Nov. 14 (Bloomberg) -- Home Depot Inc., the world's largest home-improvement retailer, said net income fell for the first time in three years and lowered its yearly profit forecast because of declining U.S. home sales.

Third-quarter earnings fell 3.1 percent to $1.49 billion, or 73 cents a share, missing analysts' estimates. Home Depot said it now expects earnings per share growth of 4 percent to 5 percent for the year through January, down from an earlier projection of at least 10 percent.

Sales at stores open at least a year fell 5.1 percent. Chief Executive Officer Robert Nardelli plans to spend $350 million and add 5.5 million worker hours to boost revenue. Sales in older stores are declining amid competition from Lowe's Cos., and a drop in home-improvement spending. Nardelli said today he expects the slump to last through next year.

``I don't think we've seen bottom yet,'' Nardelli said on a conference call with analysts and investors. ``And I don't see anything that says it's going to get significantly better in '07.''

Profit a year earlier was $1.54 billion, or 72 cents a share. Sales rose 11 percent to $23.1 billion in the three months that ended Oct. 29, from $20.7 billion the year before. The company forecast sales for the full year to rise 12 percent, down from a previous projection of at least 14 percent growth.

Shares of Home Depot and Lowe's Cos. rose as the broader market rallied. Home Depot stock gained $1.56, or 4.3 percent, to $37.96 at 4:01 p.m. in New York Stock Exchange composite trading. The shares dropped 6.2 percent this year.

Shares of Lowe's, which reports earnings Nov. 20, rose $1.23, or 4.2 percent, to $30.23. They dropped 9.3 percent in the year. The Dow Jones Industrial average gained 86.13 to 12,218.01.

Analysts' Estimates

Michael Cox, a Piper Jaffray & Co. analyst, estimated 76 cents a share in profit in the quarter, 1 cent more than the average of 22 analysts surveyed by Thomson Financial. Minneapolis-based Cox is top-rated for accuracy by StarMine Corp. Thomson doesn't provide the details behind its estimates to Bloomberg News.

The quarter was ``more challenging than we anticipated,'' Nardelli said on the call.

The company now expects profit this year to be $2.83 to $2.86 a share, up from $2.72 the year before. Analysts were expecting $2.95 a share.

``Everything that could have gone wrong for Nardelli has,'' said Shayne John, who helps manage about $2.6 billion at NCM Capital Management in Durham, North Carolina, including Home Depot shares. ``He couldn't have done anything about housing, but many of his wounds are self-inflicted.''

Pay Scrutinized

Nardelli has drawn criticism for receiving about $225 million in compensation since joining Home Depot in 2000. Bonnie Hill, who chairs the board's compensation committee, said in September directors will re-examine the performance measures on which Nardelli's pay is based. Home Depot has said almost half of Nardelli's compensation is in options that are underwater at the stock's current price.

Profit this quarter will be 50 cents to 53 cents, down from 60 cents a year ago and below analysts' projections of 59 cents, Chief Financial Officer Carol Tome said on the call. Sales in older stores will fall in the ``mid-single digits'' this quarter, she said.

Profit and same-store sales dropped the most since the quarter through February 2003, when the company posted its first sales decline ever as it lost customers to Lowe's.

`Eye of the Storm'

``They're in the eye of the storm right now,'' said Brian Barish, who oversees $8 billion as president of Denver-based Cambiar Investors LLC, which owned 6.3 million Home Depot shares as of Sept. 30.

Alan Rifkin, an analyst with Lehman Brothers, estimated a 3 percent drop in third-quarter same-store sales. Colin McGranahan, an analyst at Sanford C. Bernstein & Co., estimated a decline of 2.5 percent.

``The deceleration in the sector is unfolding even more rapidly and severely than we had expected,'' McGranahan wrote in a research note today.

Nardelli, 58, made three acquisitions in the quarter to build the company's supply division. Building supply revenue more than doubled in the quarter to $3.5 billion, or 15 percent of sales. Unit growth excluding acquisitions was 7 percent as residential construction cooled

The division will make up about a fifth of sales by 2010, Home Depot has said.

Kitchen Installation

Sales at the Home Depot unit that coordinates installation of kitchen cabinets, carpet and countertops, grew 11.3 percent to $1 billion. Counters, air conditioners and outdoor patios led the gains, the company said.

Home Depot, with more than 2,109 stores, about 90 percent of which are in the U.S., is increasing sales to builders and expanding in Mexico, Canada and China to keep pace with Lowe's, which has about 1,280 stores.

Home Depot's sales have grown an average of 12 percent the past three years. Revenue for Lowe's increased an average of 18 percent over the same period.

Wal-Mart Stores Inc. and Carrefour SA are the world's two biggest retailers.

To contact the reporter on this story: Mark Clothier in Atlanta at mclothier@bloomberg.net

Last Updated: November 14, 2006 16:25 EST