Despite improved sales reported by the real industry for May, the chairman of Washington's Woodward & Lothrop Inc. said business probably will remain sluggish unless the economy improves.

"I believe this year business will remain difficult until consumer confidence is restored," Edwin K. Hoffman told stockholders of the department store chain at their annual meeting yesterday.

Besides the general economic downturn, "serious" inventory shortages and "all-time-high" local unemployment are the major factors contributing to a decline in profits and weak sales, Hoffman said. "The tougher the economy, the more merchandise we lose."

Woodies recently reported that profits for the first quarter fell almost 80 percent and that sales rose only 4.6 percent.

Although weak sales have been felt throughout the company, Hoffman called special attention to Woodies' first Baltimore store, which he said "has not met its planned sales figures."

Hoffman blamed high unemployment in the Baltimore area but said Woodies anticipates improvement in that store's performance.

Overall, the retail industry has been "plagued" by the high cost of money, Hoffman said. Interest expense alone reduced pretax earnings by $2 million last year, he added.

"This is a tough economy to do business in," Hoffman said.

Based on key measurements of performance in the past, Woodies usually ranked high among the top 25 retailers. However, the latest rankings put Woodies 19th in sales volume, 15th in net income, 9th in profit margin and 13th in return on equity.

"I sincerely believe we will improve comparatively over the next few years," Hoffman said.

Meanwhile, Woodies' sales increased 7 percent in May, but Hoffman said he isn't very optimistic about the May figures. The retail business has to be "stimulated" and retailers "have to fight to get the business" they need, he said.

Despite first-quarter results, he told stockholders that Woodies has reversed the downward trend of the previous year, but conceded "we still have not reached the earnings figures of 1977 and 1978."

In an interview after the meeting, Hoffman said Woodies is in "a very good financial condition."

He totally dismissed recurring rumors that Woodies may be considering a merger with a larger retail company. "There's absolutely not a thing in the world occurring," he declared.

That doesn't mean that someone won't make an offer to buy the company, one of the few independent department store operators in the nation, Hoffman added.

During the meeting, a stockholder suggested that Woodies no longer enjoys the same status in the market as it once did and that it should seek a friendly takeover by a larger company. "I won't even comment on your last remark," retorted Hoffman, clearly angered by the question.

Hoffman grew further irritated at the persistent questioning of a stockholder who complained that Woodies' executives continue to receive high salaries while the company is cutting back in other areas, including the work force.

"This company is in trouble, and if the economy gets worse, we're going to die," warned James I. Black.

"I've got a hunch that at year end we'll still be in business," Hoffman said, after making it clear that there are no plans to reduce officers' salaries.

As chairman and chief executive officer, Hoffman received $359,842 in salary and bonuses last year. Woodies' President David P. Mullen received $237,473, and Vice Chairman Robert J. Mulligan received $208,295.