Shoppers' caution cuts into retailers' profits

For U.S. retailers, the phrase “challenging environment” has become a shared refrain for one of the toughest quarters in decades. And merchants expect the climate to remain rough for the rest of the year as higher gas and food costs as well as slumping home prices weigh on shoppers.

Discount retailer Target Corp. reported Tuesday that first-quarter earnings fell 8percent on weaker-than-expected sales, particularly of non-necessities like lawn furniture. Meanwhile, Saks Inc., the operator of luxury chain Saks Fifth Avenue, posted a 66percent gain compared with first-quarter results hobbled by onetime charges a year ago, but said that heavy discounting hurt profit margins.

The weak housing market is pummeling the home improvement chains, including The Home Depot Inc., which reported a 66 percent drop in first-quarter profit on Tuesday. A one-time charge also dragged down profits. On Monday, rival Lowe's Corp. reported a nearly 18 percent decline in first-quarter earnings and reduced its profit outlook for the year.

“We certainly see – on the general market side – more risks than opportunities through the remainder of the year,” Home Depot chief executive Frank Blake told analysts Tuesday.

The Atlanta-based company said it earned $356 million, or 21cents a share, in the three months ending May 4, compared with a profit of $1.05billion, or 53 cents a share, a year earlier.

Excluding the one-time charge, Home Depot said it earned $697 million, or 41 cents a share.

Analysts were expecting earnings of 37 cents a share excluding one-time items.

Gregg Steinhafel, Target's president and chief executive, told investors Tuesday that the discounter is stressing its sale prices more in its advertising, especially the 50 million newspaper circulars it puts out, to grab a bigger share of the $107billion in tax stimulus checks being distributed now to American households.

“We're just very mindful that the consumer is very cash-strapped right now and is looking for good values,” he said.

Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass., expects that stimulus checks won't provide merchants with a big lift, and said he wonders where the impetus lies for a consumer spending rebound.

“Everyone is very deal conscious, even if you are relatively affluent,” he said.

Saks earned $18.27 million, or 13 cents per share, for the three months ended May 3. That compares with $11.04 million, or 7 cents per share, in the year-ago period. The year-ago period included 12 cents per share in one-time charges.

Stephen Sadove, chairman and CEO of Saks, expects that the retailer's profit margin will remain relatively unchanged compared with 2007.

“The consumer is operating as if we are in a recession, whether we're technically in one or not,” Sadove told investors Tuesday. Bloomberg News contributed to this report.