Target, the US discount retailer, on Wednesday underlined how far it has slipped behind its larger rival Wal-Mart in the recessionary economy, which has fuelled its fierce proxy battle over board seats with Bill Ackman, the activist investor.

The retailer said comparable sales at its 1,700 US stores fell by 3.7 per cent during the first quarter, compared with the 3.6 per cent increase reported by Wal-Mart’s 3,600 US stores last week.

The results mark the fifth consecutive quarter in which Target’s sales growth has trailed Wal-Mart, starting in the winter of 2007 as the economy weakened. For the previous four years, Target’s sales growth regularly outperformed its rival.

In another sign of the reversal of fortunes, Target also reported flat gross profit margins, as the mix of products its customers bought included a greater proportion of less profitable food, beauty and pharmacy items.

Wal-Mart, in contrast, reported an improvement of 52 basis points in its profit margins as a result of selling more discretionary goods, such as clothing, electronics and home furnishings – categories in which Target outperformed Wal-Mart before the recession.

Target argued on Wednesday that it was not losing customers to Wal-Mart or anyone else. Kathy Tesija, head of merchandising, said most of the declines in its business came from its most prosperous customers, who were making fewer discretionary spending trips, rather than spending money elsewhere.

She said the company was continuing to focus on expanding food offerings – one of the areas highlighted in the campaign waged by Mr Ackman’s Pershing Square Capital Management – including introducing small fresh-food selections at up to 100 stores by the end of the year.

Target’s net quarterly income fell 13 per cent to $522m, or 69 cents a share, a smaller decline than expected, sending its shares up more than 3 per cent.

Its revenues were flat at about $14.8bn.

It also said its credit card portfolio made a profit during the quarter and had outperformed larger credit card businesses – another area where its strategy has been criticised by Pershing.

Mr Ackman is challenging the re-election of four Target directors at the annual meeting on May 28. On Tuesday, Risk­Metrics, the leading US proxy advisory service, recommended voting for two of Pershing’s candidates – Mr Ackman and Jim Donald, the ex-chief of Starbucks.

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