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.

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."

OFF TARGET

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.