updated 11/13/2007 11:07:16 AM ET 2007-11-13T16:07:16

The Home Depot Inc. reported a 26.8 percent drop in third-quarter profits and revised its financial outlook Tuesday, saying a decline in earnings would be larger than expected as the housing market continues to deteriorate.

The nation’s largest home improvement store chain predicted a decline of as much as 11 percent in earnings per share from continued operations because of persistent “softness in the housing market.”

“We started the year with a more pessimistic view of the housing and home improvement markets than many,” Frank Blake, the company’s chairman and CEO, told analysts Tuesday. “It turns out we were not pessimistic enough.”

Home Depot said Tuesday it earned $1.09 billion, or 60 cents a share, for the three months ending Oct. 28, compared with a profit of $1.49 billion, or 73 cents a share, for the same period a year ago.

Excluding discontinued operations, which analysts surveyed by Thomson Financial had done for some time, Home Depot earned 59 cents per share, falling a penny shy of expectations.

Blake said the company is trying to weather the housing slump and is looking for future opportunities.

The company had expected “some market improvement” by the third quarter but that did not happen, Blake said.

The Atlanta-based company said in September it had expected its earnings per share from continuing earnings to decline 7 percent to 9 percent for fiscal 2007 because of a tender offer that would reduce the number of its outstanding shares.

Citing volatility in the credit markets and “challenging” housing and home improvement markets, the company also said it would take a cautious stance regarding the completion of a $22.5 billion recapitalization plan the company announced in June. Home Depot has completed almost half, or $10.7 billion, of the plan.

“We don’t think it’s prudent to rush to execute the remainder of the recapitalization,” Blake said. “So this is not something that will happen in the remainder of 2007.”

Revenue in the quarter dropped 3.5 percent to $18.96 billion, compared with $19.65 billion the same period a year ago, and fell short of analyst expectations of $19.39 billion.

For the first nine months of the year, Home Depot said it earned $3.72 billion, or $1.94 a share, compared with a profit of $4.84 billion, or $2.32 a share, a 23 percent drop. Nine-month revenue fell 3.1 percent to $59.7 billion, compared with $61.62 billion recorded in the same period a year ago.

“We expect continued difficult conditions for the remainder of 2007,” Blake said. “We expect that the soft market will continue, as reflected in the current overhang of housing inventory and the difficulties in the subprime mortgage market.”

The fiscal 2007 earnings per share outlook reflects 52 weeks and does not include the impact of the 53rd week. Home Depot will have 53 weeks of operating results in fiscal 2007 and the final week will add about five cents to its earnings per share outlook for fiscal 2007.

Shares fell 15 cents in midday trading to $28.31.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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