Target Corp. said profits from its credit card operation in its fiscal first quarter, which ended May 2, fell 78% from a year earlier, to $39 million, as its annual chargeoff rate almost doubled.

The Minneapolis retailer reported its earnings Wednesday, eight days before a proxy battle waged by the activist investor William Ackman is set to be decided at its annual shareholder meeting.

Target's portfolio is the largest of the few remaining ones run by retailers, though the retailer sold a minority stake in that portfolio to JPMorgan Chase & Co. a year ago. This month Ackman called for Target to "exit" the business by selling the portfolio to a partner financial institution. Target said it is "interested in selling the balance of our credit card receivables."

It attributed the profit drop to "a decline in the spread to Libor earned on the overall portfolio," along with other factors, including a 49% "reduction in Target's investment in this segment's average receivables."

The chargeoff rate rose 630 basis points, to 13.9%. Target said its net writeoffs for the quarter were $301 million, "as expected."

Gregg Steinhafel, its chairman, president and chief executive officer, said in a press release, "Credit card segment results for the first quarter were stable, profitable and consistent with our expectations."

In a conference call to discuss the results with analysts, he defended Target's card operations.

"While it is a fact that our credit card segment profits fell sharply in 2008, this decline was due in part to paying JPMorgan Chase for the credit risk they agreed to bear in our May 2008 transaction," he said. "No bank was willing to pay us more than we actually earned during this period for the privilege of controlling or owning this portfolio. In summary, we believe there was no executable transactions that would have created more shareholder value."

Receivables were flat from a year earlier, at $8.46 billion.

"Looking forward in our credit card segment, we continue to favor reducing our near-term risks at the likely cost of causing a somewhat smaller portfolio," Doug Scovanner, Target's chief financial officer, said during the call.

Target's "internal portfolio metrics are improving," and it expects its net chargeoffs to "remain stable" this quarter "at a level near our first quarter experience of approximately $300 million," he said. "While we are cautious about making bold predictions about the third and fourth quarters on this metric, we think it is unlikely that net writeoffs would increase from the current experience."

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