(FORTUNE Magazine) – An eerie sense of been there, bought that lingers like mist inside the mammoth new Lowe's home improvement center in Alpharetta, Ga., a tony suburb of Atlanta. The cheery employee who greets me as I pass through the main entrance could be a clone of the cheery employee who greets me as I enter just about any Home Depot. She's also wearing a colorful apron, just as they do at the Depot. And the place is a do-it-, fix-it-, build-it-, paint-it-, spruce-it-up-yourselfer's heaven: row after row of lumber, tools, light fixtures, ceiling fans, ladders, saws, plungers, carpet, paint, wallpaper, and more--just like you-know-where.

Here's the twist: Everything's blue. Not Home Depot's Halloween pumpkin orange. Those spiffy aprons, the banners telling you what to find on each aisle--all blue. There are other differences, like loads of appliances: washers, dryers, refrigerators, even VCRs, none of which the other guys sell. Lowe's says that its aisles are wider than Depot's too, and that its stores are better lit. Still, it's hard not to think I'm standing smack in the middle of one of those monstrous orange stores.

It's all by design. Lowe's, the No. 2 home repair and improvement retailer, is chucking its 52-year heritage as a "small box," small-market retailer and recasting itself in the market leader's image with a $7 billion construction spree, building 150,000-square-foot stores nationwide. The new stores have already increased the size of Lowe's average store from less than 20,000 square feet in 1989 to 86,000 square feet today. Now, Lowe's will build 80 megacenters annually for the next several years and expand into large urban markets in the West and Northeast.

The plan was hatched ten years ago after Lowe's, long the top chain in the building-materials business, was lapped by Home Depot. Bob Tillman, then Lowe's senior merchandising VP, headed the transition team. In 1996 he became Lowe's president and CEO. This year he became chairman. "If you've ever been No. 1, it's no fun being the No. 2 sled dog and looking at the lead dog's you-know-what," he says. Tillman knows Lowe's will never catch Home Depot in overall size--number of stores or revenues--so he's picking his battlegrounds carefully. "Our objective is in every market we serve to be the first-choice store for home improvement products."

Some of the company's executives didn't buy into the new Lowe's. Most of the naysayers are gone. "There were some real heated battles," says COO Larry Stone. "When we first started going into Home Depot centers in the mid-1980s, we really questioned whether it would work. We finally started to realize it was a great concept, but we were slow to react. We're still kicking ourselves."

Not if you listen to Tillman, who sounds these days like a college football coach giving a pregame pep talk to his underdogs before they take on the undefeated No. 1 team in the nation. "You can't just copy somebody; you've got to be better," he says. "Retailers fail because they get arrogant. Other companies mindlessly copied Home Depot but didn't focus on the customer. Around here, if the customer doesn't think we're doing what we need to do, then we do it."

The current team is clearly juiced. "This battle will be won in the aisles," says Stone. "It's like sports," adds marketing senior VP Greg Bridgeford. "It's No. 1 vs. No. 2. I don't want to get on their locker room wall, but yeah, it gets your blood going."

It's all a far cry from Lowe's sleepy beginnings. The company is still headquartered in its birthplace, North Wilkesboro, N.C. (pop. 4,000), where in 1921, L.S. Lowe opened a small store called, simply, North Wilkesboro Hardware, specializing in groceries, snuff, and harnesses. Lowe's was founded 25 years later when Jim Lowe, L.S.'s son, sold his share of the business (by then a whole two stores) to his partner and brother-in-law, H. Carl Buchan. Buchan retained Lowe's name because, heck, he just wanted to use this slogan: "Lowe's low prices." Until last year Lowe's had stores in only one of the nation's largest 35 markets. Tillman explains the move from small-town roots into major markets: "That's where people with money live," he says. "You've got to go where the money is."

Lowe's strategy involves more than tough talk and building stores. In fact, consumers won't even see perhaps the most impressive facet of the transformation--five new one-million-square-foot distribution centers around the country (and another is on the way) that permit Lowe's to buy larger quantities of products from vendors (resulting in better volume discounts and, one presumes, lower prices) and get those products to any of its stores in as little as 24 hours. "If you come in looking for six cases of silicone caulking and we don't have it, we can get it to you the next day," Tillman says.

The CEO also had to convince Wall Street that this mutation wasn't merely the beginning of the end for a stock that had performed well for years. (Between 1987 and 1997--when Lowe's opened five stores in Dallas, its first test in an urban market--the stock grew 933%!) So he made a gutsy play: Test the new "big box" concept in Dallas and Atlanta, cities where Home Depot had its largest shares of the market. "We had to target their best markets, or the financial markets wouldn't have given us any credit for being able to compete." The results? The Dallas stores exceeded expectations by 20%, each generating over $1 million in sales during the first week. Wall Street has generally applauded the move. The stock reached an all-time high of 46x in July and has risen 60% since this time last year. No wonder Tillman isn't shy about taking his digs: "We'll always have to compete against Home Depot, even though they don't want to compete against anybody."

Buoyed by early results, Tillman predicts Lowe's will be a $30 billion company by 2003, a 20% annual compound growth rate. "There's been a bit of a backlash out there," Tillman says. "Consumers resent having only one choice. With two competitors in a market, the consumer wins. Wal-Mart may not be as good as it is today if not for Target and Kmart."

Ultimately, Stone's prophecy will likely prove correct: The battle for home improvement supremacy in markets where Home Depot and Lowe's compete will probably be won in the aisles. In this area, Tillman is differentiating Lowe's from Home Depot in two ways: (1) by providing different products than Depot, many under exclusive deals with well-known designers, and (2) by offering major project renovation services under the same roof rather than in another store, as Home Depot is doing with its new Expo Design Centers.

The branding battle will be interesting to watch. Actually, both companies are creating proprietary products--goods sold only in their stores. Two of Lowe's early successes are paint brands: one carrying the name of designer Laura Ashley; the other under the Olympic brand, known primarily for wood-staining products. In the works are deals with several high-profile designers to put their names on products in categories like kitchens, carpets, and window treatments, where no particular brand has an awareness advantage with consumers. (Can you name the company that built your kitchen cabinets?) Also, Lowe's is about to close a deal with a major consumer products company to create a line of small appliances under the company's familiar brand. Again, move fast, strike hard--and use well-established brand names to catch the consumer's eye. "We don't have time or resources to build a brand from scratch," Bridgeford says. "It's awfully hard to do that. Having said that, we're trying to make sure we don't just throw a name on an existing product but rather work with the vendor and manufacturer to create products that take what people like best about the brand and translate it thoughtfully to the category."

Lowe's is betting that consumers with major projects like new kitchens and baths will sign up for complete renovations at their stores instead of straying to the ritzy Expo stores. Is Lowe's missing another trend? Tillman doesn't think so. He's confident that Lowe's fancy designer displays will "turn heads" in the stores--and not toward the exits. In a big way, he hopes.