UPDATE 3-Home Depot profit beats Street; FY outlook raised

* Q2 EPS ex-items 64 cents vs Street est 59 cents

* Sales trends improve in California, Northeast

* Costs fall 7.5 percent

* Raises FY profit outlook; backs sales view

* Home Depot shares up 3 pct; Lowe's up 1 pct (Recasts; adds analyst comment, byline)

By Dhanya Skariachan

BANGALORE, Aug 18 (Reuters) - Cost cuts and improving sales in California and the northeast United States helped Home Depot Inc's (HD.N) quarterly earnings beat Wall Street estimates, and the company raised its full-year forecast.

The upbeat outlook drove Home Depot shares up 3 percent and contrasted with dismal news from rival Lowe's Cos Inc (LOW.N), which said on Monday that it would rein in its North American expansion plans and gave a dismal outlook for the current quarter. [ID:nBNG149135]

JPMorgan analyst Christopher Horvers noted that sales at stores open at least a year were stronger at Home Depot than at Lowe's.

"Northeast and California improved," he said, "while the Southeast deteriorated, favoring Home Depot over Lowe's."

Improved merchandise, labor planning and supply chain enhancements have "clearly turned the tide with Home Depot -- both defending its turf from Lowe's and outgrowing the market on a consistent basis," he added.

From improving its distribution network to targeting more marketing campaigns at Hispanic communities, Home Depot -- the world's largest home-improvement retailer -- has been stepping up efforts to win back market share from Lowe's.

Atlanta-based Home Depot said net profit fell to $1.1 billion, or 66 cents a share, in the second quarter ended on Aug. 2, from $1.2 billion, or 71 cents a share, a year earlier.

Excluding a charge for closing the company's Expo businesses and a tax benefit, profit was 64 cents a share, above the analysts' average forecast of 59 cents, according to Reuters Estimates.

The company, which shed about 7,000 jobs from the closure of the Expo Design Center chain and other corporate cuts earlier this year, said operating expenses fell 7.5 percent.

Sales fell 9.1 percent to $19.1 billion.

The U.S. housing slump and the recession have curtailed demand for big-ticket remodels that fueled growth at home-improvement chains in recent years. As sales have slumped, they have resorted to aggressive cost cuts to preserve margins.

But while sales at U.S. stores open at least for a year fell 6.9 percent at Home Depot, Lowe's saw a decline of 9.5 percent in the quarter.

Analysts however remain bullish on both chains and expect them to benefit significantly from easy comparisons in the second half.

"The tide should lift both boats," Horvers said.

LEAN AND MEAN

From freezing officers' salaries to closing certain specialty outlets, from streamlining its supply chain to using less energy in its stores, Home Depot has adopted an array of measures to save money. It has also managed inventory tightly.

In June, Home Depot said economic indicators signaled the worst of the U.S. housing correction had passed. It also raised its fiscal-year profit forecast as it expected improved operational efficiencies to boost margins this year.

For the full fiscal year, Home Depot said it expected earnings per share from continuing operations to be flat to up 7 percent, compared with its prior forecast of flat to a decline of 7 percent.

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

Home Depot shares were up 3 percent at $26.90 in trading before the opening bell, while Lowe's rose 1 percent to $20.68. (Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn)