John P. Miles had been a loyal Home Depot customer for years. A vice-president for a business software firm, he travels most weeks from his home in Winter Park, Fla., to his job in New York City. When it was time to renovate the kitchen in his Manhattan condominium a year and a half ago, Miles turned to the local Home Depot near Orlando, where store managers assured him that the long-distance project would not present a problem. He and his wife, Nancy, ordered new cabinets, appliances, countertops, a faucet, sink, tiles, and lighting. Home Depot kitchen designers whipped up a drawing.

Then all hell broke loose. Installers working through a Home Depot in New Jersey didn't receive the correct designs. Replacement cabinets were the wrong finish. Phone calls to the store were not returned. A letter to Home Depot Chief Executive Robert L. Nardelli went unanswered. An hour-and-a-half demolition of the 7-by-7-foot kitchen was followed by a three-month wait to complete the new one. Now, Miles says, "I'll go out of my way to go to Lowe's."

Home Depot has delivered superb financial numbers in the past five years, with total sales growing an average of 12% per year and profits doubling. But the share price has dropped 24% during the biggest home improvement boom in history. And shoppers are getting grumpier. The University of Michigan's annual American Customer Satisfaction index shows Home Depot slipped to dead last among major U.S. retailers, 11 points behind Lowe's. Home Depot employees, who were encouraged to "make love to the customer" under co-founders Bernard Marcus and Arthur M. Blank now sometimes treat them like bad dates. "I don't want to say one bad apple spoils the bunch," says Curt D. Bridges, an electrical engineer from Decatur, Ga., who used to be a die-hard Home Depot fan. "But sometimes some [store clerks] almost blow you off."

Nardelli's strategy to expand into the contractor supply business, while cutting costs and streamlining operations in 1,816 U.S. stores, has pushed customer service down the company's priority list. Many full-time workers have been replaced with part-time employees, who now make up 40% of store staff. Meanwhile, workers' incentives for good customer service have dwindled, too. The profit-sharing pool for workers shrank to $44 million, down from $90 million the prior year, despite record sales.

The customer service fumbles have been exacerbated by the emergence of newer, more customer-friendly Lowe's stores. Sales at Home Depot stores open at least one year rose 1% in the first quarter, compared with 2.1% in the same quarter last year, according to analysts. (Lowe's jumped 5.7%). Home Depot compounded Wall Street's angst last month when it announced it will stop reporting those figures. That's an unusual move for most retailers, let alone the second-biggest in the U.S., and has analysts wary of more bad news ahead.

Home Depot insists that providing perfect customer service is near impossible for a company that processes 1.3 billion transactions a year. Even a 99% satisfaction rate, it says, would leave 1.3 million unhappy customers. But the company appears to be waking up to bubbling discontent among customers and employees. BusinessWeek has learned that it plans to launch a major customer service incentive program at the end of June that will dish out millions of dollars to workers who deliver top-quality service. Nardelli believes that customer service "is the ultimate differentiater," says Jose Lopez, Home Depot's chief customer officer.

That move may come in the nick of time. Tom Marsico, chief executive of Marsico Capital Management LLC, which owns 36 million Home Depot shares, says he has staffers staking out stores to assess how Nardelli's decisions are working on the shop floor. Says Marsico: "Could he have gone to retail school for a little bit? Probably. Maybe he would have done a better job thus far."

Corrections and Clarifications In "Satisfaction not guaranteed" (News: Analysis & Commentary, June 19), 1% of Home Depot (HD ) Inc.'s 13 billion transactions is 13 million, not 1.3 million.

By Brian Grow, with Susan McMillan, in Atlanta

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