Home Depot Inc posted a higher than expected quarterly profit on Tuesday but warned that there was still a lot of pressure in the U.S. housing and home improvement markets, sending its shares lower.

Top home improvement chain Home Depot and smaller rival Lowe's Cos Inc have suffered from the prolonged U.S. housing slump. On Monday, Lowe's said it did not expect a market recovery to start until the middle of 2010.

Home Depot shares fell 2.7 percent to $26.91 in trading before the opening bell. Lowe's fell 1.1 percent

Although Home Depot is seeing some positive signs of stabilization, Chief Executive Officer Frank Blake warned there was still a great deal of pressure in the housing and home improvement markets.

Home Depot has been quicker to cut costs and constrict inventory levels than Lowe's, and in some cases has benefited as housing markets improved in regions where it has a heavy presence.

Home Depot said net profit fell to $689 million, or 41 cents a share, in the third quarter ended on November 1 from $756 million, or 45 cents a share, a year earlier.

Analysts on average were expecting earnings of 36 cents per share, according to Thomson Reuters I/B/E/S.

Sales fell about 8 percent to $16.36 billion, beating the analysts' average forecast of $16.28 billion.

For the full year, Home Depot sees earnings of about $1.55 a share from continuing operations before items, down about 13 percent from the prior year. It had earlier forecast a decline of 15 percent to 20 percent.

Christopher Horvers at J.P. Morgan called Home Depot's results a quality beat and said the company was effectively driving gross margin through more sophisticated merchandising.

Expense control has generally been strong, he said in a note to clients.


It was also the second consecutive quarter that Home Depot has outdone Lowe's on the same-store sales front.

Sales trends in Home Depot's Northeast and California markets have been showing signs of improvement. About 30 percent of its U.S. stores are in California, Florida, New York and New England.

U.S. same-store sales fell 7.1 percent versus a 7.5 percent fall at Lowe's. Credit Suisse's Gary Balter said he expected Home Depot to show better relative same-store sales going forward as the markets where Home Depot has more stores begin to bounce off of the bottom.

Home Depot said it still expected sales to fall by about 9 percent this year.

To offset declining sales, Home Depot has frozen officers' salaries, slashed jobs, managed inventory tightly and used less energy in its stores to save money.

The company has also gained from its slower expansion strategy. Under CEO Blake, Home Depot has been closing concept stores and upgrading service and products in its core retail business to win back market share from Lowe's.

Home Depot shares were down 2.7 percent at $26.91 in premarket trading. Lowe's stock was down 1.1 percent at $21.50

(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn, Dave Zimmerman)