Updated from 10:47 a.m. EST

Shares of

Home Depot

(HD) - Get Report

fell sharply Tuesday after the company warned that same-store sales would decline as much as 5% in the fourth quarter, casting doubt on the retailer's ability to meet its top-line growth estimates for the next few years.

In a conference call Tuesday, the firm failed to reiterate its three-year annual sales targets of 15% to 18% -- a goal that the company won't achieve this year. In addition, Home Depot hasn't been able to reaffirm its previous bottom-line growth target of 18% to 20% through 2004.

"It was a pretty negative quarter, almost bleak in terms of their sales forecast," said Tom Goetzinger, a retail analyst at Morningstar.

Atlanta-based Home Depot said during a conference call that it expects comparable sales to decline between 3% and 5% in the current quarter. That news sent shares down 12%, or $3.55, to $25. Same-store sales slid 2% in the third quarter, as product changes within stores and a generally weak retail environment depressed customer traffic.

"There are a lot of questions about what their sustainable sales growth is," Goetzinger said. "They're not opening as many stores as they once did. In the 1990s, their square-footage growth was 25%; now it's in the midteens."

During the call, Chief Financial Officer Carol Tome dismissed talk that the company is reaching a saturation point, saying, "we don't see that at all." But analysts say it is a growing concern. The company already has a large presence in the major markets and new stores are starting to cannibalize business at existing locations. Meanwhile, competition from rival

Lowe's

(LOW) - Get Report

has been heating up.

Goetzinger said he is looking for between 10% and 11% annual revenue growth at Home Depot over the next three years and said the company may have to rein in its expectations at some point.

Nathan Lewis, an analyst at Jackson Securities, said, "If they didn't

meet their projections this year, the expectation is they may not do it next year." He added, "That may be one of the reasons why individuals are selling off the stock, because they don't have the confidence in management."

Still, Lewis added that he does believe in Home Depot's top executives and said the stock now looks very attractive from a valuation perspective.

Goetzinger also has faith in management, saying that Chief Executive Bob Nardelli is right to focus on improving operational efficiencies and customer service rather than simply pushing for top-line growth. "Cost savings should come from better inventory purchasing and inventory management," he said.

Home Depot has centralized purchasing and is improving its technology systems to boost profitability. The company posted a 21% gain in third-quarter profit Tuesday, but said earnings for the current quarter and full year would miss analysts' estimates by a penny a share.

The home-improvement retailer said it earned $940 million, or 40 cents a share, on sales of $14.5 billion. In the same period last year, the Atlanta-based firm earned $778 million, or 33 cents a share, on sales of $13.3 billion.

While earnings per share matched the consensus estimate as measured by Thomson Financial/First Call, sales fell short by about $400 million.

"The current retail environment, coupled with merchandising changes and resets within our stores, affected customer traffic," said Nardelli. "Throughout the quarter, however, we saw customers respond to great values in areas like appliances, flooring, and power tools, supporting growth in our average ticket."

Nardelli said the firm will open 200 new stores and add 40,000 associates this year, but he said the company now expects a profit of 31 cents a share in the fourth quarter and $1.57 for full-year 2002. Both estimates are a penny below analysts' projections. Nardelli also said he is cautious on the economy going into 2003.

On Monday, competitor

Lowe's

(LOW) - Get Report

reported a 35% increase in profit, beating analysts' estimates as the company expanded into bigger and more lucrative markets. The firm also said profit for the fourth quarter and full year would probably beat estimates. Shares of Lowe's fell 4% to $38.98.