Aug. 18 (Bloomberg) -- Home Depot Inc., the largest home- improvement retailer, reported second-quarter profit that fell less than analysts estimated and increased its full-year earnings forecast after reducing operating expenses.

Net income dropped 7.2 percent to $1.12 billion, or 66 cents a share, from $1.2 billion, or 71 cents, a year earlier, the Atlanta-based company said today in a statement. Excluding costs to close the company’s Expo business and a tax gain, earnings were about 64 cents a share. Analysts predicted 59 cents, the average of estimates compiled by Bloomberg.

Home Depot beat projections after rival Lowe’s Cos. yesterday reported profit and revenue that fell more than analysts anticipated. The companies are trying to counter sales declines with cost cutting as shoppers contend with sinking home values and job losses. Home Depot’s sales in the three months ended Aug. 2 decreased 9.1 percent to $19.1 billion.

“Home Depot’s ability to strongly manage inventory, and curb selling, general and administrative expenses, led to solid earnings performance that contrasts nicely with its peer’s results yesterday,” Joel Levington, an analyst at Hyperion Brookfield Asset Management Inc. in New York, said in an e-mail.

Home Depot rose 82 cents, or 3.1 percent, to $26.93 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 17 percent this year.

Earnings Drop

The retailer said it now expects adjusted earnings from continuing operations to decline by 15 percent to 20 percent this year after forecasting a drop of as much as 26 percent in June. Home Depot still predicts sales will fall about 9 percent.

“Concerns about the housing market, rising unemployment and softness in the overall economy continue to pressure consumers,” Chairman and Chief Executive Officer Frank Blake said in the statement. “Our business performed well in a down market. We captured market share and drove operating productivity.”

Gross margin, the share of sales after subtracting the cost of goods sold, widened to 33.5 percent in the second quarter from 33.2 percent a year earlier.

Capital expenditures were $181 million, a 65 percent decline from a year ago, as the company opened fewer stores. Overall expenses were $20 million less than the company planned, Carol Tome, chief financial officer, said on a conference call.

Sales in older stores fell 8.1 percent in July, an improvement from previous months, and the trend has continued in August, Tome said. Blake said on the call that he expects sales in older stores to turn positive as soon as the second quarter of next year.

Lowe’s shares slumped 10 percent yesterday, the biggest decline since Sept. 17, 2001, after the retailer said sales dropped 4.6 percent to $13.8 billion and narrowed its full-year forecast. Sales in stores open at least 13 months fell 8.5 percent in the period, the 12th consecutive quarterly decline, Mooresville, North Carolina-based Lowe’s said. Lowe’s fell 48 cents, or 2.3 percent, to $19.99 in New York.

To contact the reporter on this story: Mark Clothier in Atlanta at mclothier@bloomberg.net

Last Updated: August 18, 2009 16:07 EDT