Small Business, Follow Home Depot's Lead

We're used to hearing bad news, given the state of the economy. Every earnings report brings another tale of falling sales and vanishing revenue.

But not all bad news is equally bad. Investors need only look at the examples set by two of the country's largest big-box retailers: Home Depot (HD Quote) and Target (TGT Quote).

Both companies have been hurt by declines in customer spending. But one has responded aggressively to its challenges, and the other has stumbled. The difference offers a valuable lesson for all business owners who are trying to withstand the weak economy.

It's a cautionary tale of two superstores. Home Depot and Target thrived when times were good and mortgages were easy to get. As homeowners traded up to larger houses, they flocked to Home Depot for remodeling supplies and to Target for decorative accessories. Both chains reached out to affluent customers, as Home Depot expanded its selection of stainless-steel appliances and Target called on trendy designers to create houseware and clothing lines.

Then it all went bust. As home spending became a luxury rather than a necessity, sales at both stores slipped. On Tuesday, Target said its quarterly earnings fell 41% from a year earlier. Home Depot had a $54 million net loss.

So why did Home Depot's stock jump 10% that day while Target's fell? Analysts consider Home Depot better positioned to take on the difficulties ahead. That's because the chain has been getting back to basics.

To slash costs, the company shed its decorating spinoff, EXPO Design Center, and other ancillary remodeling businesses. That meant cutting thousands of jobs, which likely devastated many employees. These efforts increased Home Depot's expenses, causing the quarterly loss. But they will probably generate millions in savings.