If Home Depot (NYSE: HD) isn't on your stock watchlist, it should be. The home improvement retailer achieved an impressive increase in earnings this past quarter, despite flagging sales at the start of the year. Home Depot is showing fizzle can still sizzle, when given the opportunity.

It's not how much you make, but how you use it
The depressed housing market and scared consumers have deeply stressed home improvement retailers. Lowe's (NYSE: LOW) comparable-store sales nose-dived 7.2% in 2008 and 6.7% in 2009, with minimal recovery in 2010. Sears Holdings (NYSE: SHLD) this year reported continued declining sales results of its big-ticket home retail items. Sears said consumer trends and management missteps exacerbated its poor performance. And that highlights exactly what Home Depot is doing differently.

The very same consumer trends and housing market woes smacked down Home Depot's sales 0.2% in the latest quarter, and same-store sales were off 0.6%. Yet the company's earnings sizzled at an impressive 12% year-over-year gain. No small feat. So how did Home Depot turn this fizzle around?

Trim the fat, get on the griddle
With fewer sales coming in, trimming costs in small ways can pay off big. Home Depot was able to raise gross margin nearly 30 basis points by increasing product flow and offering value products for both consumers and pros. The streamline effect of offering the right products and moving them quickly out the door effectively turned lower sales numbers into a slightly higher gross margin. Shaving additional operating expenses resulted in a 70-basis-point improvement in operating margin. That resulted in after-tax earnings of $812 million, up from $725 million in 2010. Home Depot proved that a focus on costs can add up.

While customer transactions were down 1.9% for the quarter ending May 1, on average each customer receipt rang in at roughly one more dollar spent per transaction, resulting in a minimal 1.5% increase in the average ticket year over year. That may not sound like much, but combine each small dollar with lower overall costs, and it is clear how Home Depot is grilling up a nice lean profit.

And summer's just started
The tactics that are leading this company to turn a profit in a down market are already showing good results. The company predicted that earnings per share would be up 11.4% for the year and that sales would be up 2.5%. Before you pull out your barbeque, make sure to add Home Depot to your watchlist as the summer heats up for all of us.  

Contributor Andrea Kalvesmaki does not own any shares in any company mentioned in this article, but has added Home Depot to her own watchlist. Motley Fool newsletter services have recommended buying shares of Lowe's and Home Depot. Motley Fool newsletter services have recommended writing covered calls in Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.