Top home improvement chain Home Depot Inc reported quarterly results that beat analysts' estimates, but made a forecast that suggested weaker results at the end of the year and said a recovery might not take hold until the second half of 2010.

The cautious outlook sent its shares down over 3 percent.

Home Depot's net profit fell to $689 million, or 41 cents a share, for the third quarter ended 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 analysts' average forecast of $16.28 billion.

Home Depot and rival Lowe's Cos Inc have suffered from the protracted U.S. housing slump as customers have put off expensive renovations. Lowe's said on Monday it did not expect a housing market recovery to start until the middle of 2010.

In an interview with Reuters, Home Depot Chief Financial Officer Carol Tome said she expects the first half of 2010 to be soft in terms of consumer demand, with some improvement coming in the second half of the year.

There's nothing out there that says ... consumers are going to come back with a vengeance, Tome said.

Home Depot raised its full-year earnings outlook before items to $1.55 a share, from $1.42 a share to $1.52 a share.

But the forecast and the third-quarter results reported on Tuesday imply a fourth-quarter profit of 13 cents a share, or 3 cents below the average analyst forecast, said Christopher Horvers at J.P. Morgan.

Home Depot's sales trends have also probably remained soft into the early part of the fourth quarter, since the company's outlook implies that its same-store sales will be down between 4 percent and 6 percent, Barclays analyst Michael Lasser said in a note to clients.

Home Depot shares fell 3.2 percent to $26.78. Lowe's stock declined about 1.7 percent, both on the New York Stock Exchange.

SIGNS OF STABILIZATION

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

On a conference call, the company said it sees more room for cost cuts and expects modest expansion in gross margin in the current quarter. In the third quarter, operating expenses fell 8 percent while the cost of goods sold decreased 8.4 percent.

Home Depot said it sees further signs of stabilization in the markets that were hardest hit by the housing crisis, such as California, Florida and Arizona.

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 expects 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 expects sales to fall by about 9 percent this year.

(Editing by Gerald E. McCormick, Dave Zimmerman)