Slowdown Nails Home Depot

The company cuts earnings targets, but shares hold ground on plans for a big buyback.
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Updated from 6:36 a.m. EDT

The housing slowdown continues to weigh heavily on

Home Depot

(HD) - Get Report

.

The Atlanta-based home improvement retailer again lowered its profit outlook for the year, just one month after announcing a massive share buyback. While the stock held its ground Tuesday as the company detailed plans for a tender offer for its shares, the broader retail sector fell amid concerns about how the housing slump may spill over to consumers.

Home Depot said it expects 2007 earnings to drop 15% to 18% from a year ago on a per-share basis, reflecting in part last month's agreement to sell its HD Supply business.

Home Depot said operating margins will narrow by 120 to 150 basis points as same-store sales fall and the company continues to invest in its retail stores.

Home Depot expects retail sales to fall 1% to 2% for the year and same-store sales to drop in the mid-single-digits percentage-wise.

"While we expect the housing market to remain challenging for the rest of 2007 and into 2008, we plan to continue our reinvestment plans for the long-term health of our business, understanding that it will put short-term pressure on earnings," said Chief Financial Officer Carol Tome. "We are confident that over the long term, we will deliver productivity improvements and enhance returns on invested capital as the investments take hold."

The housing market has taken its toll on all retailers, but particularly those in the home improvement business. Home Depot, which has been mired in a slump for a year, reported a 33% drop in profit in its most recent quarter, and only a slight gain in sales.

Last month, the retailer agreed to sell the HD Supply business to a private-equity group for $10.3 billion. The business was a leftover from the days of former Chief Executive Bob Nardelli, who had pushed to grow Home Depot's nonretail operations.

The decision to sell HD Supply allowed current CEO Frank Blake to initiate a $22.5 billion buyback program. On Tuesday, the company set plans to tender for 250 million shares at a price of $39 to $44 a share.

The buyback program helped boost Home Depot's stock price. Shares recently were up 7 cents to $40.30, even amid a 2% decline in the S&P retail index.

Shares of Home Depot's rival

Lowe's

(LOW) - Get Report

were down 63 cents, or 2.1%, to $30.11.

Sears Holdings

(SHLD)

contributed to the sector slump with its

warning of a weak second quarter.

The Hoffman Estates, Ill., retailer said it expects to make $1.06 to $1.32 a share for the quarter, including 8 cents a share in various gains. Analysts surveyed by Thomson Financial were looking for a profit of $2.12 a share.

The company said same-store sales dropped 3.9% in Kmart stores over the first nine weeks of the quarter and 4% in Sears stores.