Home Depot earnings hammered

Earnings fell more than expected at the nation's No. 1 home improvement retailer Home Depot.

NEW YORK (CNNMoney.com) -- Home Depot, the nation's largest home improvement retailer, said Tuesday earnings fell in the latest quarter due to the continuing downturn in real estate and home building.

Home Depot reported earnings from continuing operations that fell nearly 20 percent to $1.1 billion, or 59 cents a share, from $1.3 billion, or 65 cents a share, a year ago.

Analysts surveyed by earnings tracker Thomson First Call had forecast a profit of 60 cents a share.

The company said that it expects earnings from continuing operations to be down 11 percent for the full fiscal year, which ends in January.

It had previously forecast only a 7 to 9 percent drop in full-year earnings. But results will be helped by an extra week of operations in the current fiscal year.

The retailer also expects sales at its stores open at least a year, which is a key measure of retail performance known as same-store sales, to fall between 6 to 7 percent for the year.

The company did not provide earnings and sales guidance for next year.

Home Depot (Charts, Fortune 500) shares traded lower Tuesday on the New York Stock Exchange. Home Depot has seen its shares fall nearly 20 percent in the last three months, due to the sharp drop in home building and weak home sales market.

"We were not pessimistic enough when we said we expected to see some improvements in the third quarter. That didn't occur," CEO Frank Blake said in a conference call with analysts to discuss the retailer's results.

The call was monitored via Webcast in New York.

The company's sales fell 3.5 percent in the quarter to $19 billion, reflecting a 6.2 percent drop in Home Depot's comparable store sales, which measures sales at the retailer's stores open at least a year. Home Depot suffered sales declines in most categories with the exception of its kitchen, paint and power tools products.

Blake said he expects soft market conditions to continue into 2008.

"But Home Depot's issues are not only housing related," Blake said. "We lost marker share through our own performance."

To stem further market share erosion, he said Home Depot would focus on building supply chain efficiencies, improve its merchandise selection and expand its employee incentive programs to more stores.

Also, given the prevailing market conditions, Blake said that he felt it was "not prudent" for Home Depot to rush the completion of its $22.5 billion share buyback plan. Since the buyback was announced in June, the company has already completed almost half, or $10.7 billion, of the plan.

For the fourth quarter, which also includes the important gift-buying months of November and December, Home Depot executives said they expect the retailer to be the No. 4 destination for holiday decorations and forecasted a double-digit growth in holiday-related merchandise versus last year.

"Sales trends appear to have softened since mid-August, as we believe was widely expected," Goldman Sachs analyst Matthew Fassler wrote in a research note to clients on Tuesday.

"Given sharp recent drops in housing turnover, we do not expected business to turn until the second quarter of 2008, presuming that [the current] fourth quarter marks the bottom for housing trends," he said.

Home Depot's stock has fared worse than No. 2 home improvement retailer Lowe's (Charts, Fortune 500), which has seen its shares fall only 11.5 percent in the same period. Lowe's is due to report results Monday, with analysts forecasting a 10 percent drop in earnings.

Home Depot is second only to Wal-Mart Stores (Charts, Fortune 500) in total sales among U.S. retailers.