NEW YORK (Reuters) - Home improvement chain Lowe's Cos LOW.N issued a disappointing profit forecast for the rest of the year and dampened hopes for robust economic recovery in the second half, sending its shares down 3.8 percent.

A worker arranges a barbecue grill outside a Lowe's store in Scottsdale, Arizona in this February 22, 2010 file photo. REUTERS/Joshua Lott

The outlook was particularly surprising after Lowe's posted stronger-than-expected quarterly results. It also weighed on shares of larger rival Home Depot HD.N, which fell 1.4 percent ahead of its quarterly earnings report, due Tuesday.

“If you look at some of the economic estimates that are out there, a lot of them have started to push out when the timeline is for recovery,” Lowe’s Chief Executive Robert Niblock said on a call with analysts. “So, for example, the thought was originally that home prices would bottom in the second half of 2010.”

He views 2010 as a “a year of transition” for the home improvement industry, adding that “it will likely be 2011 before we see significant growth.”

Lowe’s said it was still somewhat cautious about the state of the consumer and the economy as a whole. New data from the New York Federal Reserve also pointed to a slower pace of recovery.

In an interview, Niblock said he expected U.S. economic recovery to come in “fits and starts,” adding that home prices probably will not bottom until the first half of next year.

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.

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 $1.45.

“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.

STRONG SPRING QUARTER

In the seasonally strong first quarter that ended April 30, Lowe’s saw robust demand for fertilizer, potting soil and tools as many Americans spruced up lawns and gardens.

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 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 $12.25 billion. Sales at stores open at least a year rose 2.4 percent.

Many homeowners who put off renovations during the recession 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 saw its customers venture beyond repair and maintenance categories in the first quarter. For example, demand for discretionary items like riding mowers and gas grills was strong. It also pointed to stronger-than-expected demand in some expensive categories like kitchen and bath.

“Consumers are showing signs of re-engagement 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.