Home Depot profit falls, but beats Wall St. view

ATLANTA (Reuters) - Home Depot Inc reported a higher-than-expected quarterly profit on Tuesday as it reduced price markdowns in the face of lower sales and a weak economy, sending its shares up as much as 7 percent.

The world's largest home improvement retailer said it expected a steeper drop in full-year sales as the U.S. housing slump and difficult economic conditions hurt demand.

"This company continues to perform well in a challenging environment," said Stephanie Hoff, senior retail analyst with Edward Jones. "Home Depot was able to demonstrate great inventory control."

On Monday, rival Lowe's Cos Inc topped earnings expectations as demand for hurricane-related goods and outdoor products helped offset weakness in big-ticket sales. On Tuesday, Lowe's shares rose as much as 2.6 percent before turning lower along with the overall market in early afternoon trading.

Home Depot and Lowe's have posted quarterly profit declines for more than a year as falling home values and tighter credit led consumers to put off pricey projects such as kitchen remodels.

But sales of some basic repair goods have held up as consumers maintain their homes. Home Depot said on Tuesday that a new program offering lower prices on more than 1,000 items helped increase transactions at the end of the quarter.

"While other retailers are just experiencing a downturn in 2008, Home Depot and Lowe's have experienced it since 2006," Hoff said. "It's only going to take stabilization in the housing market for sales to start to improve."

Both companies have been cautious on pinpointing when a U.S. housing recovery could begin. On Monday, Lowe's Chief Executive Robert Niblock told Reuters a rebound was not likely to occur until 2010, based on economic forecasts.

BETTER MARGINS

At Home Depot, earnings fell 31 percent to $756 million, or 45 cents a share, for the third quarter ended November 2, down from $1.1 billion, or 60 cents a share, a year earlier.

Analysts had expected 39 cents a share, according to Reuters Estimates.

Sales fell 6 percent to $17.8 billion. Sales at stores open at least a year, an important retail measure, fell 8.3 percent.

"Being able to achieve expectations in this environment is no small feat," Credit Suisse analyst Gary Balter said in a research note. "Hardline retail stocks have historically begun their recoveries when expectations began to be achieved, and this may be happening for Home Depot and Lowe's."

Home Depot said gross margin improved to 33.7 percent from 33.4 percent, reflecting fewer markdowns.

As housing has weakened, Home Depot has also closed unprofitable stores and pared jobs in areas such as human resources and redirected the savings to store maintenance, staffing and other improvements.

"I believe we have better execution in our business -- across merchandising, operations, supply chain and our supporting functions -- than we have had in quite a while," Home Depot Chief Executive Frank Blake said on a conference call.

The Atlanta retailer said it now expects total sales to fall as much as 8 percent this year, steeper than the 5 percent drop it had forecast in August. It said it still expected per-share profit from continuing operations to decrease about 24 percent this year.

Home Depot rose as high as $21.42, before paring gains to 35 cents at $20.35 on the New York Stock Exchange early Tuesday afternoon. Lowe's fell 17 cents to $18.82, also on the NYSE.

Home Depot's stock, a component of the Dow Jones Industrial Average, has fallen 21 percent this year, while Lowe's is down 16 percent.

(Reporting by Karen Jacobs; Editing by Lisa Von Ahn, Dave Zimmerman, Richard Chang)