IMPEACH BUSH

NEW YORK (MarketWatch) -- Home Depot Inc. on Tuesday reported a 31% drop in its fiscal third-quarter profit as consumers curtailed big-ticket and other discretionary spending, leading the world's top home-improvement retailer to lower its sales projection for the year but keep its profit outlook.

Sales worsened throughout the quarter given the financial crisis, and previously strong markets such as Seattle, Portland and Spokane in the Northwest posted double-digit same-store sales drops, said Chief Executive Frank Blake on a conference call. On the international front, Canada also began to feel some economic pressure and posted negative same-store sales along with China.

"Three months ago it was just a housing story," said Chief Financial Officer Carol Tome in an interview. "It's turned out to be a credit story, coupled with unemployment story and the U.S. economy and the world in recession."

Home Depot has changed its marketing message to "shout out" its product value and evoke an action plan instead of past campaigns that are more inspirational and softer, Tome said. The company also is carrying new items such as a $49 programmable thermostat to attract budget-conscious shoppers concerned about heating homes. It also is watching spending closely and plans to lower capital spending "significantly" next year from $1.9 billion this year, Tome said.

"In an environment where the demand is uncertain, Home Depot is doing what it can," she said.

Home Depot also has been able to gain market share and has reduced promotions to widen profit margin against the sales shortfall. Customer service also improved as the company made stores cleaner and more associates responsive to customer inquiries.

Shares of Home Depot, part of the Dow Jones Industrial Average, rose 4.3% to $20.85 in early afternoon trading.

Home Depot joined smaller rival Lowe's Cos. and a slew of other retailers in seeing demand for their products being hurt by the macroeconomic backdrop of rising job losses, tightening credit and declining value of retirement funds that have all but frozen consumers' desires to spend.

Third-quarter net income at the Atlanta-based company fell to $756 million, or 45 cents a share, from $1.09 billion, or 60 cents, a year earlier. Sales in the quarter ended Nov. 2 fell 6.2% to $17.8 billion, as comparable-store sales sank 8.3%. Excluding a calendar shift, the company said comparable sales would have declined 7.1%.

Analysts, on average, expected Home Depot to earn 38 cents a share, according to FactSet. Neither Home Depot or Lowe's "is out of the woods yet (or into higher lumber sales, to use a home improvement parlance) but being able to achieve expectations in this environment is no small feat," said Credit Suisse analyst Gary Balter.

Home Depot Inc. said sales for the year could fall as much as 8%, compared with its previous forecast of sales falling 5%.

It kept its forecast of per-share profit from continuing operations, excluding store closing and other non-recurring items, to decline by about 24%.

Analysts surveyed by FactSet Research expect full-year profit to decline 25% to $1.70 a share, on average, from $2.27.

Expense control

"Better expense management is helping offset the weakening" sales, said Cowen & Co. analyst Laura Champine. "While productivity continues to decline, it seems that trends have stabilized." Gross margin widened by 0.27 percentage point to 33.7% after the company reduced discounts. Retail inventory fell 5.7% to $11.9 billion and dropped 7.5% on a per-store basis. Home Depot said it also has gained unit share in six out of 13 departments in the U.S. and merchandise categories from insulation, carpet, to toilets and grills all gained share, said the company's merchandising chief Craig Menear on the conference call.

Home Depot has abandoned new openings in its pipeline as retailers across the board are honing in on their capital spending and controlling expenses and inventory in the face of uncertain sales. In a bid to drive traffic and lure budget-conscious shoppers, the retail giant in September said it was slashing prices on 1,200 items from paint to a toilet repair kit by as much as 50% and launching a marketing campaign to promote the deals.

Lowe's which reported a 24% drop in its third-quarter profit on Monday, said that while oil prices have come down and the housing turnover showed some initial signs of stabilization, the worsening economic outlook led to a decline in sales trends in the last week of October that has continued into November.

The company also cut its full-year outlook and gave a fourth-quarter projection that missed Wall Street expectations.