Online Extra: At Home Depot, "the Model Has Changed"

CEO Robert Nardelli talks about where it went wrong and how it's making big adjustments

Since taking the foreman's role at Home Depot (HD ) in December, 2000, Robert L. Nardelli, chairman and CEO, has faced an uphill battle. When he arrived, Home Depot's vaunted profit machine was already sputtering. Its big orange boxes were growing old, and worse, they were being bypassed by millions of consumers in favor of upstart Lowe's (LOW ).

But Nardelli, the former head of GE's Power Systems unit, quickly developed a new strategy for Home Depot and doggedly stuck to it. Backed by reams of research, he began to upgrade Home Depot's stores, open new ones with reshaped layouts, add more upscale merchandise, expand into urban and international markets, and tap new niches such as carpet and cabinet installation. Four years later, that strategy is paying off. Home Depot's stock hit a 52-week high on Oct. 11 of $40.21.

Nardelli recently sat down with BusinessWeek Correspondent Brian Grow at the home-improvement chain's new Manhattan store to discuss the challenges and frustrations of turning around Home Depot. Edited excerpts of their conversation follow:

Q: Some analysts say Home Depot's turnaround is a work-in-progress. Do you agree?


That's a fair assessment. The overarching strategy is solid. It's a mosaic that we put on the wall a couple of years ago about enhancing the core, extending our business, and expanding our market. That strategy is kind of timeless.

The retailers that have failed -- and the landscape is strewn with them -- had a very successful model, locked into it, and lost the most important perspective in retailing: be market-focused and customer-centric. Markets change, consumers change, there's an evolution. Baby boomers are moving away from do-it-yourself to do-it-for-me.

Q: Do you think Home Depot should be viewed as a growth stock?


This company will have gone from $40-some billion [in sales] when I got here, to $70 billion (in fiscal 2004). We will have doubled earnings-per-share in the last four years.

Looking at my peer group and other corporations, I would say that we have demonstrated our ability to grow in adverse cycles, in a difficult economy, with currency and global unrest, rising utility and fuel prices. The numbers speak for themselves. Yesterday we hit another 52-week high. [Wall Street] is starting to see the intrinsic value that we're creating and the sustainability. The challenge is to continue to deliver profitable growth and drive execution bigger and faster.

Q: Does Wall Street's apparent infatuation with Lowe's frustrate you?


Lowe's is a formidable competitor. Home Depot-Lowe's is no different than Coke-Pepsi, McDonald's-Burger King. I think that our strategy will continue to distance us from Lowe's. The [Manhattan] store sends a very loud message of our ability to differentiate. As we define a $900 billion market, you're going to see a broader base of businesses in a broader geographic reach than you have historically seen within Home Depot.

Q: You identified the $900 billion market potential. Why does Wall Street still feel that the market is saturated with big orange boxes?


If you took a very narrow view, you would certainly say that the home-improvement sector could be creating more stores than God is creating people. What you have to do is find new geography, [like] Wal-Mart (WMT ). They're going to open a couple of hundred stores offshore [next year]. I try to be a student of Wal-Mart. That's evidenced by our move to Mexico.

And a week ago, we opened a store similar to Manhattan in Vancouver -- breaking the tradition of a standard box where you walk in and the lumber is on the left and garden is on the right. [Vancouver is an urban, multilevel Home store with 60,000 square feet of floor space, less than half the size of a typical Home Depot]. What you're seeing -- at least in [our] retail format -- is a product-line extension.

Q: Can you talk about the technology investments you've made at Home Depot?


Last year, we strung 5,000 miles of cable. We put 90,000 [cordless scan gun] devices into stores. We added self-checkout to 800 stores, even though the naysayers said it wouldn't work. We got over 30% utilization and 40% reduction in queue time. My goal is to use technology to enhance the shopping experience. Next, I want to use technology to take tasks out.

Every hour that we save through self-checkout went back onto the selling floor. Third, I want technology [to help us] run our business more efficiently -- get sales data faster so that point-of-sale automatically releases an order for [inventory] replenishment.

Q: What was the goal in bringing rigorous data analysis to Home Depot?


What got us here wasn't going to get us [where we want to go]. That's not critical of the past, it's building on it. That's a real important message because a lot of times people want to pit the [current] leadership against prior leadership. I was blessed to get $30 billion of assets and a wonderful culture.

We recognize that we probably underinvested. We probably got overconfident. I think a lot about not letting success breed arrogance. Arrogance breeds complacency. Complacency breeds failure.

Q: How has your experience at GE (GE ) helped you here?


Seventy to 75% of what we know is portable: how to deal with people, the importance of human resources, accountability, giving back to the community. Whether I was running a tungsten mine in Winnemucca, Nev., or building locomotives, or providing the national grid with innovative power, you have to learn how to be a dry sponge and absorb the uniqueness of the business and market that you're in.

Q: What's Lowe's doing right?


They do a lot of things right. They follow us to every new location. (Laughs.) They've been around a long time, they're an established company. They took advantage of a period of time when we probably got too complacent.

Q: What are they doing wrong?


I focus on the things that I have to improve.

Q: Do you have to work harder to communicate the changes under way at Home Depot to Wall Street?


Absolutely. The model has changed. Historically, the model was: We're going to build this many stores, which gives you this square-footage, that gives you this average ticket, times this gross margin.

Today, you have external forces -- cyclicality, seasonality, global influences, elections, so you have to work longer and harder. You can't just look at one metric, i.e. same-store sales. It's one of many now.

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