NEW YORK (CNN/Money) - Shares of Home Depot fell to their lowest level in nearly five years Friday afternoon after the No. 1 home improvement retailer cut its profit and sales outlook because of a disappointing December.

Atlanta-based Home Depot said it now expects a profit of $1.53-to-$1.55 a share in the fiscal year ending Feb. 2, down from an earlier forecast of $1.57 a share.

The news, released after the closing bell Thursday, brought more pain to last year's worst-performing stock in the Dow Jones industrial average. Shares of Home Depot Friday tumbled $3.50, or 14 percent, to $21.38, their lowest level since February, 1998.

Losses spread to rival Lowe's (LOW: Research, Estimates), even though the No. 2 home improvement chain late Thursday said quarterly and full-year results would meet targets.

"We've spoken about the risks to the Home Depot story for some time now and continue to believe one of the biggest challenges the company faces is the onslaught by Lowe's in many key markets where Home Depot once faced little competition," Doug Neviera, who covers the company for Merrill Lynch, told clients.

Home Depot (HD: Research, Estimates), which blamed slowing sales during the month of December, also said fourth-quarter sales at stores open at least a year are expected to fall as much as 10 percent, versus previous guidance of a 3 percent-to-5 percent drop.

In a statement, Bob Nardelli, Home Depot's CEO, said "lower- than-expected performance in traditional gift categories like hardware and power tools severely impacted December results."

He said Home Depot will be spending less on marketing and expects a "challenging environment well into the next fiscal year."

Analysts surveyed by First Call expected Home Depot to post a profit of 31 cents a share for its fourth quarter and $1.57 for fiscal 2002.

In 2002, Home Depot tumbled 53 percent, underperforming all 29 other components in the Dow industrials.

Deutsche Bank cut its investment rating on Home Depot to "sell" from "hold" after the warning, saying sales appeared to be slowing more dramatically than expected.

However, Salomon Smith Barney kept its "market perform" rating, saying the stock valuation was "too interesting to pull the plug on our rating at these levels."

But credit rating agency Standard & Poor's Friday lowered its outlook on the company to negative from stable, a sign that S&P may downgrade Home Depot's $1.3 billion in debt, which it currently rates as "AA."  

-- Reuters contributed to this report.