When Home Depot Inc. landed Robert L. Nardelli as CEO some two years ago, it was hailed as a coup for the nation's second-largest retailer. A retailing neophyte, Nardelli was a manufacturing star at General Electric Co.'s Power Systems unit. Home Depot's board bet it could benefit from his operational savvy. After all, though Home Depot had successfully blanketed the nation with its orange-striped stores, the $58 billion retailer was rife with waste and inefficiency, having failed to invest in the systems to manage its ever-sprawling network.
Fast-forward to the present, and it's clear the transition has been more difficult than expected. On Jan. 2, Atlanta-based Home Depot warned that fiscal fourth-quarter sales at stores open a year or more would be down as much as 10%. It was the second such quarterly drop and the seventh straight quarter in which Home Depot has lagged archrival Lowe's Cos.
It was no surprise, then, that the announcement sent shares down 14%, to $21.38. All told, they're off 50% since Nardelli became CEO in late 2000. "I think there are people on Wall Street who are questioning his ability to make the change and run a retail organization," says Erik Becker, an analyst at Waddell & Reed Financial Inc., which has cut its stake from 1.7 million shares to 448,000 since June.
The heavy hammer has hit Home Depot from many fronts. The company blames its sales dip largely on the poor economic and retail climate, as well as a decision not to repeat the costly promotional sales of past years. But analysts and investors see another culprit: A customer backlash against Nardelli's overambitious inventory and staffing initiatives, which have badly disrupted service and sales.
Nardelli dismisses the skeptics, insisting that the transition from turbines to tools has been relatively smooth. "Is retail different? Sure it is," he admits. "But there are certain fundamentals in running a business that are pretty portable." And directors profess their full support of Nardelli's sweeping makeover. "We're telling him to stay the course," says director Ken Langone.
But critics argue that Home Depot's woes stem from Nardelli's efforts to force manufacturing-like processes onto retailing. In his GE days, he was able to shave inventory even as he pushed managers to move products out the door quicker. But his efforts to do the same at Home Depot have simply slowed reorders, leaving stores out of stock in such key areas as electronics. Meanwhile, he has shaken up his workforce. The share of part-time sales clerks has gone from 26% to as high as 50% in 2002--even as rival Lowe's with a staff that's 80% full-time garnering a rep for better service.
Home Depot officials maintain that the sweeping makeover will leave the retailer stronger than ever. But Nardelli & Co. can only hope that disaffected customers give the retailer a second look.
By Dean Foust
With Brian Grow in Ocala, Fla.