Small Business, Follow Home Depot's Lead

The company also evaluated its inventory, making sure it offered the goods customers wanted without overstocking shelves with merchandise stores might need to discount later.

"We maintained sound inventory control, reducing inventory by over $1 billion while achieving the best in-stock rate we have had for several years," Chief Executive Officer Frank Blake said in a statement.

Target, on the other hand, struggled to adjust its product mix to the new economic reality. The company may have thought its reputation for fashionable-but-affordable items would help it survive lean times. But price-conscious consumers were worried about getting their next paycheck, so they headed to Wal-Mart (WMT Quote).

Target says most of its products are priced within 2 percentage points of Wal-Mart's. But "guest perceptions do not reflect this reality," said Kathryn A. Tesija, Target's executive vice president of merchandising, on a conference call with analysts.

The company plans to give more shelf space to food and household essentials. Advertising and in-store displays will emphasize its affordable prices. But it may be hard to catch up to the retail steamroller, Wal-Mart.

Target's credit-card business has added to its troubles. As more accounts turn delinquent, the company has had to put aside millions to cover those losses. Pushing credit seemed like an easy way to boost profit during a boom time, but companies are now grappling with the downsides.

Home Depot and Target still face a rough year, along with every other retailer. But for now, Home Depot proves that relentless cost-cutting can pay off. Its approach is simple: Shed secondary product lines, offer exactly what customers need and be wary of extending credit.