Category: Articles

Target’s Strategy Regarding Ackman: "Na Na, We Can’t Hear You"

Post author By ToddSullivan
Post date March 31, 2009
9 Comments on Target’s Strategy Regarding Ackman: "Na Na, We Can’t Hear You"

It is clear Bill Ackman has plans for Target. It is also clear in public he has been very complimentary of Target’s (TGT) management. It is also clear that he has avoided a direct confrontation with them for over year, until now. It is also clear that management has no intention of even listening to their largest shareholder who has made investors billions doing what he is proposing Target do, unlock value.

What does it all mean? Management at Target does not have a clue that the landscape is changing out there and being outright dismissive of shareholders while sales crater and the stock languishes, is well, not a very good idea.

Ackman has an interest in 8% of Targets shares. If you are a shareholder, you should want to know, if management says his idea are bad for shareholders, how many shares do they own. The answer? .31%. Not 31, not 3.1 but POINT .31% or less than 1%. Now that includes the Board all management. All of them.

So, what are they more concerned about really? Their jobs maybe? Ackman has an interest in 25 times more stock than they do. If you are a shareholder, wouldn’t that mean to you that he probably has a rather large vested interest in the health of the stock? Maybe management is truly more concern with their nice salaries & perks than the share price?

This is not to say that they do not care about it, just that their pay and benefits trump stock price.

Here is the most recent pay figures:

Now, it is nice to see them taking the free shares from the company. But, one has to ask, “how many shares are they actually using their own money to buy?. The answer? None. In the past year only Chairman Seinhafel made a singe purchase and that was the exercise of an option that he did not turn around and sell.

Meanwhile, Ackman, his investors and anyone else who bought shares did so with their hard earned money.

Changes on the Board would probably mean changes in management as Target sought to be managed by those with more experience in those area such as food, real estate etc.

I think it is pretty clear that managements actions are about “protecting our jobs”, not “maximizing shareholder value”.

If you are a shareholder, who are you going to want to hear from? Are you wondering why the blanket dismissal? Are you wondering, “well, what is management going to do other than sit wait for the economy to turn?”

The letter:

To Our Shareholders:

You are cordially invited to attend Target Corporation’s 2009 Annual Meeting of Shareholders. The Annual Meeting will be held at 1:00 p.m., Central Daylight Time, on Thursday, May 28, 2009 at the Target Store located at 1250 West Sunset Drive, Waukesha, Wisconsin. Details regarding admission to the Annual Meeting and the business to be conducted are more fully described in the accompanying Notice of Annual Meeting of Shareholders and Proxy Statement.

At this year’s Annual Meeting, you will be asked to determine that the number of directors constituting our Board of Directors shall be 12, to elect the Class III directors to our Board of Directors for three-year terms, to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm, to approve the performance measures available under the Target Corporation Long-Term Incentive Plan, and to act on the shareholder proposal in the Proxy Statement, if presented at the Annual Meeting.

We hope you will be able to attend the Annual Meeting, but if you cannot do so, it is important that your shares be represented. We urge you to read the proxy statement carefully, and to use the WHITE proxy card to vote for the Board of Director’s nominees by telephone or Internet, or by signing, dating, and returning the enclosed WHITE proxy card in the postage-paid envelope provided, whether or not you plan to attend the Annual Meeting. Instructions are provided on the WHITE proxy card.

You should know that Pershing Square Capital Management, L.P. and certain affiliated entities, a group of hedge funds led by William Ackman that own Target shares and derivative securities (“Pershing Square”), have stated their intention to propose alternative director nominees for election at the Annual Meeting in opposition to the Board’s recommended nominees.

We strongly urge you to vote for the nominees proposed by the Board by using the enclosed WHITE proxy card and not to return any proxy card sent to you by Pershing Square. If you vote using a proxy card sent to you by Pershing Square, you can subsequently revoke it by using the WHITE proxy card to vote by telephone or Internet, or by signing, dating and returning the WHITE proxy card in the postage-paid envelope provided. Only your last-dated proxy will count—any proxy may be revoked at any time prior to its exercise at the Annual Meeting as described in the Proxy Statement.

Thank you for your continued support.

Disclosure (“none” means no position):None

Tags ackman

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AutoNation’s Mike Jackson on GM, Chrysler News

Post author By ToddSullivan
Post date March 31, 2009

AutoNation’s (AN) Jackson is clearly the class of this industry. Here he responds to yesterday’s news on GM (GM) and Chrysler.

On CNBC:

On FOX Biz:

From the dealership side, Mr. Jackson went on to say that the industry has stabilized now at about 9 million units, and with the emergence of the TALF this month and GM and Chrysler’s reorganization finally being materially addressed the future, over time, should improve.

“Credit is still the key and is beginning to improve, but leasing programs still need to be revived. Floor plan financing is still difficult to acquire as well.”

Mr. Jackson reiterated. “However, there is no question there may be a risk of a downward spiral with an uncontrolled bankruptcy of General Motors and Chrysler, but if the government will provide material support and direction, this will provide the necessary stability that should allow the companies to come back with a new future.”

Disclosure (“none” means no position):Long AN, none

Tags AN

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Stunning Changes at Sears.com

Post author By ToddSullivan
Post date March 31, 2009

Just three weeks ago I was complaining about Sears Holdings (SHLD) websites:

What is Lampert doing? Well ,first of all he basically bought the CEO to become VP of Sears. Lampert had made no secret in desire to increase Sears web presence. Currently it is a bit unorganized. You have Sears.com, Kmart.com, Sears2go — a mobile commerce Web site, Partsdirect.com (you can find almost any part for anything there), Landsend.com, managemyhome.com and Service Live (allows people to bid improvement projects out) and a few others.

Sears has valuable online brands, their Sears and Kmart site are some of the most visited retail site (although far behind #1 Amazon (AMZN)). What Sears needs is a way to consolidate the various properties in a cohesive site that could be very powerful. For instance. If I am on Sears.com and do a search for “home improvement”, I get a listing of dvd’s from Tim Allen’s sitcom by that name. I do not get choices for managemyhome.com or thegreatindoors.com. Just the dvd. Sears is not maximizing its properties with its search feature. In a way Sears has its online stores almost standing alone rather than under Amazon.com type umbrella.

Lampert has expressed in the past his desire to sell more direct to customers and expand Sears online presence. My thought is this move is a way for Sears to rapidly increase progress there.

“Ask and ye’ shall receive”

Sears has released a beta version of it’s new website and it is nothing short of fantastic.

It tackles my main complaint that I had to travel back and forth from the Sears to Kmart sites to check product availability. Sears now has the inventory combined.

Other features:

– Easy site to store pickup
– The ability to post products easily to Facebook, Twitter and other social networking sites.
– Extensive and easy to use inventory navigation to make search easier
– Easily usable “profile” section that contains address book, saved payment methods, order history, wishlists, registries, and “save for later”.
– A “virtual shopping” assistant
– Each product listing notifies the buyer if it is available for in-store pickup, site to store and if there are any special offers attached to it.

Now it has been no secret Lampert has been investing in Sears online presence for the past two years. It would appears the fruits of that labor may finally come to fruition.

Now from the “Irony” department. Just yesterday I posted and speculated of the now 7 week surge in Sears online traffic vs. other retailers. I have yet to get confirmation when the beta site went live, but when I do I will post.

I’d have a hard time believing the two events did not coincide…

Disclosure (“none” means no position):Long SHLD

Tags SHLD

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General Growth’s Debtholders Trying to Avoid Chapter 11

Post author By ToddSullivan
Post date March 31, 2009

This is the most backwards thing you’ll ever see. It also gives more confidence of the equity surviving even should they be forced to file.

From the WSJ:

But a bankruptcy filing isn’t imminent for the mall giant, according to people familiar with the matter, and General Growth’s (GGP) ability to remain out of bankruptcy shows the unusual dynamic between lenders and distressed companies in the recession-ravaged commercial-real-estate market.

Bondholders have refrained from forcing mall owner General Growth Properties into bankruptcy court, despite lack of a deal on a debt extension.

Under normal circumstances a company with as much past-due debt as General Growth would have been forced into Chapter 11 bankruptcy protection by now. Creditors so far have been willing to let deadlines pass because they believe there is little to be gained and much to be lost through a bankruptcy. General Growth’s mall operations are stable and many bondholders hope for a greater recovery outside of bankruptcy court.

“This is really rare,” said Kevin Starke, an analyst at CRT Capital Group LLC, a research company that tracks distressed securities. “It is corporate-bond limbo like I’ve never seen before.”

This piggybacks on the thesis laid out here recently that lenders want to avoid a Chapter 11 here at almost all costs.

It continues:

Many creditors say that General Growth’s management is doing a good job running the company. Its 200 U.S. malls, a portfolio second in size only to Simon Property Group Inc., generate enough cash to cover interest on the debt. But its properties are overleveraged and it lacks the borrowing capacity to retire those debts as their principal comes due.

“There’s no question that General Growth is a liquidity issue,” said Jeff Spector, an analyst with UBS AG. “The properties, for the most part, aren’t broken.”

General Growth, based in Chicago, isn’t the only real-estate borrower that is getting a reprieve from its lenders these days. Hundreds of property owners have had loans come due without a repayment made in recent months. But most lenders have agreed to extend loan terms, hoping that the credit market will improve.

For those who did not see it previously, here is the legal basis should it go into bankruptcy for the equity staying in tact. The point that cannot be forgotten here is the company is technically solvent and that alone separates this Chapter 11, should it occur, from 99% of all other Chapter 11’s when the companies entering them are insolvent.

It continues:

A person familiar with the bondholder talks said that, while some creditors are angry, none appears ready to insist on an involuntary bankruptcy petition yet. It is possible that bondholders didn’t go along with the consent solicitation primarily because they feared that making such a pledge would reduce the value of their bonds.

General Growth has told lenders that they’ll have more influence over the outcome if it restructures outside of bankruptcy court, according to people familiar with the talks. A bankruptcy filing could force the company to liquidate its assets for less than the whole company would be worth if it remained a single entity for the long term, these people said.

Another deterrent to an involuntary petition is that bankruptcy wouldn’t bring immediate payment of General Growth’s debts. “It’s such a large company that the bankruptcy would definitely last at least a couple of years,” said Heidi Sorvino, a lawyer leading the bankruptcy practice of law firm Smith, Gambrell & Russell LLP.

The timeframe could be shorter if General Growth did a prepackaged bankruptcy in which the creditors agree to terms prior to the company entering bankruptcy, Ms. Sorvino added. But wrangling so many creditors without the threat of a judge making and enforcing decisions is “almost impossible,” she said.

This is the classic “everyone wins” or “everyone loses”scenario. Banks facing liquidity issues cannot have billions tied up in a Chapter 11 proceeding for years. The viability of common equity, while in my opinion is safe in an 11, can never be assured once the courts get involved. By restructuring out of court and now, everyone wins…

Boilerplate ending for this investment:
Now as usual, a warning. I know people have been following into this investment. If you do, you must be prepared to lose all of it. There is no guarantee of the above outcome. Buying this stock now is essentially buying a call option on the company’s survival. It is hits, you win big, very big. If not, what you invested is worth nothing. I believe the above scenario plays out, I am also not going to be broke should it not.

Disclosure (“none” means no position):Long GGP

Tags ggp

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Tuesday’s Links

Post author By ToddSullivan
Post date March 31, 2009

Lead Paint, CDS, Shareholders, Blowing up Wall St.

– Can we just stop this insanity?

– How to manipulate stock prices

– If nothing else comes of this crisis, more shareholder activism would be welcomed

– This is a sobering article

Disclosure (“none” means no position):

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Is Sears Holdings the Beneficiary of Circuit City’s Demise?

Post author By ToddSullivan
Post date March 30, 2009
6 Comments on Is Sears Holdings the Beneficiary of Circuit City’s Demise?

Some interesting trends have emerged since February. Remember when looking at these numbers that Circuit City began the liquidation process in late January.

Here is the full month of February 2009 (click to enlarge):

Week ending 3/7: (click to enlarge)

Week ending 3/14: (click to enlarge)

Here is the most recent weeks data from 3/21 (click to enlarge):

Let’s look at numbers 2 and 3, Wal-Mart (WMT) and Target (TGT). They have remained stable since February with very little fluctuation in numbers. Best Buy (BBY), Amazon (AMZN) and Sears (SHLD) is where it gets interesting. Sears has seen a 14% jump in traffic since February, growing each week. Now, my first thought was that this is coming at the expense of Sears’ other owned site, Kmart. A quick check there however shows that Kmart has also seen growth since February albeit less at 6%.

Best Buy has seen traffic fall 15% and Amazon has seen a 22% fall in traffic.

Why?

Now, Best Buy recently reported better than expected numbers for the quarter ending Jan. 2008.
From CNN Money:

In a forecast that seemed to lift investor spirits, the company said it expects to earn $2.50 to $2.90 a share for fiscal 2010. Analysts have forecast a profit of $2.45 a share, according to FactSet.

U.S. sales of mobile phones and accessories saw a triple-digit comparable- store gain while computer repair business saw a low double-digit increase and warranty sales, a low single-digit increase as Best Buy rolled out a premium Geek Squad protection plan. They were among categories that are more profitable for the company, helping to offset less profitable products such as notebook computers, analysts have said.

While the recession, rising job losses and decreased access to credit have all hurt Best Buy, the retailer is expected to gain further market share after its smaller electronics-chain rival Circuit City Stores Inc. filed for bankruptcy protection and liquidated its stores.

It should be noted that the Circuit City liquidation would not be baked into these numbers as it began in earnest after the reported quarters numbers were finished. So, where did the Circuit City web traffic go? The general consensus of the investing community as stated in the above quote was that Best Buy and Amazon would be the main beneficiaries of the Circuit City liquidation.

Based on the above charts, it appears shoppers may have skipped Amazon and Best Buy and gone to Sears. Let’s look closer:

Now, Sears has probably garnered increased internet traffic from it recent appliance push (coupled with people getting tax return money back to buy them) but one cannot escape the oddity of the timing of its traffic increase coupled with the dramatic decreases at both electronics competitors while Wal-Mart and Target held constant.

One also could assume that lawn and garden played a role as both Lowes (LOW) and Home Depot (HD) saw gains. While some of this is surely in the numbers, Sears would not expect to see the same surge as a Home Depot or Lowes because lawn season is coming around. Sears is not as large a player in the field and have smaller offerings than they do, especially when it comes to plants and yard items. The numbers here also show Sears/Kmart outpaced both home Depot and Lowes, not what one would expect unless there was a another reason.

That still leaves us with Sears’ large gain (+20% Sears/Kmart combined) corresponding to the large declines at both Amazon (-22%) and Best Buy (-15%) that cannot be explained away easily. Had they both kept share close or above previous levels, then the Sears gain could be said to be purely appliance/lawn and garden. But they didn’t, so we can’t explain it that way. Sears must be making gains in electronics traffic.

We have essentially 7 weeks of data in these results and no definitive conclusions can be drawn from it. But, the results do seem to be running contrary to what people were expecting to happen when Circuit City finally closed the door and does mean it requires close monitoring.

Now, this all means very little if Sears is not converting this traffic into sales and we will not know this until May as Sears does not report monthly numbers. This trend does bear very close attention. Should it continue, it is is very good news for Sears shareholders as it means the effort Lampert and the rest of the folks there have put into the internet properties may be paying off.

Last weeks data will be out soon and we can check back then …

Data from Hitwise

Disclosure (“none” means no position):Long WMT, SHLD, none

Tags CC, SHLD

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Cramer on Sears Holdings

Post author By ToddSullivan
Post date March 30, 2009

Okay, saw what you want about Jim Cramer but he makes some very good points here about Sears Holdings.

For those inclined to skip the video, here are the main points:

1- Sears is levered to housing. When that stabilizes, Sears turns. Read this from 2007 on the subject
2- Great brands. More on that here
3- Naked shorts. Read more about that here

As an aside, I so much prefer the thoughtful Cramer to the character he plays on his nightly show…

Lampert’s recently released 2009 shareholder letter:

Disclosure (“none” means no position):Long SHLD

Tags SHLD

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Mondays Links

Post author By ToddSullivan
Post date March 30, 2009

Options, Biden’s Daughter, Coup, Sheila Blair

– If you are thinking about or so trade options, your daily reading ought to start with Adam

– So, should we expect the same press coverage Jena Bush got for drinking a gin and tonic or Palin’s daughter? Or is it “hands off” now it is a Democrat’s kid?

– Frightening

– Bronte makes some very salient points.

Disclosure (“none” means no position):

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Sunday Viewing

I am liking Rep. Ryan more every time he speaks..

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

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Weekend Viewing

Here is a must see video…………….

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

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On Wall St. Media Talking General Growth Properties.

Post author By ToddSullivan
Post date March 28, 2009
3 Comments on On Wall St. Media Talking General Growth Properties.

Doug at Wall St. Media was nice enough to have me for a chat yesterday to talk about General Growth Properties (GGP).

Could be a big weekend for shareholders.

Disclosure (“none” means no position):Long GGP

Tags ggp

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The Commercial Real Estate Time Bomb

Post author By ToddSullivan
Post date March 27, 2009
5 Comments on The Commercial Real Estate Time Bomb

Tick, tock goes the clock…

Here is 2009 outlook for commercial real estate from Deutche Bank. It does notr paint a pretty picture. Run through it (it is mostly graphs)

Commercial Real Estate Outlook 2009

Publish at Scribd or explore others: Business Presentations & Slid commercial real esta

So? What to make of it? Short answer there is still pain hovering out there for banks if they allow these loans to default…..if.

First we need to segment to commercial owners into categories. The owner who holds mortgages on a single strip mall in Des Moines vs. the REIT that hold 100 or more properties. The little guys who gets in trouble? Sorry bud but you are cooked. There will be no help for you from either the banks or the Feds. But, you big boys out there are going to be spared OR at least kept on life support.

Why? Scale. Let’s say we have three property owners in a town. One guy holds 20 properties and the others each own one or two. All three are currently delinquent. Who does the bank care the most about? Of course, the big guy. If he is forced into bankruptcy, the entire town’s property values are destroyed. The chance of the bank recovering anywhere near their investment is virtually nothing. Now if they refinance his loans (extend maturity to lowers payments so they are covered by current rents) and let the other two go into bankruptcy, the market takes a small hit while it waits for the economy to come back. As the economy comes back rents rise and, property values rise with it and the bank gets made whole on its loans. The key point here is that the market survives.

But, with banks already strapped, how can we be sure there will be funds available to refinance?

From the WSJ:

Commercial real-estate debt is potentially more dangerous to the financial system than debt classes such as credit cards and student loans because of its size. The Real Estate Roundtable, a trade group, estimates that commercial real estate in the U.S. is worth $6.5 trillion and financed by about $3.1 trillion in debt. Partly because the commercial real-estate debt market is nearly three times as big now as in the early 1990s, potential losses in dollar terms loom larger.

According to an analysis of bank financial reports by The Wall Street Journal, the broad shift to real-estate lending can be seen by comparing commercial real-estate loans — including both mortgages and construction loans — with banks’ so-called Tier 1 capital, a key indicator of a bank’s ability to absorb losses. In 1993, less than 2% of the nation’s banks and savings institutions had commercial real-estate exposure exceeding five times their Tier 1 capital. By the end of 2008, that had risen to about 12%, or about 800 financial institutions. A higher ratio means a thinner cushion for loans that go sour.

The Federal Reserve and the Treasury are moving to adapt a funding program to make it attractive for investors to buy debt backed by office buildings, hotels, stores and other income-producing property. The program, called the Term Asset-Backed Securities Loan Facility, or TALF, was begun to finance purchases of debt backed by consumer credit, and officials will expand its use to include commercial-property debt.

See, if CRE goes bust, all the aid to banks that has been doled out up to this point gets flush away. It is in both the banks AND the government’s best interest to assure that does not happen. Keeping it from happening in CRE is also FAR easier than the mortgage market. Rather than dealing with millions of individual homeowners, only a dozen or so REIT’s must be helped.

So, this all leads us to General Growth Properties (GGP). It looks increasingly like two or three debt holder are going to force (or allow) it to file Chapter 11 reorganization today (this weekend) after the 5pm deadline. If (when) that happens, what is in the best interest of all? You see GGP is the largest mall owner in the US. That means that whatever happens to it, effects the entire CRE market in the US.

Because of that, a liquidation cannot happen. There are not buyers that can purchase enough of the properties with credit markets in their current state to avoid a total collapse of the CRE market. With $3.1 TRILLION of loans out there for it, it sort of makes the $50 billion given to Citi (C) look like change found in the sofa and gives us some proportion of the potential damage. With mark-to-market accounting rules, the destruction of GGP debtors would cascade to all lenders and make what homeowners did to banks look like “the good ‘ole days”.

How bad could it be? Look at the following chart from Goldman Sachs (GS).

Click to enlarge:

If you look at the third column you’ll see that most banks are still carrying commercial loans at 99% or higher. This means they haven’t even begun to write-down these loans. It also gives them more impetus to do anything possible to avoid having to do this..translation? Refinance..

As an aside. It would seem that Wells Fargo (WFC) has been the most honest with its marks (that being relative to the others). It also means they may be done marking down assets. A lot of “mays” but worth watching.

Now is the problem with GGP that the business is going under? No. If the debt is refinanced, GGP can pay its interest from its operation (here is case law to support this). Don’t forget, it did as of the last quarter have a 92% occupancy rate. That is sure to fall but is at the top of the industry. If the debt can be refinanced, everyone is made whole and we now have the largest player in the market stabilized and provide a blueprint for the rest of the industry.

One cannot underestimate the positive effect on the CRE market as a whole should that happen.

Well, if all that is true, why hasn’t it happened yet? TALF just went into effect and while it appears it will be expanded to include CRE, that has not officially happened yet. That is why we are seeing extension after extension. Once it comes into effect, we ought to see movement here.

Now as usual, a warning. I know people have been following into this investment. If you do, you must be prepared to lose all of it. There is no guarantee of the above outcome. Buying this stock now is essentially buying a call option on the company’s survival. It is hits, you win big, very big. If not, what you invested is worth nothing. I believe the above scenario plays out, I am also not going to be broke should it not.

Disclosure (“none” means no position):Long GGP, WFC, none

Tags ggp

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The Other Side: Wesbury Says Rally Is For Real

Post author By ToddSullivan
Post date March 27, 2009

In the interest of full information for readers, here is the other side of the bear argument. Brian Wesbury says this is no “dead cat bounce” but the end of the bear market.

Readers here know I am not as optimistic and think we have downside in store for the market.

My gut tells me we both are. I see short term downside and then a gradual run up. As for the when and how much? Don’t know the answers to those but I do have the cash waiting to buy when I’m comfortable.

Disclosure (“none” means no position):

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Friday’s Links

Post author By ToddSullivan
Post date March 27, 2009

AIG, Soros, Congress, Football

– Top Execs quitting at AIG might cause the whole thing to collapse. Nice job Congress

– I often disagree with him but on this he is right.

– As if we have not had enough hypocrisy out of them

– Call me crazy but I going to say the Senate has more important things to worry about that football?

Disclosure (“none” means no position):

Visit the ValuePlays Bookstore for Great Investing Books

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Ackman Sends Letter To Target CEO

Post author By ToddSullivan
Post date March 26, 2009

Let’s put aside the fact Ackman seems to know Target’s bylaws better than they do (or at least pretend to). In the revised 13D/ a just filed, Ackman states:

Subsequent to the delivery of the Original Notice, we received a telephone call from your outside counsel informing us that the Board of Directors of the Company (the “Board”) currently consists of 12 directors and that only four directors are up for election at the 2009 Annual Meeting.

As we have explained in detail in a separate letter from Mr. Ackman to Mr. Gregg W. Steinhafel, Chairman, President and Chief Executive Officer of the Company, based on our review of the Company’s Restated Articles of Incorporation and its filings with the Securities and Exchange Commission, we are of the view that size of the Board remains at 13 members. While the resignation of Mr. Robert Ulrich on January 31, 2009 created a vacancy in Class III of the Board, the size of the Board has not changed.

This is pretty simple. Target, recognizing that Ackman is likely to win seats on the Board, is trying to shrink it to minimize whatever effect his nominees may have. But, if you are a shareholder you have to ask, why? Ackman left shareholders of McDonalds (MCD), Chipolte (CMG), Wendy’s (WEN) and Tim Hortons (THI) far better off than when he arrived. Shareholder also have to ask, if this guy is the largest shareholder of the company, aren’t his interests totally aligned with ours?

Here is the letter Ackman sent the CEO Greg Steinhafel:

Exhibit 99.1

March 26, 2009
Gregg W. Steinhafel
Chairman, President and Chief Executive Officer
Target Corporation
1000 Nicollet Mall
Minneapolis, Minnesota 55403

Re:Number of Directors for Election at the 2009 Annual Meeting of Shareholders

Dear Gregg:
On March 16, 2009, affiliates of Pershing Square Capital Management, L.P. delivered a Notice of Nomination to Target Corporation proposing to nominate five individuals for election as directors of Target at the Company’s 2009 Annual Meeting of Shareholders. The same day, Target issued a press release indicating that its board is comprised of 12 directors and that the Company is nominating only four directors for election at the 2009 Annual Meeting. Subsequently, we received a telephone call from your outside counsel informing us that the Target Board currently consists of 12 directors and that only four directors are up for election at the 2009 Annual Meeting.

We disagree with the Company’s position on this issue. We have reviewed Target’s SEC filings and have found no disclosure to the effect that the size of the Target Board has been changed from 13. We are aware that Mr. Ulrich resigned in January, but a board does not automatically shrink as a result of a resignation; rather, a vacancy is created, in this case, a vacancy in Class III of the Target Board.

Our view is informed by the Company’s Restated Articles of Incorporation, which provide that only the shareholders may reduce the size of the Target Board. Specifically, Article VI of Target’s Restated Articles of Incorporation provides the following:

“The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors consisting of not less than five nor more than twenty-one persons, who need not be shareholders. The number of directors may be increased by the shareholders or Board of Directors or decreased by the shareholders from the number of directors on the Board of Directors immediately prior to the effective date of this Article VI; provided, however, that any change in the number of directors on the Board of Directors (including, without limitation, changes at annual meetings of shareholders) shall be approved by the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as defined in Article IV), voting together as a single class, unless such change shall have been approved by a majority of the entire Board of Directors.” (emphasis added)

Article VI was adopted at Target’s 1988 Annual Meeting of Shareholders. Immediately prior to the effectiveness of Article VI, the size of the Target Board was 13. Under Article VI any reduction in the size of the Target Board requires a shareholder vote. As the Company’s shareholders have not been asked to vote on any matter since the 2008 Annual Meeting of Shareholders, we believe that the size of the Target Board remains at 13. While Mr. Ulrich’s resignation created a vacancy on the Target Board, the size of the Target Board has not been changed to our knowledge.

If the Company continues to believe that the size of the Target Board is 12 and that only four seats are up for election at the 2009 Annual Meeting, we believe that the interests of the Company and its shareholders would be best served by a quick, low-cost resolution of this issue. Therefore, we would suggest that we jointly submit the issue to a binding arbitration that will take place in Minnesota and will be decided by a mutually acceptable arbitrator, pursuant to the AAA Commercial Rules of Arbitration.

If, on the other hand, you agree with our interpretation of the Articles of Incorporation, you can simply nominate a fifth director.

It is in all of our interests to resolve this issue promptly. Please let me know how you would like to proceed. Thank you.

Very truly yours,

/s/ William A. Ackman
William A. Ackman

So, what then is the problem with management? Why are they stonewalling every idea Ackman has to create shareholder value? Do they have other plans? If they do, none have been announced.

Here is the reason. Management is entrenched at Target. They have all been for for a long time. None of them have any experience running the type of organization Ackman is proposing (the Board members he has nominated do) and what they are fighting is the feeling that should he get his way, they become less important or worse, irrelevant. What they fail to realize is by simply dismissing him out of hand, they are doing just that.

How long do they think shareholders will sit for a fallen and stagnant stock price before they want to “see what the other guy can do”? Is there any plan to reverse the same store sales decline that is now over a year old? Shareholders surely have noticed that Wal-Mart (WMT) shareholders are not suffering the same fate.

Current management has done a fantastic job brining the company to it current state, a well respected retailer, probably the second in the nation. But, they are stuck and sitting back waiting for the economy do lift them out of their funk will not cut it with shareholder as they watch Wal-Mart’s taillights disappear into the distance.

Disclosure (“none” means no position):Long MCD, WMT, none

Tags ackman, mcd