Home Depot Inc posted a better-than-expected quarterly profit and raised its full-year forecast after cost cuts kicked in and sales improved in areas that had been hard hit by the U.S. housing downturn.

Results from the world's No. 1 home improvement chain coincided with a government report showing a fifth straight monthly rise in U.S. single-family home construction.

But they contrasted sharply with dismal 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.

Home Depot shares were up 3.8 percent in midday trade, while Lowe's shares were down 1.9 percent.

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 stepped up efforts to win back market share from Lowe's, improving its merchandise and supply chain and targeting Hispanic communities.

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 the year.

Home Depot Chief Executive Frank 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 were up $1 at $27.11 on the New York Stock Exchange, while Lowe's stock was down 39 cents at $20.08.

(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn)