Retailers could face tough times

By Anne D’Innocenzio

Published: August 20, 2008

NEW YORK — From affluent shoppers at Saks to bargain-hunters at Target, from Home Depot to office supplier Staples, consumers are pulling back and that's hurting retailers and raising more concerns about how they'll do the rest of the year.

The latest round of second-quarter reports show more signs of financial stress on shoppers, as Target's customers stick to necessities and have trouble making their credit card payments. Saks says it's now seeing its high-end designer consumer cut back, whereas previously it was only the aspirational customers who were the ones retrenching.

And while falling gas prices in recent weeks should provide some relief to consumers, economists say that won't be enough to offset all the other economic problems out there, from a housing slump and a weakening job market to soaring food prices and tighter credit.

"It's a small positive, but you still have all the other negatives,” said Carl Steidtmann, chief economist at Deloitte Research. He predicted that retailers are facing "tough” back-to-school and holiday seasons.

Investors weren't pleased with the latest reports, either, sending retail stocks down along with the broader market. Home Depot's shares fell more than 2 percent, while Staples' dropped more than 5 percent and Saks' stock tumbled more than 10 percent.

The increasing frugality among consumers is challenging even Target's forte in cheap chic. The discounter, whose performance has been lagging behind Walmart Stores Inc., the king of consumables, reported a 7.6 percent drop in profit as its customers focused on necessities such as food and paper towels.

"The customer is very cash-strapped right now and in some ways, our greatest strength (has) become somewhat of a challenge,” Target's President and Chief Executive Gregg Steinhafel told investors during a conference call. "During these tough times, some of our consumers don't want to be tempted as much as they have in the past.”

Home Depot, the nation's largest home improvement retailer, saw its profit drop 24 percent and reiterated its weak outlook for the year. Still, the results weren't as bad as Wall Street expected and the retailer benefited from a return of do-it-yourselfers, lulled by warmer weather and the government stimulus checks.

Saks, meanwhile, reported a wider-than-expected loss for the second quarter and forecast weak same-store sales growth in the second half. Same-store sales are an important retail measure that gauges sales at stores opened at least a year.

Staples Inc., which is set to post final second-quarter results Sept. 3, warned that results, excluding its acquisition of Corporate Express, would be softer than anticipated, dragged down by lower customer traffic and smaller orders.

At Home Depot, executives said one bright spot was basic repair jobs that are shoppers are undertaking, even as bigger-ticket purchases continue to fall.

Net income for the three months ended Aug. 3 fell to $1.2 billion from $1.59 billion a year earlier. Revenue slid 5.4 percent to $21 billion, and same-store sales fell 7.9 percent.

Home Depot said it expects earnings per share from continuing operations to drop 24 percent for the year. It had said in May that it felt "more comfortable” that it would meet the low end of its full-year guidance for a drop of 19 percent to 24 percent in earnings per share.

Target said it earned $634 million for the three months ended Aug. 2, down from $686 million a year earlier. Sales grew 5.7 percent to $15 billion, while same-store sales slipped 0.4 percent.

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