Tidying Up at Home Depot

Bob Nardelli is bringing GE's discipline to a retail giant

These are a few things that Robert L. Nardelli has learned in his first year as chief executive of The Home Depot Inc. (HD ): to shout the company cheer and wear an orange apron whenever he visits a store; to say "sku" as shorthand for stock-keeping unit, not "S.K.U."; and to expect a kiss on the head when he greets co-founder and chairman Bernard Marcus. Hey, Nardelli used to be a football player. He understands camaraderie.

Executives at Home Depot have always encouraged that kind of exuberance. The company culture might best be described as rowdy. The idea was to grow big, fast. It did: Since 1979, Home Depot has gone from four stores in Atlanta to 1,301 in four countries. During the 1990s, profits at the nation's top home-improvement retailer grew an average of 35% a year. So what if the company got a little sloppy? It could afford to. Few managers, it's safe to say, spent much time thinking about metrics or best practices.

But efficiency is what the 53-year-old Nardelli is all about. Nardelli, who in December gave up a 27-year career at General Electric Co. (GE ) after he lost the race to replace CEO Jack Welch, knows a thing or two about making businesses run better. "He's got the GE discipline, and he brought it to us. And we needed it," concedes Marcus. As the economy slides into recession and rival Lowe's Cos. (LOW ) moves into the big urban markets Home Depot has dominated, improving operations is now imperative. "There's more change ahead for the company over the next two to three years than there's been over the past 10," says J.P. Morgan Chase & Co. retail analyst Danielle Fox.

Home Depot certainly had its share of problems in 2000. Its profits grew just 11%, after increasing by more than 40% the year before. Sales in stores open a year or more increased only 4%, compared with 10% in 1999. Now, Nardelli's cost-cutting is kicking in: Profits grew 20% for the third quarter and should rise 16%, to $3 billion, for the year, according to Budd Bugatch, retail analyst at Raymond James & Associates. But he expects 2001 same-store sales to be flat and overall revenues to grow only 14%, to $52.3 billion. The company's stock price has slid to about $44, from a high of $68.75 on the last day of 1999.

REDUNDANCIES. The economy can only get so much blame for the troubles at Home Depot. Executives were so focused on opening stores--total square footage increased an average of 25% a year during the past decade--that they didn't pay enough attention to controlling the company's sprawling operations. In contrast to other giant retailers, such as Wal-Mart Stores Inc. (WMT ), Home Depot's basic systems--purchasing, accounting, and logistics--had not been updated in years. Buyers from the company's nine regions each dealt directly with suppliers, which created redundancies in the company's $37 billion supply chain. Inventory controls were loose, too many layers of managers impaired accountability, and there was no uniform system to assess employee performance. As a result, return on investment, while an impressive 19.6%, hasn't improved since 1991. Analysts say it should have, as Home Depot leveraged its growing store base.

Enter Mr. Fix-it. His first decision was to cut 9% of the new stores planned for this year; Home Depot will open 204, the same number as last year. "We're not letting the economy take us off strategy," he says. "We want to be a $100 billion business."

ROLE REVERSAL. If Home Depot does get there under Nardelli, it will be because of the nuts and bolts. Nardelli moved quickly to flatten levels of management, make regional managers more accountable, and centralize purchasing in Atlanta. He told every store to get with the new service program before the end of the year: Employees now restock at night instead of driving forklifts through the aisles while shoppers are around. It takes away that warehouse feel, but it's safer, and employees no longer spend just 30% of their time with customers and 70% restocking. Now it's the reverse. He expects the change to generate the equivalent of 70 stores' worth of sales, or some $2.8 billion. Nardelli also tightened the customer return policy: A receipt is now required for all cash returns. And for the first time in the company's history, stores stayed open on Easter Sunday. Nardelli, a Catholic, even took his family to one that day.

Marcus and his partner, Arthur M. Blank, were so eager to hire Nardelli that they agreed to give him Blank's job as chief executive instead of just the post of president. Imagine the shock of most employees: They knew nothing about Nardelli, and he knew little about retail. Blank left the board in May; Marcus will step down as chairman in December and serve as a director until next May. For now, Nardelli and Marcus talk by phone at least once a week.

Joining what was essentially a family-run business with a distinct, almost laissez-faire culture was not easy. And some certainly see Nardelli as an interloper who doesn't get what Home Depot is all about. "Everything he's doing is counter-culture," says a former senior vice-president who left a few years ago. "It's bad for morale." Some midlevel managers have left, as well as one top executive, Mark R. Baker, head of merchandising and once considered Blank's likely successor. And Nardelli's No. 2 is a colleague from GE, Dennis M. Donovan, who heads human resources. Nardelli admits there was "a lot of anxiety and trepidation about the transition" but says he's trying to "protect the holy grail of culture."

It's easy to see where Nardelli got his intense focus on keeping track of the money. From his parents, children of the Depression, he learned that "you need to earn your way in life." His father started out as an hourly employee at GE and rose to plant manager; his mother took care of the two kids. While attending Western Illinois University on a football scholarship in the late 1960s, Nardelli took a summer job paving highways. He can come off as extremely serious, but everyone has their frivolous side: Nardelli is known for his lavish Hollywood-themed parties, replete with Elvis impersonators.

SHORT-LISTED. Retailers rarely turn to total outsiders, but that's definitely what Nardelli was a year ago. "I came here as a kind of dry sponge," he says, almost proudly. He figured that he could apply 75% of the skills he honed at GE--where he started in 1971, straight out of college. Over the three decades that followed, he headed the Canadian appliance unit, the transportation systems division, and GE Power Systems, which he took over in 1995. At the time, the business mostly sold power-generation products. Nardelli transformed it into one of GE's most profitable divisions by developing the services it offered; he made about 90 deals and quadrupled revenues, to $20 billion. He also managed to win over the locals in Schenectady. Early on, he and the mayor tangled over the need for an environmental cleanup at the company's campus. Nardelli worked to find a solution, though, and earned the mayor's respect.

On paper, Nardelli's performance was the best of any manager. He followed the GE formula with great precision. "Never show him a number you don't want to deliver, because he will remember," says Donovan. But some believe that for all that, Nardelli wasn't the strategic thinker Welch was looking for.

At Home Depot, Nardelli's GE-style directness has jolted some employees. But he is trying to make sure he has a good feel for the staff. He's held town hall meetings and met with associates deemed to be on the fast track. He likes to give out pay increases on the spot, as well as candid assessments of an employee's prospects. Marcus and Blank motivated people with hugs and cheers. Nardelli knows some of that is necessary, but he prefers metrics and a small measure of fear. Wonder who he learned that from?

By Aixa M. Pascual in Atlanta

Before it's here, it's on the Bloomberg Terminal. LEARN MORE