Lowe's

(LOW) - Get Report

keeps gaining on

Home Depot

(HD) - Get Report

.

Lowe's, the nation's No. 2 home improvement chain, reported better-than-expected first-quarter earnings Monday while boosting its outlook for the rest of the year. The report offered more evidence that consumer spending remains robust -- especially when it comes to the home -- and also signaled that Lowe's continues to gain ground in its face-off with Home Depot, the nation's largest do-it-yourself home retail chain.

Only a few years back, Wilkesboro, N.C.-based Lowe's was widely perceived as an also-ran, a mostly rural chain whose management was dismissed by Wall Street as unseasoned. But lately the company has been changing all that, through a push into metropolitan markets on the West Coast and mid-Atlantic states, markets where it has come into direct competition with Home Depot. Its success -- the company has continually met or exceeded earnings forecasts -- has made it a Wall Street darling, to the point where some some analysts now push Lowe's stock harder than Home Depot's.

"I like to use a baseball analogy," says Colin McGranahan of Sanford Bernstein. "Home Depot is in the bottom of the ninth, while Lowe's is in the top of the seventh."

Lowe's continued success will have Wall Street casting an even more eager eye toward Home Depot's earnings report, which is scheduled for tomorrow. Both stocks rose Monday in spite of the marketwide selloff.

Growth Play

On Monday Lowe's reported first-quarter earnings of 44 cents a share, up 52% from the year-ago period and better than the 36-cent analyst projection, according to Thomson Financial/First Call. Sales for the quarter jumped 23% to $6.5 billion.

"Our customers continued to demonstrate an eagerness to maintain, decorate and improve their homes even against a backdrop of mixed economic data," said Robert Tillman, Lowe's chairman and CEO, in a statement. "Our increased national presence, our ability to leverage national advertising and our continued focus on becoming the consumer's first choice for home improvement has paved the way for expansion into new markets while increasing traffic in existing stores."

Running Away
Lowe's vs. Home Depot, two years

At the same time, Lowe's boosted its outlook for the remainder of the year. For the second quarter, Lowe's expects earnings of 53 cents to 54 cents per share, compared with current expectations of 51 cents. For the full year, Lowe's is now projecting earnings of $1.66 to $1.69 per share. Wall Street had been anticipating $1.58 per share.

Lowe's results were the headline-grabber in a busy day for retail earnings.

Toys R Us

(TOY)

reported that its loss narrowed compared with a year ago and said it expects to meet analysts projections for the full year, while apparel chain

Limited

(LTD)

came up just shy of estimates for the first quarter. Tuesday will bring results from two retail giants: Home Depot and discounter

Target

(TGT) - Get Report

.

Lowe's shares were up lately $2.14, or 4.8%, at $46.90. The stock has soared since falling in the wake of Sept. 11, and now trades near its 52-week high of $48.88. Home Depot shares were up 38 cents at $48.47. Since early last year, when Lowe's began attracting a loyal following on Wall Street, Lowe's shares have outperformed Home Depot's.

Up, Up and Away

On the heels of Lowe's stellar quarter, some analysts were upping estimates for Home Depot, which reports earnings Tuesday. For example, Donald Trott of Jefferies raised his estimate for Home Depot to 37 cents a share, from 33 cents.

Since early last year, Lowe's shares have outperformed Home Depot's. However, Lowe's, at around 24 times next year's earnings estimates, still trades at a slight discount to Home Depot's

price-to-earnings ratio of around 26.

Bernstein's McGranahan rates both stock market perform because he believes the housing market is peaking and that mortgage rates can only go up. Still, he lauds Lowe's success and expects the valuation gap between the two companies to continue to narrow.

"The gap's been narrowing for a while," says Peter Benedict, who covers both companies for CIBC World Markets. Like others on Wall Street he likes both companies -- but is slightly more bullish on Lowe's. He has a strong buy rating on Lowe's and a buy rating on Home Depot. (His firm doesn't have a banking relationship with either company.)

But for now the bottom line is that investors like the kind of growth numbers Lowe's is putting up. "Lowe's is very much a new-store-growth story," says Benedict, noting that Lowe's opened 46 new stores in the first quarter and now operates 785 stores. Meanwhile, Home Depot runs close to 1,100 stores. "Home Depot will rely less on new store growth and more on marketing initiatives."