Robert Nardelli of Home Depot: The fixer-upper

Roughly every 43 hours another Home Depot opens in the U.S., Canada or Mexico. As of late last month, the company had 1,666 stores. Next month the Atlanta-based retailer expects to wrap up its fiscal year with record sales of more than $60 billion.

But it wasn't so long ago that Home Depot was itself in urgent need of renovation. In 2002 the company's stock price tumbled 53 percent. Many analysts concluded that the home improvement market was overbuilt. Scrappy competitors -- notably, Wilkesboro, North Carolina­ based Lowe's Cos. -- were whittling at Home Depot's customer base.

When Robert Nardelli was brought in from General Electric Co. to run Home Depot in December 2000, the company had posted four consecutive quarters of declining same-store sales. Recruited by the company's three founders -- Arthur Blank, Kenneth Langone and Bernie Marcus -- Nardelli was to be the first outsider to run the 24-year-old enterprise.

Many of the close-knit company's veterans were skeptical of, and even a little hostile toward, their new chairman and CEO. Nardelli, 55, had been president and chief executive of GE Power Systems, which manufactures gas turbines and generators, and had no retailing experience. The week before he arrived at Home Depot, he had formally lost out to Jeffrey Immelt in the contest to succeed General Electric CEO Jack Welch (who once called protégé Nardelli "the best [company] operator I've ever seen").

The new CEO's strategy to leverage Home Depot's brand was straightforward: Enhance the core business through such initiatives as sprucing up stores in a $250 million refurbishing effort; installing self-checkout systems to cut down on lines and free up salespeople; extending the franchise to new locations, in particular urban areas consisting mostly of apartment dwellers; and expanding the company's do-it-yourself market by providing home improvement services like carpet laying.

In his direct, GE-style approach, however, Nardelli came on like a buzz saw. He says that he found a company in need of a sweeping overhaul, with antiquated systems and controls. Nardelli replaced the company's decentralized, "every store manager a king" structure with a central command center using sophisticated technology to take advantage of economies of scale.

The changes were wrenching. The company's nine regional managers, who were accustomed to cutting their own deals with suppliers, resisted relinquishing control over merchandise. Many wound up opting for early retirement. Other managers complained that new shipping arrangements calling for lean inventories left their stores out of stock of popular items. Meanwhile, Nardelli was criticized by Wall Street analysts and institutional investors as Home Depot continued to lose ground to arch-rival Lowe's.

Just in time, Nardelli's strategy -- and the recovering economy -- have begun to produce impressive results. Centralized purchasing has squeezed more-competitive prices out of vendors, bolstering margins. Between 2000 and 2002 Home Depot's annual earnings surged 30 percent, to $3.7 billion. In November the company announced that profits for its fiscal third quarter, ended November 3, had jumped 28 percent year-on-year. The company is now on pace to grow earnings by 20 percent in the current fiscal year, ending next month. Cash reserves are at a record $5.3 billion. And Home Depot's stock price, having sunk to a low of 20 in January 2003, was up 80 percent, to 36, by year-end.

The worst is over, says Nardelli. Slack service is improving. Analysts are issuing buys on the company's stock. Although Nardelli can't unbuckle his tool belt yet -- Lowe's reported an even better 33 percent surge in third-quarter profits -- he struck a note of exuberant optimism in discussing Home Depot's outlook with Institutional Investor Staff Writer Rich Blake.

Home Depot opens a new store virtually every other day. Can you sustain such an ambitious pace?

Yes, absolutely. We see ourselves continuing at this rate for the foreseeable future. Growth opportunities come in different forms, such as opening up smaller stores near existing locations that are getting swamped, or securing really good locations in markets that perhaps aren't fully developed but have tremendous potential. It's not just about seeing how many stores we can throw up every two days. That's not the goal. Different formats of stores allow for continuous expansion.

Besides opening new stores, what have you been doing to grow earnings?

Baby boomers are moving from do-it-yourself to do-it-for-me. So we are now selling services as well as goods, mostly through arrangements with local contractors. We are in the high-end landscaping business; we are putting up siding, installing ventilation systems, laying carpet. Our services business grew 40 percent last year, and we are only getting started. We've also begun to cater to professional builders and contractors, a brand-new market for us. We are selling different types of merchandise, like lawn tractors and fridges. But most importantly, we have totally transformed how stores are run.

What shape was the company in when you walked in the door?

It was one of the great growth stories of the 1990s, and I had a lot of respect for the pride that people had in what had been created. But at the same time, I found there was a lot of cleaning up to do. It was as if the company had been in start-up mode for 20 years. I remember the first thing I wanted to do was send an e-mail companywide, and I was told by an administrative person that, no, I couldn't do that. I said, "What do you mean?" and it turned out I literally couldn't send an e-mail companywide because we didn't have the infrastructure set up to do it. Computer systems were antiquated; management was scattered around with no central power base; stores were looking run-down; service was poor in some cases. We were generating less sales on a per-square-foot basis, so we had to drastically change the entire underpinnings of the company. But as traumatic as that was for people, it was beneficial in the end. While I had respect for Home Depot's past, I let people know fairly early on that I was not wed to this past. The time had come to streamline, to centralize -- I knew it was imperative from the moment I got there.

What are the benefits of centralizing?

Essentially, we've gone from 1,600 separate businesses under one banner to one brand with 1,600 stores. We went from nine buying offices to one. This has translated to gross margin expansion and a higher return on invested capital. We've got one of the strongest balance sheets in retailing today, with $5 billion in cash compared with negative $800 million when I got here. I'm proud of that.

How are you going to use that cash?

We completed a $1 billion stock buyback earlier this year. But mostly, it will go toward capital reinvestment, new stores, training and some strategic acquisitions in Mexico, where we are now the No. 1 home improvement retailer.

Will Home Depot ever go to Europe?

If we did, it would most likely be through an acquisition, because sites for opening new stores are difficult to find. But we are exploring different opportunities. Right now we see plenty of growth opportunities in the U.S. Home improvement is a $500 billion market, and we are only getting about 10 percent of that.

What is the most valuable lesson you brought with you from GE?

That there is an infinite capacity to improve what you do. Innovation and technology have never let me down.

What sort of technology upgrades have you made at Home Depot?

We desperately needed major systems across three main areas: financial systems to track receivables, personnel management systems and retail tools to improve service. One thing we introduced that has been very successful is the use of two-way cordless scanners. So now if someone has a large sheet of plywood, instead of having to take it out of the cart, the checkout person can just quickly scan the price -- a huge time-saver. We introduced self-checkout in 800 stores, and customer acceptance has been impressive. Something like 30 percent of our customers use it, and we found that their time in line is reduced 40 percent.

Have you ever popped into a Home Depot and seen something that made you mad?

Well, maybe now and again, but more often I see something that makes me proud. In a typical week I'll cover six states and do 25 or so store walks. We've been giving out merit badges for exemplary customer service. But we pay cash bonuses, too. We paid $16 million in bonus pay for sales performance, and that doesn't include management, just the men and women on the floor. What I see when I go into stores, a lot of the time unannounced, is people taking pride in their work.

Where do you see the most need for improvement?

We need to offer more selection. Buying patterns change. What got us here in the past isn't necessarily going to get us to where we want to go in the future.