No. 2 U.S. home improvement chain Lowe's Cos Inc forecast earnings for its next fiscal year that could fall short of Wall Street expectations, sending its shares down 4.2 percent.

The cautious outlook came just a month after the company said it expected a recovery in the North American market starting in the first quarter of 2010.

Lowe's, like bigger rival Home Depot Inc , has been hurt badly by the U.S. housing downturn, with sales slumping as homebuilders and consumers put off big renovations and housing-related purchases.

I think the outlook is pretty conservative, Oppenheimer's Brian Nagel said from Charlotte, North Carolina.

The company would take a conservative posture given what they are still seeing in the marketplace, Nagel said after attending a company meeting with analysts and investors at Lowe's headquarters in Charlotte.

The lackluster outlook also weighed on shares of industry leader Home Depot . Home Depot is probably trading in sympathy with Lowe's, Nagel said.

For its fiscal year 2010, ending January 28, 2011, Lowe's forecast earnings of $1.24 to $1.34 a share and a sales rise of 3 percent to 4 percent, which translates to revenue of about $48.18 billion to $48.65 billion.

Analysts' average forecast is $1.33 a share on sales of $48.36 billion, according to Reuters Estimates.

Lowe's stood by its previous forecast for fiscal 2009, which ends on January 29. It expects earnings of $1.13 to $1.21 a share for the period. It said it may have to take impairment charges of up to $100 million due to uncertainty about economic recovery.

According to Reuters Estimates, analysts expect the company to earn $1.20 a share in 2009.

SLOW-BUT-PRUDENT STORE EXPANSION

The company, which recently decided to apply brakes to its North American store expansion after a 19 percent drop in quarterly profit, said future growth would be fueled by prudent store expansion in underserved markets and internationally.

Lowe's said it plans to continue a slower pace of store openings over the next five years and focus on high-volume, metropolitan markets where it has fewer stores than Home Depot.

Lowe's, which made its first foray outside North America last month through a joint venture with Australia's largest retailer Woolworths Ltd , said it will open the first store as part of the venture in 2011. It added that it saw potential for 150 large-format stores in the market.

The company also plans to open its first two stores in Mexico in the current fiscal year. Industry leader Home Depot has also been targeting Hispanic markets aggressively and recently talked about opportunities to take its Mexican business model to Latin and South America.

Lowe's shares were down 4.4 percent to $20.98 in afternoon trading on the New York Stock Exchange. Home Depot shares were down 2.1 percent at $27.56.

(Reporting by Dhanya Skariachan in Bangalore, editing by Gerald E. McCormick, John Wallace and Tim Dobbyn)

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