"Home Depot is going to need a turn in the industry to really energize earnings growth," said Bill Schultz, chief investment officer for McQueen, Ball & Associates.
Earnings declined by about a third, to $1 billion, or 53 cents a share, in the first quarter ended on April 29, from $1.5 billion, or 70 cents, a year earlier.
Analysts on average expected profit of 59 cents a share, according to Thomson Financial.
Sales rose less than 1 percent to $21.6 billion, shy of the analysts' average estimate of $21.83 billion. Retail store sales fell 4.3 percent to $18.5 billion, while sales in the supply segment geared to professional contractors rose 46 percent to $3.1 billion, aided by acquisitions.
At retail stores, which account for 86 percent of Home Depot's total sales and 92 percent of operating income, average purchase fell 2.9 percent to $59.01. Sales at stores open at least a year, an important retail measure, fell 7.6 percent.
Home Depot and smaller rival Lowe's Cos. have seen their results weaken as lower home sales and construction and rising foreclosures pressure the U.S. housing market.
"We believe the home improvement market will remain soft throughout 2007," Chief Executive Frank Blake said in a statement. Blake was named to the top job when Robert Nardelli stepped down in January.
Atlanta-based Home Depot is boosting capital spending by 29 percent this year to overhaul stores and hire trade specialists, but expects the investments and housing weakness to hurt sales and earnings.
"Until we can see a turnaround, Home Depot has to focus on the cost side and improve store performance, including customer service," Schultz added.
Home Depot said it was still reviewing options, including a possible sale, for the supply unit that provides building materials and other products to contractors.
Home Depot shares have fallen 3 percent so far this year, while Lowe's is off less than 1 percent.