Bob Ulrich - Chairman, CEO Doug Scovanner - EVP, CFO Gregg Steinhafel - President

David Strasser - Banc of America Securities Jeff Klinefelter - Piper Jaffray Charmaine Tang - Citigroup Bob Drbul - Lehman Brothers Virginia Genereux - Merrill Lynch Mark Husson - HSBC Adrianne Shapira - Goldman Sachs Gregory Melich - Morgan Stanley Charles Grom - JP Morgan Neil Currie - UBS Christine Augustine - Bear Stearns Michael Exstein - Credit Suisse Teresa Donahue - Neuberger Berman Dan Binder - Buckingham Research Todd Slater - Lazard Capital Market

Welcome to the Target Corporation's first quarter earnings release conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Bob Ulrich, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning. Welcome to our 2006 first quarter earnings conference call. On the line with me today are Gregg Steinhafel, President; and Doug Scovanner, Executive Vice President and Chief Financial Officer. This morning Doug will review our first quarter 2006 financial results and describe our outlook for the second quarter and full year, then Gregg will provide an update on Target's recent business and current initiatives, then I will wrap up our remarks and we will open the phone lines for a question-and-answer session. Now Doug will review our results which were released earlier this morning.

Thanks, Bob. As a reminder we're joined on this conference call by investors and others who are listening to our comments today live via webcast. We plan to keep today's call to no more than 60 minutes including our Q&A session and Susan Kahn and I are available throughout the remainder of the day to address any follow-up questions you may have. Also any forward-looking statements that we may make in our remarks this morning should be considered in conjunction with the cautionary statements contained in our SEC filings. This morning Target Corporation announced our financial results for the first quarter of 2006, and overall they met our expectations for growth. The composition of our profitability reflected continuing strength in our credit card operations as well as consolidation of the tremendous margin gains we've enjoyed over the past few years in our retail operations. On balance, our first quarter performance gives me even greater confidence than 90 days ago in our ability to generate a mid-teen percentage increase in 2006 earnings per share. To put this outlook in perspective, let's look at the quarter in more detail. Total revenues in the first quarter grew 12.1% to $12.9 billion. Earnings before interest and taxes, or EBIT, increased 12.2%, in line with our revenue growth, to $1 billion, compared with $907 million in the first quarter of 2005. Net earnings in the quarter grew 12% to $554 million, compared with $494 million last year. On this same basis, diluted earnings per share rose to $0.63 from $0.55, an increase of 14.0%. In addition to the very strong results of our credit card operations, which I'll discuss separately in a few minutes, several other factors contributed to our first quarter performance. We benefited in the quarter from a non-recurring pre-tax adjustment of $28 million to correctly amortize leasehold acquisition costs over our expected terms for individual leases. As a result of an internal review, we determined that we had inadvertently assigned lives that were too short to a small group of leased stores, including former Montgomery Ward stores, and this resulted in too much expense being recorded in earlier periods. Separately, our SG&A expenses grew faster in the quarter than our sales, resulting in a 70 basis point increase in our expense rate. A portion of our increased expense is directly related to benefits in our gross margin rate. These expenses represent about 30% of the unfavorability. Timing accounts for about another 30% of the year-over-year increase in the quarter, and as a result, we expect to enjoy some favorability later in the year. Finally, core underlying expense drivers, such as store payroll and utilities, represent about 40%, or 30 basis points of the quarter's expense rate increase. Gross margin rate in the quarter was also slightly unfavorable to the prior year by 18 basis points. We believe this performance is more reflective of the strength of last year's gross margin rate expansion than any underlying concerns in this year's results. In fact, favorability in purchase mark-up, and inventory shrinkage trends reinforce our belief that gross margin rate for the full year will likely match or somewhat exceed last year's record high 31.9% of sales. Depreciation and amortization expense declined $6 million, or 1.6% compared to the same period a year ago, as a result of normal growth offset by the effect of the adjustment I described earlier. We expect to return to a more typical rate of growth in depreciation and amortization expense beginning in the second quarter. Net interest expense increased $20 million in the quarter from $111 million a year ago, to $131 million this year. In consolidation, the majority of this increase was attributable to higher average funded balances. Our effective income tax rate for the quarter was 37.5%, compared with 37.9% in last year's first quarter. Under current application of GAAP, there will continue to be variability between our individual, quarterly, and full year effective tax rates. As we discussed previously, for the full year 2006 we continue to expect our effective tax rate to be in the range of 38.0% to 38.5%. Under the $5 billion authorization provided by our Board of Directors, we continued to repurchase shares of Target common stock during the first quarter of 2006. Specifically, we invested $350 million to buy approximately 6.6 million shares of our common stock at a weighted average price of $53.11 per share. Cumulatively, we have now repurchased 58.1 million shares of common stock at an average price of $48.54 per share, for a total investment of $2.82 billion. As a result, weighted average diluted shares outstanding in the quarter were lower by nearly 16 million shares, or about 2%, than the corresponding figure last year. We continue to believe that we will complete our total share repurchase authorization by the end of 2008, if not sooner. Now let me turn to the balance sheet. Net accounts receivable at the end of the first quarter were $5.4 billion, 10.5% above our receivables levels at this time last year. Over this same period, we have increased our allowance for doubtful accounts to $476 million, or 8.1% of quarter-end gross receivables. Our balance sheet inventory position grew 11.5% from a year ago, reflecting the natural increase required to support additional square footage, same-store sales growth, and our strategic focus on increasing direct imports. As usual, we've funded the substantial majority of this increase through a parallel increase in accounts payable, and on balance our inventory is in very good condition. Now let me provide some additional guidance for the balance of 2006 and put this in perspective by teeing off of our first quarter experience. I'll begin with our credit card operations which delivered superior first quarter performance. Our results were driven by terrific underlying revenue and expense performance and augmented by the near-term benefit of very low bad debt expense. While we expect to continue to enjoy strong year-over-year underlying performance throughout the remainder of 2006, we expect our delinquency and write-off rates to return to more normalized levels in the second half of this year as we annualize last year's changes in federal bankruptcy law and begin to experience higher write-offs related to the change in minimum payments mandated by the OCC. We believe we are amply reserved and remain confident in the continued strong contribution of our credit card operations to earnings, which is likely to be especially robust again in the second quarter. Overall our sales trends remain strong, and we're on track to deliver another year of low double-digit percentage growth in our top line, fueled by the contributions of our new stores and by a mid single-digit percentage increase in same-store sales. We continue to believe our EBIT margins for the year will approximate last year's record levels as we translate our sales to profits. Specifically, current First Call median estimates for Target envision EPS of $0.69 in the second quarter and $3.11 for the full year. In our view, these estimates appear reasonable given our current outlook. Now Gregg will provide a brief summary of current business trends, describe Target's growth plans, and review some of our recent and upcoming merchandising initiatives. Gregg.

Thanks, Doug. Our first quarter results were in line with our expectations, and we are pleased with our performance, particularly in light of last year's outstanding results. Comparable store sales rose 5.1% in the quarter on top of a strong 6.2% increase a year ago as we experienced typical growth in both guest traffic and average transaction amount. Our sales growth reflected better than average performance in toys, children's apparel, and nondiscretionary categories like health and beauty, pharmacy and consumables. In contrast, our home business continued to be somewhat disappointing during the quarter, and we continue to work on improving its performance. We managed our inventories well during the quarter and are comfortable with the mix, balance, and level of inventories as we head into the second quarter. During the first quarter we continued to expand our store base, opening a total of 25 new stores, including 24 discount stores and one SuperTarget, bringing our total store count at quarter end to 1,418 stores in 47 states. Our store opening program in the second quarter is expected to be similar in scope: a total of 28 new sites, comprised of 25 discount stores and three SuperTarget locations. The strength of our first quarter financial performance affirms our commitment to offer our guests great design, innovation, and value in our merchandise assortment and superior experience in our stores. To consistently deliver the freshness and excitement our guests expect, we regularly introduce new products and brands, routinely refine our assortments to reflect current trends in guest preferences and undertake significant category reinventions to provide increased differentiation and/or value. During the first quarter we launched Go International with strong guest response to our first collection featuring the designs of Luella Bartley and a solid start from our line of apparel and accessories with designer Tara Jarmon introduced earlier this month. We substantially upgraded our in-store assortment of garden and patio decor with the launch of Smith & Hawken, the expansion of our Sean Conway collection, and the introduction of outdoor, lightweight, full-sized fountains. In addition, we continue to leverage our in-store assortment with line extensions available on Target.com. In home, we continued to refine our assortment within each of our five lifestyle preferences to better meet the needs of our guests. We rebalanced our mix of good, better, best to include quality offerings across our full spectrum of price points. We delivered innovation and newness introducing Target Casual and Contemporary Home and relaunching the Waverly brand. We enhanced our store presentation with an end cap display of larger furniture pieces introducing room essentials and upholstered seating and we reinforced our strategy with distinctive marketing, such as our Design Your Spring home catalog. Electronics is also undergoing some meaningful changes. We are evolving our assortment to include more digital and flat panel TVs, particularly within our better and best brands, and we are simplifying our signage to assist our guests in making their purchasing decisions. Finally, we implemented a significant reinvention in both intimate apparel and bath and body, resulting in greater merchandise differentiation and exclusivity through new brand partnerships and own brand development. Our bath and body assortment now includes hundreds of new items previously available only in European specialty stores and our intimate apparel offering includes well-known department store brands such as Solutions by Hanes and ASSETS by Sara Blakely. Throughout our stores we also remain firmly committed to driving increased guest frequency by providing greater convenience, reliability, and value in our consumables and commodities offerings. Specifically, we continued to differentiate ourselves through increased penetration of our own brands, including recent product introductions in Market Pantry, Archer Farms and Choxy. We continued to expand our food offering in our general merchandise stores, with up to 34 sides of food in our new and remolded stores. We are right-sizing an additional 150 stores to incorporate our expanded offering of dry grocery and refrigerated and frozen foods, with completion expected by early August. We continue to improve our guest shopping experience at SuperTarget with our expansion of self-service delis, broader assortments of organic and natural foods and locally grown produce and greater availability of pre-packaged produce to enhance both food safety and check-out speed. To ensure that Target continues to offer the newness and excitement our guests want at the lowest possible cost, we remain focused on opportunities to leverage our sourcing, technology, and supply chain sophistication, and capture incremental efficiency. For example, we are focused on continuous improvement in our hard lines packaging and soft lines product design and development processes. We continue to expand our distribution network by adding regional and import capacity to support our growth, and we are pursuing opportunities to improve transit times and reduce costs across our supply chain, both domestically and internationally. Each of these efforts support our Expect More/Pay Less brand promise and helps us sustain our competitive advantage. Whether we are building and operating Target Stores, designing and sourcing unique and affordable merchandise for our guests, or managing the systems and infrastructure that support our business, we are not standing still. As the competitive environment intensifies and Target continues to grow, we understand that continuous improvement and superior execution throughout the organization are critical to our future success. By remaining unwavering in our focus on delighting our guests and firmly committed to balancing innovation with discipline we believe we will achieve our goal of being best for our guests, our team members, our shareholders, and our communities. Now Bob has a few concluding remarks.

As you've just heard in detail, we are pleased with our overall results in the first quarter and believe that Target remains on track to delight our guests with the right combination of innovation, design, and value. We are confident in our strategy and in our ability to deliver another year of strong growth and outstanding performance in 2006. That concludes our prepared remarks. Now Doug, Gregg, and I will be happy to respond to your questions.

(Operator Instructions) Your first question comes from the line of David Strasser of Banc of America Securities. David Strasser - Banc of America Securities: Thank you. Just going back to the gross margin, looking at the compares for the next two quarters at least, it seems that they get even more difficult than the first quarter. Just in the last couple of days, being in several stores and just seeing a little bit more aggressive markdowns on apparel, especially women's apparel, than I had seen in past years -- (a) Am I right on that? (b)How do you continue to keep the gross margins flat year-over-year or get to that level with such more difficult compares?

The question in women's, our women's business has been fine all spring, and there's no real difference in the cadence or in the amount of markdowns that we have issued in our apparel area. I'm not sure what you're seeing out there but it's the normal mark-down rhythm that you would see for this time of year.

Generally speaking, markdowns that you would observe in our store today were recorded in our financial statement in the first quarter. David Strasser - Banc of America Securities: It was swimsuit apparel and stuff like that that was being marked down in stores.

But that's just ongoing culling and making assortment changes throughout any season. There's always going to be some mark-down activity in all of our fashion categories. David Strasser - Banc of America Securities: Getting back to the second part of it, the tougher compares, do we start to see the big opportunity for the flat gross margins as you get into the fourth quarter, were the compares easier? Or are there more things that can happen between now and then?

I'll go out on a limb and tell you that I think that in the second quarter you're more likely to see gross margin flat to up slightly compared to prior year. Again, in my earlier remarks, I cited the two subcomponents of gross margin rate that to me are better leading indicators of gross margin rate than any others -- purchase mark-up and shortage -- and those trends are very good coming out of the first quarter into the second. We certainly don't envision anything like the year-over-year kinds of increases that we enjoyed Q1, Q2 last year but from today's vantage point, I'm feeling quite good about our gross margin rate generation in Q2. David Strasser - Banc of America Securities: Okay, thanks.

Your next question comes from the line of Jeff Klinefelter of Piper Jaffray. Jeff Klinefelter - Piper Jaffray: Doug, could you get a little more specific on your SG&A comments, particularly the 30% that's timing related? You said you would get some of that back through the balance of the year, or get that back through the balance of the year. Could you talk more specifically about what hit in Q1 and how we should think about that flowing through the next couple of quarters?

I can give you a laundry list of relatively small items, but they do add up to something that's meaningful. Looking forward in the big picture sense, before I touch on the laundry list, I think that overall expense rate is likely to remain under some pressure for the next couple of non-seasonal, non-holiday quarters. I clearly expect some benefit in Q4 from the net of all of these timing issues. A couple of issues that certainly come to mind, start-up expense was a contributor in the quarter. We're opening three DCs this year compared to one. It's not going to be a recurring issue throughout the year, but that put a lot of expense in the current quarter compared to prior year. Separately, as you know, we continue to provide IT and non-IT transition services to the new owners of Mervyn's. The amount of that income, of course, has been winding down over time. Q1 '06 versus Q1 '05 is the single largest quarterly decline in contra-expense, if you will, in our P&L compared to a couple of quarters before or after, so that one is clearly more of a timing issue. As you know, as well, we remodel and expand a very substantial number of stores each year. We don't even remotely try to time that by quarter for any particular purpose other than doing it when it makes the most sense. That drove a bit more expense in the quarter than we would expect for the balance of the year. That line item, per sae, should end up being flat year-over-year, but ended up putting some pressure on this quarter's expenses. Jeff Klinefelter - Piper Jaffray: Okay. That's very helpful. Just one follow-up as it relates to the investment in your gross margin initiatives, or product margin expansion initiatives. Any thoughts on how that timing matches up with your gross margin performance, or is it just too difficult to look at that on a quarter-over-quarter basis?

It isn't something that we carefully try to plan on a quarter-over-quarter basis in terms of tracing that sub-component of gross margin rate. On balance, we continue to enjoy gross margin rate benefits from year-over-year increases in our direct imports activities. Year-over-year, that certainly is not at the same pace that it was say two or three years ago, but it's still a very important element in our generation of gross margin rate that helps us offset some of the more natural pressures on gross margin rate due to mix and other factors. Jeff Klinefelter - Piper Jaffray: Great. Thank you.

Your next question comes from the line of Deborah Weinswig of Citigroup. Charmaine Tang - Citigroup: Good morning. It's Charmaine Tang for Deb Weinswig. Would you guys mind giving us an update on your thoughts on keeping the credit card portfolio?

Well, you make it sound as if there's some question that we ought to be answering about keeping the credit card portfolio. The credit card portfolio, as I mentioned earlier, continues to generate very, very strong absolute performance and spectacular year-over-year performance. Today, it is operating at a rate of profitability unmatched by nearly anyone with a substantial bank card portfolio. It's growing, and it's hugely profitable. Those aren't usually the dynamics that lead one to question whether or not a business ought to be owned. Charmaine Tang - Citigroup: If you could just share some more recent color on how you're sort of working towards building new customers into that portfolio base as well as enhancing the relationships with the existing customers? That would be helpful as well.

Our new account acquisition focus is largely unchanged. The key source of new account holders for the Target Visa card is by intercepting guests in our stores and online who are already guests of ours who choose to want to strengthen and deepen their relationship via a credit card relationship as well. We continue to have a variety of fascinating ways to reinforce the strength of that relationship. Our principal vehicle, of course, is our guest loyalty program on the Visa card and on our Target card which reinforces the propensity for our credit card guests to visit our stores more often and to spend more -- in some cases far more -- on each visit. It's a wonderful, wonderful aspect of our operations. Charmaine Tang - Citigroup: Thank you.

Your next question is from Bob Drbul of Lehman Brothers. Bob Drbul - Lehman Brothers: Good morning. Can you give us some of the numbers on traffic versus ticket in the quarter? Secondly, can you talk a little bit about the competitive environment in terms of if Wal-Mart's performance is at all impacting you in its move to go a little bit more upscale?

First of all I'll tackle the numerical side and I'll ask Gregg to comment on the competitive situation. Our comp for the quarter consisted of positive traffic trends in the range of 1%, and the balance was growth in average ticket. The growth in average ticket in turn was considerably more a function of growth in units per transaction than price per unit. Gregg.

The marketplace continues to be highly competitive. It's rational; but, like it has been for some time, it's very aggressive. We really haven't seen any impact from Wal-Mart out of their efforts to upscale. We have seen just limited amounts of upscaling going on in their home and slight upscaling in apparel, but it's not of any meaningful scale at this point. Bob Drbul - Lehman Brothers: Can you talk a little bit about the performance of the remodeled stores that incorporate dry grocery and refrigerated and frozen food in terms of how they're performing on a comp basis and maybe on an operating income basis?

Well, we're very pleased with the results of the remodeled and right-sized stores as we've expanded our presence of food and other consumable products. We have experienced stronger increases in guest traffic, and that has led to strong performance out of those stores. Bob Drbul - Lehman Brothers: Great. Thank you very much.

Your next question is from Virginia Genereux of Merrill Lynch. Virginia Genereux - Merrill Lynch: Thank you. Two questions, if I may. Doug, your CapEx looks like it's growing a little faster this year than sales, which has not been the recent trend, or CapEx last couple of years was up 10% or 11%, and I think your outlook was up maybe 14% this year. Is that the DCs? Can you tell us if that's accurate and what might be driving a little faster CapEx growth, if that's the case?

Generally speaking, DCs and remodel expansions are key drivers here. We do expect CapEx for the year to grow moderately faster than sales but not by any huge amount, and that was contained in our earlier guidance as well. Virginia Genereux - Merrill Lynch: Are you seeing higher cost dynamics in CapEx?

Certainly some of the raw materials that go into our remodels and our new stores and our DCs for that matter, are consolidating at sharply higher prices than we were experiencing two or three years ago. The biggest year-over-year inflationary dynamics though seem to be behind us. Here I'm talking about concrete and steel in particular. Virginia Genereux - Merrill Lynch: Thank you. Secondly, on credit, you said on the January call that you thought an 8% yield after funding would also be achievable for '06, given especially the strong start. Is that still your view, or could '06 this year be even better?

'06 clearly could be even better than that. The quarter just ended was 10.9% of average receivables, and we had a net interest margin after funding costs and all other expenses of running our credit card operation of 13.2% annualized in the quarter. So clearly we're off to a spectacular start to 2006, and I expect the dynamics that I've just described to continue at least through the second quarter. Clearly as we get into the back half of the year we will be cycling periods of wonderful performance from 2005, and as I remarked earlier, we'll also be experiencing the natural side effect of the increase, the mandated increase in minimum payments that will flow through delinquencies and write-offs. But on balance, this is a golden time to be involved in credit card operations for Target Corporation. Virginia Genereux - Merrill Lynch: You deserve all the credit in the world for the yields, but, Doug that doesn't make you think -- I mean, you guys are willing to hold on to this business through tougher times, cyclically, or times where the yields won't be necessarily as robust as they are now. Is that fair?

You make it sound as if "willing to hold on" sounds as if we need to brace ourselves for some kind of storm. This business has been a fabulous tool for making our guests want to visit our stores more often and spend more on each visit across a long period of time, and our margins today are as wide as they've ever been. We were delighted with this business 200, 300, 400 basis points ago, and I would be just as delighted with it 200, 300, 400 basis points lower than today's rates even though I don't predict that that's going to happen.

Your next question comes from the line of Mark Husson with HSBC. Mark Husson - HSBC: I wanted to talk a bit about currencies and procurements and obviously the dollar has been a bit weaker. That shouldn't impact you near term but longer term if the RMB floats upwards and if the dollar continues to weaken -- I know you do a lot of contracts in dollar -- but at what stage do you start to run up to vendors in Asia asking for some sort of compensation or some money back?

First of all to clarify, nearly all of our sourcing contracts are denominated in U.S. dollars. It is the functional currency preferred by the vendors with whom we contract in this kind of business. Over time, it's been very, very hard for us to ever trace the cost side of our sourcing against movements of the dollar against a basket of world currencies. Theoretically you and I would both agree that it's in there somewhere, but practically, it's a very, very hard thing to be able to trace. Mark Husson - HSBC: Just in terms of individual currency exposure, obviously the Chinese currency is a big one for you, and you are on the ground in like 50 markets but part of your gross margin or your SG&A hit, rather, was building this business. Are you spreading your net physically wider? Are you opening more offices? What are you doing to try and spread it?

We have had a balanced portfolio of sourcing for the longest of times. We are not making any significant changes. We operate in 28 countries, and we are well diversified throughout the world. So there's really no significant change that we need to make, and we can shift our sourcing base as need be. Mark Husson - HSBC: So what were the dollars involved in the component of SG&A hit then? What were they spent on?

I'm not clear on your question. Mark Husson - HSBC: Just in part of the SG&A increase, you had talked about the benefits in gross margin accounting for 30% of the increase in SG&A dollars. I'm just wondering what those dollars were actually spent on.

Well, let me clarify. I would tell you that the line of questioning you're on would probably be the third level of issues contained in here. For example, as many of you know, we changed our photo finishing business model a year ago from essentially a leased business to an owned business. That means that today the payroll expense associated with photo finishing in our stores is flowing through against virtually no payroll expense a year ago and on the other side of the equation we're generating a lot more gross profit dollars. That would be the single largest current quarter example in that category that I was describing earlier. Mark Husson - HSBC: Okay. That's helpful. Thank you.

Your next question comes from the line of Adrianne Shapira with Goldman Sachs. Adrianne Shapira - Goldman Sachs: Doug, could you revisit your previous comments that you leverage expenses on a 4% to 5% comp? We understand that's on an annual basis, but could you, perhaps, drill down on the 20 basis points or so higher core underlying pressures we saw in the quarter? Was that a little bit higher than you would have expected given the 5.1% comp in the quarter?

Yes, it was a little bit higher than we would have expected, and by way of explanation -- Adrianne, could you turn off your speakerphone, please? Adrianne Shapira - Goldman Sachs: Sure. Sorry.

By way of explanation, the single biggest driver in that category is store payroll. Store payroll is an item that is very difficult to control to the same percent of sales when units per transaction are such a key driver in our comps. So the comp is in line with that figure that you're using for the guidance, but the mix of that comp is a very important thing as it relates to our expenses. Adrianne Shapira - Goldman Sachs: Okay. That's helpful. Thank you. And then my second question, perhaps, Gregg, talk about the mark-down pressures. It sounds as if it was pretty much contained to the home category, and perhaps specifically on Global Bazaar. If that's in fact the case, could you give us the verdict on Global Bazaar for next year? If you are revisiting the category what are the key take-aways from this past year's experience that could perhaps could improve next years?

Sure the mark-down issue was primarily in home decor. It was split between both the Global Bazaar performance, and our performance in home in general has been softer than we would like. The take-aways as it relates to Global Bazaar, is we upscaled too far this particular point in time, and some of the learnings that we're going to apply to next year, are we're going to be bringing those price points down; we're going to focus more on some classification dominance and we're going to make the kind of changes that are going to stimulate impulse buying and people not waiting for the assortment to go on sale. Adrianne Shapira - Goldman Sachs: Thank you.

Your next question comes from the line of Gregory Melich of Morgan Stanley. Gregory Melich - Morgan Stanley: Doug, you mentioned that for the full year you still expect EBIT margins to approximately be flat. Does that include credit or is that focusing on the retail business?

Clearly credit is included in our business outlook, but I would think that my comment was generally flat if not wider, so I think the credit business contribution to EBIT, among other things is a key function of interest rate changes. I do not mean to be implying that I expect any meaningful decline in retail EBIT margins. Gregory Melich - Morgan Stanley: But when you say for the full year that EBIT margins will approximate last year, that would implicitly include credit?

Yes, it would explicitly include credit, but one key point here, this is a 53-week fiscal year for us. That 53rd week does not effect EPS very much one side or the other, but it is a sharply lower EBIT margin week; so the 53rd week alone will pressure reported annual retail EBIT margins, even though I don't think that's very useful analytically. Gregory Melich - Morgan Stanley: Gregg, you mentioned the expansion to the 34 sides of food in the new and remodeled stores. Can you just give us an update as to how many stores are up to that and what the average sides of food there are in the rest of the store base?

Yes, we have very few general merchandise stores today that have 34 sides of food. With the introduction of our P-2004 prototypes, and subsequent remodels, and right sizing, those stores were getting approximately 24 to 26 sides of expanded food, and as we now remodel and introduce new stores going forward, we will be expanding our presence in food. So at total time, if you take a look at where the chain is as it relates to the 24-sided food presence, we have approximately 650 stores today that are close to that or have that expanded food presence, and by the end of this year, that number will be closer to 950 stores. We'll have approximately 20 to 24 sides of food, and maybe we will have in the neighborhood of 50 to 75 stores that might have up to 34 sides. Gregory Melich - Morgan Stanley: Great. Thanks a lot.

You're welcome.

Your next question comes from Charles Grom of JP Morgan. Charles Grom - JP Morgan: In the past you've highlighted superstore square footage growth of about 25% to 30%, but it looks like the mix this year is only going to be about 21% to 23%. Two questions. One, is our math correct? And two, could you speak to the returns of the two formats today versus five to six years ago when you started the rollout?

Yes, your math is sound. That's not a growth rate that's an objective of ours, but just simply kind of an outcome of the single individual prototype decisions we make. Year-over-year, square footage and general merchandise stores is up 6.8% in the quarter, SuperTarget stores 12.8%. Probably a more useful way to look at that is across time, across rolling quarters, generally speaking, our SuperTarget square footage growth will remain nearly double general merchandise square footage growth. Today, looking at the same age of general merchandise, and SuperTarget store, looking at each of the cohorts of stores that we've built over the last one, two, three, four years, our return profile is very similar. SuperTarget generally enjoys a favorable sales to asset turnover ratio compared to our general merchandise stores, and in terms of ROIC, typically that is offset by the slightly lower return on sales generated out of a SuperTarget store. Charles Grom - JP Morgan: Great. Second question, shifting gears, Gregg, could you speak a little bit more towards what you're going to be doing to stimulate sales in the furniture and home decor area? Also, why you think the sales at Target have been weak? Is it something specific at your company or is it something more macro? I know we've seen the space very weak for several years now. Thank you.

The home business has not been really weak for several years. It really started to soften up the middle of last year. We actually have parts of our home business that are performing very well. Our bath business is very well. Our housewares business is performing very well. Our stationary business is performing. So it's really a mixed bag right now, and we're working hard on those portions of the business that aren't performing well. Primarily we're focused on decorative accessories and our bedding business. We are making assortment changes, mix changes, pricing changes to try and stimulate that business and get those businesses back on track.

Your next question comes from Neil Currie with UBS. Neil Currie - UBS: Thanks a lot. On the 34 sides of food that you're putting into the newer remodeled stores that is higher than 24, where are the incremental products coming from? Are you actually putting some fresh food now into the store like a small selection of produce and meats?

We are expanding primarily the assortment that we have today, so we're expanding our assortment of dry grocery, refrigerated, and frozen. For example, in our 24-sided store we have 38 cases of frozen and refrigerated product. In a 34-sided store that would be expanded to approximately 96. So we are just adding more assortment in dairy, dry, and frozen. We are not introducing any fresh product into these stores, so it's an expansion of the current assortment, expansion of our private brand, expansion of some of the national brands that we're not able to carry due to the limited space in the 24-sided store. Neil Currie - UBS: Thanks. Will you go back into the stores that have been remodeled to 24 sides and up them to 34, or will you wait until the remainder of the store base has been remodeled?

It's unlikely that we will go back into those existing stores. We're very confident that our 24-sided store has the right kind of critical mass to offer our guests their fill-in grocery items and drive traffic to the stores. So this is a going forward strategy only at this particular time, and we'll evaluate it to see at what point in time it will make sense to go back and remodel stores but it's unlikely that we'll go back to the 24-sided stores. Neil Currie - UBS: Thanks. My understanding is that initially the remodels drive higher ticket, because people who are visiting the store put more in the basket, but then ultimately the drive in traffic comes a bit later. Is that the experience across all the stores, or is it just a few stores that I visited?

Well, I'm not sure where you're getting your information from but over time we know that the basket, the frequency of visits is going to continue to drive the performance in those stores. Neil Currie - UBS: Okay. Thanks.

Your next question comes from the line of Christine Augustine with Bear Stearns. Christine Augustine - Bear Stearns: Thank you. Doug or Gregg, could you please discuss where food inflation trends are this year as compared to where you were last year? Are there any other details that you can share with us on the new prototype that you're introducing in Atlanta this July? Thank you.

It's very, very difficult for us to track any inflation at an ongoing basis in any category, whether it's food or home, and as you know, at one point in time and year at the end of October we're able to give you a range throughout the store whether we're in an inflationary or deflationary environment. Having said that, we continue to experience cost pressures in food and other health and beauty aids and hard lines categories. But it's almost impossible to try and quantify that for you in terms of, what does this mean in terms of inflation, specifically. The SuperTarget that we are opening in Acworth, Georgia is our standard SuperTarget format that we have introduced as of last year so there's really no new changes to that SuperTarget that you haven't already seen in existing SuperTargets that have opened in the latter part of last year and the early part of this year. Christine Augustine - Bear Stearns: If I may just ask you a follow-up on the cost pressures then, are you still finding that you are able to pass through the increases?

Again, it's marketplace determined. We operate in a very, very competitive marketplace, and it's like anything. Some of the increases that we get we're able to pass on. Others do not get passed on. It's really an item-by-item, store by store, market by market issue as it relates to whether these are accepted into that market or not. Christine Augustine - Bear Stearns: Thank you.

There certainly isn't any adverse impact on our gross margin rate that we've experienced so far related to that set of issues. Christine Augustine - Bear Stearns: Thank you very much.

Your next question is from Michael Exstein with Credit Suisse. Michael Exstein - Credit Suisse: Good morning, everyone. While some of the changes in SG&A may not have been a surprise to you, they were a surprise us. Can you sort of give us a hint as to whether there were any one-time items that may impact specific quarters going forward, so we have some idea of that going forward? Specifically what is the depreciation run rate post this adjustment going forward? Finally, what's the outlook in terms of really estate, opportunistic real estate? Thank you.

Michael, the best I can do for you is to repeat the comment that I made earlier. On balance I think that more likely than not expenses will grow somewhat faster than sales in Q2 and Q3 and I expect that trend to reverse in Q4 and for the full year, stir all that together, expenses likely up slightly as a percent of sales. On the depreciation question, absent this disclosed $28 million figure, our run rate in the quarter looks a lot like the last several quarters, and will look a lot like the next several as well. So you can just simply take this single $28 million issue and analyze around it, and there really isn't a lot of volatility at all in our depreciation rate. And I'm afraid you'll have to repeat your third question. Michael Exstein - Credit Suisse: It has to do with opportunistic real estate and what you're seeing out there or what you're not seeing out there.

Today we continue to fill our pipeline one transaction at a time with high quality real estate that should add up to about a net 8% growth in square footage. We'll construct more or less 9% and close or relocate, mainly relocate, stores equal to about 1% of our beginning of year square footage. Today we have not seen anything particularly meaningful in blocks of real estate that would be suitable for our purposes at price that are attractive. Michael Exstein - Credit Suisse: Thanks a lot.

Your next question is from Teresa Donahue with Neuberger Berman. Teresa Donahue - Neuberger Berman: Good morning, guys. A follow-up to Michael on SG&A. It made for an exciting morning. The IT indications on the services provided to Mervyn's, is that a function of the runoff, or is it just the timing of the quarter? Then I have a quick question on credit and the aftermath of the new bankruptcy legislation.

We are cycling a period last year in which our income, or contra expense, was higher than it was for the rest of the year. We'll be cycling lower amounts of income for the balance of this year. If all goes as expected, our relationship in terms of supplying those kinds of support will wind down later this year. Teresa Donahue - Neuberger Berman: So in '07, you wouldn't expect to have any contribution from this? The agreements over? Is that fair to say?

Correct. Teresa Donahue - Neuberger Berman: In terms of credit, the aftermath of the bankruptcy legislation, could you give us dumb retail analysts some sense of how that winds down? In terms of to the extent there may have been some front-loading of bankruptcies and an acceleration post this legislation? How many more quarters should we expect to see the benefit from that?

Clearly we anticipate at least one more quarter of very meaningful benefit. Essentially it cleared out the pipeline. It accelerated to last fall some bankruptcies that otherwise might have occurred during the current time. In addition, it accelerated to bankruptcy write-off last fall for accounts that would have likely gone through our various aged categories to an aged write-off circumstance. So both aged write-offs and bankruptcy-related write-offs are unnaturally and likely unsustainably, low favorable today. The degree of that benefit will begin to lessen as the year goes on, and the more dominant feature that will flow into our credit card financials will be the write-offs associated with accounts that got caught up in this mandated increase in minimum payments. Teresa Donahue - Neuberger Berman: Thanks, Doug.

Your next question comes from the line of Dan Binder of Buckingham Research. Dan Binder - Buckingham Research: My question pertains to the work you're doing on consumer electronics. I was just wondering beyond expanding the TV assortment if you'd give us any more detail in terms of what you're doing either on the product side and/or warranty, service, installation, anything you might be testing there.

Well, it's broadly speaking, we are introducing more digital products throughout the entire consumer electronics area. We will be introducing chain-wide post-paid cellular phone service coming this fall. As you know, there's new video game platforms that are going to be introduced in the November timeframe. Overall it's a very exciting time. There are a lot of new product introductions, a lot of category expansions and we believe it's going to be a good year in electronics this year. Teresa Donahue - Neuberger Berman: Are you doing anything in terms of offering any kind of installation on those new technology TVs or delivery, warranties, anything like that?

At this time we are not planning on introducing any installation, any delivery, and at the appropriate time if we were to get into that business we certainly would share that with you but we don't have any plans to do that at this time.

Your last question comes from the line of Todd Slater with Lazard Capital Markets. Todd Slater - Lazard Capital Market: Thanks very much. My question is relative to your mid-teens earnings outlook for the year. Just wondering what we should expect in terms of the composition of the growth between retail earnings growth and credit growth. Looks like credit growth up 50%, non-credit up 4% in the quarter, so I'm just wondering how you see that looking going forward? Also maybe if you could just look at the operating earnings growth versus the non-operating. So how much from operating versus how much from lower tax rate, buybacks, things of that nature.

For the quarter, EBIT grew in line with sales. You're correct that there was a very, very sharp positive contribution to that growth rate from credit cards and a much, much lower than sales growth rate, growth nonetheless in the contribution from the rest of our business. I think those two numerical relationships are useful looking forward, but both of those trends will tend to migrate toward the mean. I expect our retail EBIT, if you will, to increase more in line with sales as the year progresses, and I expect the year-over-year profit growth in our credit card operations for the reasons I outlined earlier will tend to slow down, particularly in the back half of the year. I don't generally think about operating and non-operating, but specifically on income taxes, as we have indicated earlier, I expect an effective income tax rate for the full year to lie in the range of 38.0% to 38.5%, and that would represent an increase from last year. So on balance, I would expect to achieve that mid-teens growth purely from operations as it relates to income taxes that will likely be a year-over-year drag. Share repurchase is what it is to the extent that it has an effect on EPS, it is beneficial, and it is very, very heavily concentrated in the fourth quarter, because of the seasonal dynamics of our earnings. On balance, we just finished a quarter where despite some challenges that we faced, looking back across time, against other non-holiday quarters, we just set all-time records in sales, in revenue, in EBITDA, in EBIT, or earnings before interest and taxes, in EBT and net income and EPS. Clearly I understand that the mix of those components isn't what we might have envisioned at the beginning of the quarter, but again on balance these results give me even greater confidence in our ability to generate a mid-teens earnings growth rate measured in EPS for the full year in 2006. Bob, do you have any final comments?

Are there any more questions?

No, sir, there are no further questions at this time.

Well then, that concludes our first quarter earnings conference call. Thank you all for your participation.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.