Target Corp reported a better-than-expected profit on Wednesday as the No. 2 U.S. discount retailer offset sluggish sales by keeping a tight control on inventory and expenses, while its credit card business was profitable.

The retailer said it was seeing strong increases in sales of food and commodity categories at its stores open at least a year -- a trend also happening at BJ's Wholesale Club , which posted a higher-than-expected quarterly profit and raised its full-year earnings forecast.

Cash-strapped consumers have been seeking out lower-priced retailers during the recession for everyday products like food, toilet paper and soap.

The results come as Target, which is locked in a proxy battle with hedge fund manager William Ackman, has increased its focus on necessities. It is also emphasizing the Pay Less side of its Expect More. Pay Less tagline to draw in shoppers, who are no longer splurging on its trendy clothes and home decor.

The earnings release reaffirms our view that Target has reached a positive inflection point in its business -- both in the retail and credit card operations, wrote William Blair & Co analyst Mark Miller in a research note.

He said Target's results suggest that the proxy contest with Ackman has driven heightened management focus on driving near-term financial performance.

The company's shares were up 4 percent at $43.62 in morning trading on the New York Stock Exchange.

PROFIT DROPS AT TARGET

Target said profit fell to $522 million, or 69 cents per share for its fiscal first quarter ended May 2, from $602 million, or 74 cents per share, a year earlier.

Analysts, on average, had been expecting it to earn 60 cents per share, according to Reuters Estimates.

Sales edged up to $14.4 billion from $14.3 billion, but sales at its stores open at least a year, or comparable store sales, fell 3.7 percent.

The latest figures mark Target's seventh consecutive drop in quarterly profit and come as shoppers stick to buying basics instead of splurging on the trendy clothes or furniture that account for roughly 40 percent of the company's sales.

To improve its sales, Target is trying to change the perception among shoppers that it charges more than Wal-Mart Stores Inc . It is also keeping a close eye on inventory and has cut jobs to lower expenses as sales falter.

Its credit card segment reported a profit of $39 million, down from $181 million last year. But the results marked an improvement from the pretax loss of $135 million it reported in the fourth-quarter.

BJ'S POSTS HIGHER PROFIT

BJ's, the No. 3 U.S. warehouse club operator, said net profit rose to $24.3 million, or 45 cents per share, for the fiscal first quarter ended May 2, from $17.2 million, or 29 cents per share, a year earlier.

Analysts had expected a profit of 43 cents a share.

This environment has played directly in to BJ's strength -- a low-price focus, consumers searching for value, said Christian Andreach, a managing director at money management firm Manning & Napier Advisors.

But BJ's shares fell 2 percent to $37.32, and Andreach attributed the declined to investors having come to expect strong results from the retailer.

Sales rose 0.2 percent to $2.26 billion.

BJ's had raised its first-quarter earnings forecast earlier this month, citing higher-than-expected merchandise sales and margins. It forecast earnings of 41 cents to 45 cents a share, up from a prior forecast of 29 cents to 33 cents a share.

Warehouse clubs like BJ's, Costco Wholesale Corp and Wal-Mart's Sam's Club have been appealing to shoppers who want discounts on staples such as groceries and toiletries. But they are facing greater challenges compared with a year ago when high gas prices drove sales at their fuel stations.

While BJ's overall sales rose in the first quarter, sales at clubs open at least one year fell 1.5 percent, including a 9 percent hit from gasoline sales.

On Wednesday, BJ's raised its per-share outlook for the full year ending January 30, 2010, to $2.44 to $2.54. That is up from an already raised forecast of $2.42 to $2.52, which BJ's issued earlier in May.

(Additional reporting by Aarthi Sivaraman in New York, editing by Dave Zimmerman)

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