dillon, global chief marketing officer for McDonald's Corp., and George W. Tamke, a partner at Clayton, Dubilier & Rice Inc.

A fifth seat was vacated when Robert Ulrich, a former Target chief executive, retired last year. The company hasnt named a candidate to replace him on the board.

Source.

Add another item to the list of daft ideas from the hedge fund boom: single-stock funds. The performance of Pershing Square Capital’s souped-up bet on US retailer Target should bury any argument for investments of this kind. They looked like silly ideas even when markets were rising. In a bear market they’re downright toxic.

Pershing Square, led by Bill Ackman, raised some $2bn two years ago to invest in a single company whose name was not disclosed. The fund then bought up to 13% of Target, including call options which would have ginned up returns had the stock risen.

But Target, like all retailers dependent on the American consumer, has been hard hit. Fold in the leverage provided by the fund's use of options, and Ackman’s investors have suffered an extra wallop. The fund sunk by a third last month and is down 93% since it was formed, Bloomberg reports, citing an email sent to investors.

Had the stock surged, investors would have enjoyed outsized gains. So would the fund manager by not having diluted the one-way bet with any others that might not have performed as well. In the perverse “heads I win, tails you lose” of the hedge fund industry’s boom-times, this was a big motivation for a single-stock fund.

But don’t cry for investors who foolishly abetted the Target fund. After all, they handed some $2bn over to Pershing Square in 2007 solely on the notion it would wager on a single iconic US stock. That’s not unlike the prospectus for a certain South Sea Company, which in 1711 solicited funds from investors for an undertaking of great advantage, but nobody to know what it is. 

Source.

On commercials, Target (TGT) promises its customers: "This is a brand new day." With the stock down 58% since July 2007, the retailer's shares may eventually deliver on the same promise.

Once fueled by shoppers looking for "cheap chic," Target's sales and earnings have fallen victim to the recession, causing heartache for fans of the stock including hedge-fund manager William Ackman, whose Pershing Square Capital Management suffered losses betting on the stock in 2007 and 2008.

Though it's the nation's largest discount retailer behind Wal-Mart Stores (WMT), Target isn't viewed by shoppers these days as the place to go for the cheapest prices. Wal-Mart, by contrast, has been a solid performer in this recession: Its stock has bested most retailers over the past year. But with multiples bouncing off five-year lows, Target offers a compelling opportunity for patient investors with a long horizon.

"Rarely do you see a best-of-breed retailer with a brand and operations like Target's at this kind of a value," says Robert Drbul, an analyst with Barclays Capital. "Their weakness is entirely due to the economy. They are taking steps to mitigate the downside of the recession. So at these levels, the stock looks attractive." At $29.46, the share price already reflects a bleak year ahead. And if falling profits start climbing again in 2010, as expected, Target's share price should climb nicely in the next few years.

Even Ackman seems willing to bet on the stock's long-term prospects, despite the embarrassing performance of Pershing Square IV, a hedge fund that invested solely in Target, mostly using stock options to wager that the share price would rise. According to a recent regulatory filing, Pershing Square has a 9.7% stake in Target, and Pershing Square IV's portfolio was recently restructured using longer-dated options that expire in January 2011.

Ackman declined to comment for this story, but assured investors in a recent letter that "We will ultimately be successful in our investment in Target." Since the first store opened in 1962, Target has grown into a chain of 1,681 stores that control 1.9% of U.S. retail and food sales.That's a far cry from the 7% controlled by Wal-Mart.

But under former Chief Executive Bob Ulrich, Target reinvented the discount store. Employing "upscale discounting," Target became a purveyor of well designed, trendy merchandise. And with its slogan "Expect More. Spend Less," it lured more affluent shoppers, and grew profits fast. But changing shopping habits have hurt Target, which gets 40% of its sales from clothes and home décor.

Now, consumers are buying basics and bargain hunting. But the perception that Wal-Mart has cheaper prices is inaccurate, says Mark Cohen, a retail expert and marketing professor at Columbia Business School.

"Wal-Mart has always marketed aggressively that it's the lowest price in town, while Target has just started focusing on cheap prices," Cohen says. "But in market-basket comparison, the two retailers are competitive." Target's credit-card portfolio continues to suffer amid rising delinquencies and net charge-offs.

The result i that the Street expects a 14% drop in profits generated during the fiscal year that ended on Jan. 31, and sees another 11% decline this year to $2.56 a share. Target has shifted its advertising to emphasize value, enlarged its food section and tightened the availability of credit. It's opening fewer new stores, and recently announced job cuts. Late last year, the company suspended stock buybacks.

And under pressure from Ackman, the company sold half of its credit-card receivables to JPMorgan last year for $3.6 billion. Target, however, rejected a proposal to free up cash by placing the land under its stores into a spinoff real-estate investment trust that would then lease it back to the retailer.

"It was the right decision," says Cohen, the former chief executive of Sears Canada, arguing that adding to operating expenses "without knowing if they are going to face one, two or three years of operating difficulties is crazy." Analysts expect operating profits to rise 19% to $3.06 a share in the fiscal year that ends on Jan. 31, 2011. The stock, meanwhile, has fallen into the bargain bin.

At 12 times forward earnings, the stock trades in line with the Standard & Poor's 500, well below a historic average of 17 times forward earnings. And Chris Armbruster, a senior analyst at Al Frank Asset Management, recommends buying Target at its current price. He predicts the stock could hit $48 a share in three to five years. At that price, the stock would be trading at 13.7 times the $3.50 a share Target should earn in three years.

"The fundamentals won't look terribly positive for a while, but if you are buying with a long-term horizon, the value will bear out over time," Armbruster adds. Of course, like other retailers Target faces serious headwinds, and the stock could fall even more -- at least in the near term.

No one knows for sure when the economy will rebound. Consumers may cut back on purchases for longer than most people expect now, as they see the growing ranks of the recently unemployed. Bad credit-card loans remain a burden. But the old adage says that patience is a virtue. And at these multiples, investors willing to wait may find Target a well-tailored fit.

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Microsoft plans to open retail stores to peddle its wares in competition with Apple’s hip outlets. But the software giant’s focus on software, rather than cool gadgets like the iPhone, will make it difficult to generate the same level of buzz.

It’s easy to see why Microsoft wants to follow Apple’s foray into retail. Apple’s roughly 250 outlets brought in hefty average revenues of $30m per store last year. And they’re great advertising. Many Apple stores, like its flagship outlet on New York’s Fifth Avenue, have become tourist destinations.

Microsoft does produce the popular X-Box video game console and the struggling Zune music player. But these are sideshows to the company’s software business. Unfortunately, software is just less sexy than hardware – and Microsoft’s offerings are hardly exciting enough to draw in gawkers and computer nerds, the way Apple’s stores do. Also, most sales of Microsoft’s flagship operating system come pre-installed in computers. Selling PCs from manufacturers like Dell or Hewlett-Packard could hurt sales at the retail chains it currently depends on, like Best Buy.

Meanwhile, there are indications that the company’s grasp of “cool” is somewhat tenuous. It hired 25-year Wal-Mart veteran David Porter to head the retail venture. Apple’s retail boss, Ron Johnson, had been with Wal-Mart’s hipper competitor, Target.

Microsoft’s stores could aim for a different demographic than Apple and become a magnet for PC buyers. That would position it well for the much anticipated launch of Windows 7, its forthcoming operating system. But to succeed like Apple, the company will have to work hard to overturn its image as a dull monopoly.

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William Ackman, the hedge-fund manager known for criticizing insurers and other companies over their performance, scrambled over the weekend to ease investor ire stemming from losses of his own.

Investors smarting from a decline in Mr. Ackman's fund that bets exclusively on a resurgence of retailer Target Corp. are expected to be told about new breaks on fees and will be allowed to withdraw completely from the fund, a person familiar with the matter said. Initially, Mr. Ackman told investors last week they might be able to withdraw just 15% of their money. But he changed course and committed to personally add $25 million to the fund in order to pay clients out, the person said.

The fund in question, called Pershing Square IV, primarily uses stock options to wager that Target's share price will rise. But Target's stock hasn't cooperated, and the fund's losses were amplified through the use of options. Mr. Ackman is an activist investor who took a concentrated position in Target stock betting it had room to rise.

"It's a disaster. Down 90% is nothing to be proud of," Mr. Ackman said when reached at his office Sunday night. "We're doing everything we can to make it up to people." The fund lost 40% of its value just last month on top of a 68% decline in 2008, according to investors and fund documents. During the same 13 months, Target shares fell 38%.

Mr. Ackman, 42 years old, last month took steps to restructure the concentrated co-investment vehicle he started in mid-2007 with $2 billion. One concession was waiving its small management fee. Before the restructuring, the bigger 10% performance fee only applied if the fund made money. It has not had a profitable month since its inception.

Most investors in the Target fund, which include other hedge funds, also invest in better-performing Pershing Square funds. The plan is to tell them that until they regain losses from the Target fund, they won't have to pay the larger 20% performance fees in the other funds, a person familiar with the plan said.

Mr. Ackman's other funds lost between 11% and 13% in 2008 on performance, better than most hedge funds last year.

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For the second straight year, activist hedge fund manager William Ackman’s bet on Target Corp. has failed to pay off. Pershing Square IV, which invests exclusively in the Minneapolis-based retailer, with two-times leverage to boot, lost 68% last year. Target stock, which lost 31% on the year, was not buoyed by any Christmas optimism, sending Pershing Square IV down a further 7.7%.

The fund lost 43% in 2007. Ackman’s New York-based firm, Pershing Square Capital Management, controls 9.5% of Target. The well-known activist has been pushing Target to spin its real-estate holdings into a separate real-estate investment trust. Target has thus far balked at giving up control of the land under its stores, but Ackman has succeeded in campaigns to get the retailer to buy back shares and sell half of its credit-card portfolio. Source.

Target announced a $10 billion share repurchase program in November 2007 and sold almost half of its credit-card portfolio to JPMorgan Chase & Co. for $3.6 billion last year. Target rose $1.51, or 4.4%, to $36.14 at 4:15 p.m. in New York Stock Exchange composite trading on January 5, 2009. Target fell 31% last year, compared with the 38% decline by the Standard & Poor’s 500 Index. Source.

The Federal Reserve cut the benchmark interest rates to an extraordinary low between zero and 0.25% and promised a range of consumer and corporate lending programs to stimulate the economy. The question now is that after the government practically promised to print money to keep the economy alive is whether this desperate ploy will work.

Daniel Frascarelli, who manages large-cap core equity investments at Lord Abbett, has nudged up his exposure to credit-dependent sectors like financials and increased consumer-discretionary from underweight to equal weight. While the Fed's zero interest rate policy may eventually trigger inflation, Mr. Frascarelli thinks that credit will improve first and that will help consumer discretionary and financial. The hope is for mortgage rates to fall far enough to encourage buyers, slow the slippage of home prices, improve interest margins and get banks to lend again.

In addition to Mr. Frascarelli's holdings of quality financial stocks like Bank of New York Mellon and PNC Financial Services, he has added those that might benefit if credit and capital markets improve like Goldman Sachs and well-capitalized insurers like MetLife. He has also expanded from his clutch of recession-resistant stocks like Walmart to less defensive names like Coach and Target. Source.