Home Depot Inc. (HD) forecast a bigger decline in 2007 profits Tuesday, citing weakness in the U.S. housing market and the sale of its supply unit.

The home improvement industry leader said it expected full-year profit to fall 15 percent to 18 percent to a range of $2.30 to $2.36 per share. In May, Home Depot said earnings per share would fall 9 percent this year to $2.54. In February, Home Depot had projected a 4 to 9 percent decline in per-share earnings.

The revised outlook reflects the pending sale later this year of the supply business that provides building materials to contractors. The May guidance included that unit, which is being sold for $10.3 billion to private equity firms.

"Housing turnover continues to slow and prices continue to come down," said Keith Davis, an analyst with Farr Miller Washington, which owns Home Depot stock. "People aren't spending the way they had been on home improvements."

Home Depot said its total sales could fall 1 percent to 2 percent this year, with sales at stores open at least a year dropping in the mid-single digits. Previously, the chain had forecast full-year sales growth of up to 2 percent.

Shares were up modestly after Home Depot also said it would buy back up to $11 billion of its stock through a tender offer of 250 million shares at $39 to $44 per share. The offer expires on Aug. 16.

In June, the board approved a $22.5 billion increase in its stock repurchase program.

Home Depot said it will keep investing in store improvements, even though that will pressure short-term earnings. As the market improves, it expects sales to rise in line with or better than the overall home improvement industry.

"Right now, we see some headwinds in the home improvement and housing markets, but eventually this market stabilizes," Chief Executive Frank Blake said during a conference call.

Results at Home Depot and rival Lowe's Cos. Inc. (LOW) have weakened over the last year as higher interest rates and other factors weigh on the U.S. housing market.

Sales of new and existing homes fell in May, while the number of unsold houses rose, according to government and industry reports.

On Tuesday, Standard & Poor's said it may cut $12 billion in U.S. subprime mortgage securities, citing expectations of a drop in U.S. home prices and more defaults on home loans. The subprime market caters to borrowers with spotty credit histories.

LOWER THAN EXPECTED

"The (Home Depot) guidance is lower than anticipated, but I think that really shows how deep this housing downturn is," said Bill Schultz, chief investment officer for McQueen, Ball & Associates.

"They're doing this tender offer to support the stock because if you do get a turnaround in housing, it's a relatively inexpensive stock to own," Schultz added.

In addition to the tender offer, the company plans to issue $12 billion in senior notes over time as well as buy back more shares.

The retailer is spending up to $4.3 billion this year to build and maintain stores and recruit skilled trades staff. Davis, the Farr Miller analyst, said boosting store investments could help.

Home Depot has "lost share to Lowe's, and it's due to the fact that it hasn't been investing back in the existing store base," Davis said. "They view their best opportunity right now as improving their competitiveness."

The Atlanta chain plans to open about 108 new stores this fiscal year, down from 115 units it forecast in February, adding that operating margin would decline by 1.5 percentage points because of the negative same-store sales and stepped-up investments.

Home Depot stock, a component of the Dow Jones industrial average was up 34 cents to $40.57 on the New York Stock Exchange, while Lowe's was off 62 cents, or 2 percent, to $30.12.