No. 1 home improvement chain Home Depot Inc is banking on a slow-but-steady growth strategy and cost cuts to fight lackluster demand for big-ticket remodeling projects.

The world's largest home improvement chain posted a better-than-expected quarterly profit and raised its full-year forecast as cost cuts kicked in and sales improved in areas that had been hard hit by the U.S. housing downturn.

The results contrasted sharply with disappointing news from rival Lowe's Cos Inc , which said on Monday it would curb North American expansion plans and gave a weak outlook for the current quarter.

Sales at U.S. stores open at least a year, an important retail gauge known as comps, fell 6.9 percent at Home Depot and 9.5 percent at Lowe's.

This is the first time that Home Depot has 'out-comped' its primary public competitor since the fourth quarter of 2003, Raymond James analyst Budd Bugatch said, noting that some 30 percent of Home Depot's U.S. stores are in California, Florida, New York and New England.

That geographic footprint helped the company, JP Morgan analyst Christopher Horvers said. Northeast and California improved... while the Southeast deteriorated, favoring Home Depot over Lowe's.

Home Depot has frozen officers' salaries, slashed jobs, managed inventory tightly and found creative ways like using less energy in its stores to save money.

Chief Financial Officer Carol Tome told Reuters that the company was still looking to cut costs further.

We are so big it doesn't take lot to move the needle, she said; even small efforts to curtail costs are important.

Home Depot has also benefited from its slower expansion strategy. Under Chief Executive Frank Blake, Home Depot has been closing concept stores and upgrading service and products in its core retail business to win back market share from Lowe's.

Frank's message was 'we are not doing anything until we get it right' and slow down for the sake of being a better company, Stifel Nicolaus analyst David Schick told Reuters.

Blake, who became chairman and CEO in early 2007 after Robert Nardelli resigned, returned the company's focus to being the regular big-box strip-mall type store and improving its merchandise, supply chain and customer service.

Those efforts clearly turned the tide with Home Depot -- both defending its turf from Lowe's and outgrowing the market on a consistent basis, Horvers said.

But Horvers is bullish on both chains and expects them to benefit from easy comparisons in the second half of this year.

Blake said on a conference call that he expected to see positive comps probably in the second quarter or back half of 2010.

COST CUTS KICK IN

Home Depot said operating expenses fell 7.5 percent in the quarter while cost of goods sold decreased 9.6 percent.

Home Depot's net profit fell to $1.1 billion, or 66 cents a share, in the second quarter ended August 2, compared with $1.2 billion, or 71 cents a share, a year ago.

Excluding items, profit was 64 cents a share, topping analysts' average forecast of 59 cents, according to Reuters Estimates.

Sales fell 9.1 percent to $19.1 billion, compared with analysts' average forecast of $19.2 billion.

The weak U.S. housing market and recession curtailed demand for remodeling materials.

For the full fiscal year, Home Depot said it expected earnings per share from continuing operations to rise as much as 7 percent, versus a prior forecast calling for it to fall as much as 7 percent.

Excluding items, it expects earnings per share from continuing operations to fall 15 to 20 percent. It had earlier seen a decline of 20 percent to 26 percent. Home Depot still expects sales to fall by about 9 percent this year.

Home Depot shares closed 3.1 percent higher at $26.93 on the New York Stock Exchange on Tuesday, while Lowe's stock ended down 2.3 percent at $19.99, also on the NYSE.

(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn and Tim Dobbyn)

Florida California New York Dell