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Home Depot, Target results show retail gloom

NEW YORK (Reuters) - Two of the largest U.S. retailers said on Tuesday that the weak U.S. economy and battered housing industry were discouraging cash-strapped consumers from making anything more than basic purchases.
/ Source: Reuters

NEW YORK (Reuters) - Two of the largest U.S. retailers said on Tuesday that the weak U.S. economy and battered housing industry were discouraging cash-strapped consumers from making anything more than basic purchases.

Leading home improvement retailer Home Depot Inc and No. 2 discounter Target Corp both reported lower earnings, and warned that results for the rest of the year would be sluggish.

"As gas and food prices continue to rise and housing market slows, consumers are facing increased financial pressure and reducing their spending, especially in discretionary categories," Target Chief Executive Gregg Steinhafel said on a call with analysts.

Home Depot shares fell 4.6 percent to $27.53 while Target slipped 0.5 percent to $54.70.

The overall stock market was also battered by fears that retail would continue to struggle for the remainder of the year, with oil prices at record-high levels of about $130 a barrel, food costs rising and home values falling.

While Target and Home Depot have different business models, the weakness in consumer spending is widespread.

Upscale department store owner Saks Inc was also downbeat about prospects for the rest of this year.

"I do believe that we're in a rough economic period right now," Saks Chief Executive Stephen Sadove said. "The consumer is operating as if we are in a recession, whether we're technically in one or not."


Target reported a 7.5 percent drop in quarterly profit as shoppers passed over clothes and jewelry in favor of basics like food.

The No. 2 U.S. discount chain behind Wal-Mart Stores said profit was $602 million, or 74 cents per share, for its fiscal first quarter ended May 3, down from $651 million, or 75 cents per share, a year earlier.

Analysts, on average, had been expecting earnings of 71 cents per share, according to Reuters Estimates.

"It paints to me a picture of a company that is feeling the stresses and strains of the economic environment," said Matthew Kaufler, portfolio manager at Touchstone Value Opportunities Fund.

Sales, excluding credit card revenue, rose 5 percent to $14.3 billion, boosted by new stores openings.

But sales at stores open at least a year, a key retail gauge known as same-store sales, fell 0.7 percent.

Target said the first-quarter gross margin rate declined from last year, driven by faster sales growth in lower-margin merchandise.

The company, which has been under pressure from activist investor William Ackman to boost its stock price, said earlier this month that it would sell a 47 percent interest in its credit card business to JPMorgan Chase.


Home Depot said its profit fell 66 percent as the housing meltdown hurt sales. It also took a charge to close stores and curb expansion plans.

Net income fell to $356 million, or 21 cents a share, in the first quarter ended May 4, from $1.05 billion, or 53 cents a share, a year earlier.

Results included a charge of $543 million to close 15 underperforming U.S. stores and scrap plans to open 50 stores that had been in the company's pipeline.

Excluding the charge, profit was 41 cents a share, compared with the average forecast of 37 cents.

Sales fell 3.4 percent to $17.9 billion, topping estimates of $17.63 billion. Sales at stores open at least a year fell 6.5 percent.

"The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country," Home Depot Chairman Frank Blake said in a statement.

Smaller rival Lowe's Cos said on Monday that first-quarter profit fell 18 percent, while total sales slid 1.3 percent. It also cut its full-year earnings forecast.

The Home Depot results "corroborate assessments from Lowe's results yesterday -- the sector is bumping along the bottom, lagging housing turnover by several months," Goldman Sachs analyst Matthew Fassler said in a note.

In a call with analysts, Chief Financial Officer Carol Tome said the Home Depot expected further tough quarters ahead.

She also said a planned $22.5 billion share buyback, or recapitalization, program was still "on pause" as the company awaitsr stability in its business and the credit markets.

"It's really hard to judge what's going to happen based upon this quarter because it was about as bad as you can get in terms of the environment and a low point," said Sarah Henry, analyst with MFC Global Investment Management.

(Reporting by Nicole Maestri, Martinne Geller, Karen Jacobs and Aarthi Sivaraman)