UPDATE 3-Home Depot beats estimates, sees weakness into '09

(Adds company comments, analyst, updates shares)

By Karen Jacobs

ATLANTA, Aug 19 (Reuters) - Home Depot Inc (HD.N), the world's largest home improvement retailer, posted a higher-than-expected quarterly profit on Tuesday but projected weakness for its sector into 2009 from the U.S. housing slump.

The company, whose shares fell 3 percent, said it still expects full-year profit to drop about 24 percent this year.

"Home Depot and (rival) Lowe's saw benefit from better weather this quarter and stimulus checks," said Morgan Keegan analyst Laura Champine. "That's one-time, so I think they are being suitably cautious given the macro pressures."

The second quarter is typically one of the strongest for home improvement retailing as consumers spruce up their houses in warmer weather. This year, U.S. tax rebate checks also provided a boost.

On Monday, smaller rival Lowe's Cos (LOW.N) posted higher-than-expected quarterly results but forecast third-quarter profit that trailed Wall Street estimates.

Analysts cited better expense control and improved gross margin from Home Depot, which has closed unprofitable stores and cut jobs in some areas like human resources. Champine raised her rating on the stock to "market perform" from "underperform," citing an increase in cash generation.

The crumbling U.S. housing market has compounded troubles as consumers also face higher food and gasoline costs. Home Depot's second quarter marked its eighth-straight quarterly profit decline, hurt by weakness in big-ticket renovations.

"Because there's just so much uncertainty out there including things like credit availability..., we think things will stay weak into the first part of 2009," Chief Financial Officer Carol Tome said.

Net earnings fell 24 percent to $1.2 billion, or 71 cents a share, in the quarter ended on Aug. 3, from $1.59 billion, or 81 cents a share, a year earlier. Analysts had expected earnings of 61 cents a share, according to Reuters Estimates.

Sales fell 5 percent to about $21 billion, but were better than the $20.58 billion analysts expected. Sales at stores open at least a year fell 7.9 percent. The average purchase fell 1.2 percent to $57.58.

SCALING BACK STORE GROWTH

The retailer said it has bolstered customer service, eliminated margin-eroding promotions and added more lower-cost goods to draw customers. It estimated the U.S. government stimulus checks added $300 million in sales.

"Garden made up about 20 percent of our sales in the second quarter, but we certainly saw a shift to the repair side of the business," Tome said. Plumbing products were the best-performing category in the quarter, she added.

Last year, Home Depot sold its supply unit that distributed building materials and used the proceeds to buy back stock. This year, it has scaled back store growth, cut headquarters and human resource jobs and redirected savings from those moves to store maintenance and staffing.