Despite a year of retooling its business model by going back to retail basics, Home Depot in 2007 suffered its first-ever decline in annual sales.

In a quarterly earnings report Tuesday, Home Depot said annual sales dipped 2.1 percent, from $79 billion to $77.3 billion. Those results included a 53rd week. Excluding that week, sales for the year declined 3.5 percent, to $76.2 billion. Comparable store sales -- which excludes revenue from new stores opened during the year -- declined 6.7 percent.

Atlanta-based Home Depot, the nation's largest home improvement retailer, also missed earnings estimates by three pennies for the fourth quarter of 2007.

Analysts, on average, estimated Home Depot would earn 43 cents a share on sales of $18 billion, according to Thomson Financial.

Instead, the company earned 40 cents per share, on sales of $17.7 billion.

Despite the shakier results, the company still remained profitable, with $671 million net earnings for the quarter, down 27.5 percent from a year earlier, and $4.4 billion net earnings for the year, down 23.7 percent from 2006.

"I believe we'll look back on 2007 as one of the most difficult years ever for The Home Depot financially," said Frank Blake, chairman and CEO in a call to analysts.

But he emphasized the company will stay the course, by focusing solely on how to improve the retail business.

"We are proud of what we have accomplished but realistic about all the work we have left to do," he told analysts. "We are still too often perceived as lagging in customer service. And we know that in a down market, we have to work all the harder to earn our customers' confidence."

However, he warned Wall Street that 2008 will be "challenging" for the home improvement industry, as there is a substantial inventory of unsold homes; continued pressure on housing prices; uncertainties around credit availabilityand overall concerns about the economy.

For 2008, he said the company is forecasting a 4 to 5 percent decline in sales. Finally, the company will open 55 stores in 2008, of which only 35 will be in the United States.

In 2007, Home Depot opened 100 stores worldwide.

There also will be some changes for consumers.

Home Depot plans to stop selling pet products and Halloween decorations.

But the retailer plans to add some new products, such as a line of Freshaire paint that is Green Guard certified, as it is "odor free" and has no volatile organic compounds.

New lines of affordable patio sets, starting at $399 for rustproof metal frames, will also come to stores.

And as the credit crunch impacts the profitability of the Home Depot's branded credit cards, CFO Carol Tomé said there will be fewer credit promotion days in 2008.