Lowe's Cos gave a disappointing profit forecast for the rest of the year, sounding a note of caution about the pace of a U.S. economic recovery and sending its shares down more than 3 percent.

The outlook from the No. 2 U.S. home improvement chain was particularly surprising after it reported stronger-than-expected quarterly results and also weighed on shares of larger rival Home Depot , which is due to report on Tuesday.

I think they are being somewhat cautious given the still-uncertain outlook for home improvement growth and housing, and the fact that in the first quarter you had both the strong spring selling season and the appliance benefit, Sanford C. Bernstein analyst Colin McGranahan said.

In the seasonally strong first quarter that ended on April 30, Lowe's saw robust demand for products like fertilizer, potting soil and tools as many Americans prepared to spruce up lawns and gardens.

Many homeowners who had put off home renovations in the U.S. economic downturn also upgraded appliances to take advantage of a federal stimulus for energy-efficient goods and invested in homes they are likely to live in for a longer period of time.

Lowe's forecast second-quarter earnings of 57 cents to 59 cents a share. Analysts on average were expecting 62 cents, according to Thomson Reuters I/B/E/S.

While we are optimistic we will experience solid demand through the balance of the year, we view 2010 as a year of transition for our industry, Chief Executive Officer Robert Niblock said in a statement.

For the full year, Lowe's sees earnings of $1.37 to $1.47 a share, up from its prior outlook of $1.30 to $1.42. Analysts were expecting a full-year profit of $1.45.


Consumers are showing signs of reengagement in home improvement, including discretionary projects and purchases of bigger ticket products, which had taken a back seat during the worst of the economic downturn, Niblock said.

First-quarter net income rose to $489 million, or 34 cents a share, from $476 million, or 32 cents a share, a year earlier.

Analysts on average were expecting a profit of 31 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 4.7 percent to $12.39 billion, beating the average estimate of about $12.25 billion. Sales at stores open at least a year rose 2.4 percent.

Shares of Lowe's were down 3.1 percent at $25.25 in trading before the market opened, while Home Depot fell 1.1 percent to $34.80.

(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn )