Target, Saks expect weak sales climate for year

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 8 percent 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 66 percent profit compared with first-quarter results hobbled by onetime charges a year ago, but said that heavy discounting hurt profit margins.

Shares of Target slipped 63 cents, or 1.2 percent, to $54.29, though results beat Wall Street estimates. Saks' shares tumbled 93 cents, or 6.6 percent, to $13.20 as results missed analysts' projections. Saks also forecast that operating profit margins will remain relatively unchanged from 2007.

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.

Target's President and Chief Executive Gregg Steinhafel told investors in a conference call 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 $107 billion 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. They're looking for more sale merchandise, and we are responding," 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.

Target reported a profit of $602 million, or 74 cents per share, in the three months ended May 3, down from $651 million, or 75 cents per share, during the same period last year. Analysts surveyed by Thomson Financial expected 71 cents per share.

Minneapolis-based Target said revenue rose 5 percent to $14.8 billion from $14 billion. Analysts predicted $14.92 billion.

The company said profit margins declined slightly from last year because sales grew faster in low-margin categories, which generally includes food and essentials like paper towels. And Steinhafel said shoppers are increasingly buying replacement pillows and sheets rather than a whole new set. In its lawn and patio items, consumers are buying new seat cushions rather than all-new lawn furniture.

Sales at established stores fell 0.7 percent. Retail profits not counting interest and taxes fell 2 percent to $959 million.

Chief Financial Officer Doug Scovanner said for the full year that the analysts' consensus of $3.47 "lies within a reasonable range" but that they expect the second quarter to be "somewhat softer" than the consensus of 79 cents.

"Our topline growth will likely remain sluggish until we see some stability or improvement in the economic environment," 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.

Revenues rose to $862.35 million compared with $792.75 million in the year-ago period. Same-store sales, rose 8.4 percent.

Analysts surveyed by Thomson Financial expected higher profits of 17 cents per share in the latest period on lower revenue of $841 million. The estimates typically exclude one-time items.

Stephen I. Sadove, chairman and CEO of Saks, expects that the retailer's profit margin will remain relatively unchanged compared with 2007. The company increased discounting for the period, including a more extensive Friends & Family sales event. Such moves depressed gross margins in the first quarter to 38.2 percent from 41.4 percent in the year-ago period.

Sadove told investors that the stores' performance is more tied to confidence in the financial markets. "I do believe that we're in a rough economic period right now. The consumer is operating as if we are in a recession, whether we're technically in one or not."

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AP Business Writers Josh Freed in Minneapolis and Harry R. Weber in Atlanta contributed to this story