(FORTUNE Magazine) – When Bob Nardelli didn't win Jack Welch's vote of confidence to be CEO of General Electric in November 2000, he packed up and headed south to Atlanta to run the world's largest home-improvement retailer. The top spot at Home Depot, now the nation's 13th-largest company, was not only a respectable second prize but a chance to prove Welch wrong.

It's been a tough slog. While the market rallied behind Nardelli in his first few months at the helm, Home Depot's stock price tumbled 47% by early 2003 (see chart). Nardelli drew criticism for trying to impose GE's famously rigorous management techniques too quickly on the freewheeling Home Depot culture. But his recent performance has been a redemption of sorts. Despite pressure on multiple fronts--the challenging economic climate, rising lumber costs, fierce competition from Lowe's--Nardelli has increased revenues 42%, to $65 billion last year, and profits 67%, to $4.3 billion. And though the stock price, now at $38, is down from around $40 when he took over, it has been climbing steadily in recent months.

FORTUNE editor-at-large Patricia Sellers and writer Julie Schlosser caught up with Nardelli in early September to find out how he has put the company back on track--and how the GE way helped. Edited excerpts of the interview follow.

When you came to run Home Depot, you brought a lot of ideas from General Electric. Which of those ideas worked, and which didn't?

I wanted to invest in store modernization, merchandising, technology, and leadership, and all that has worked. I said that we were going to be laser-focused on merchandise that brought distinction and innovation. Proof positive is that the average ticket has gone from $48 to $55 over the past couple of years. We spend 12 times more in information technology than we did when I got here. Today we have more than 800 stores with self-checkout, and 32% of customers use it. The learning here is: Lay a strategy, lay a course, and stay with it. Not blindly stay with it, but believe in it and mobilize and do two of the most important things as chairman of a company: make resource allocations into physical capital and human capital. And when you do that, it is amazing what happens.

What happened to your grand plan for ramping up leadership development and training--something GE is famous for?

We will do 23 million hours of training this year. We have an executive-leadership program in place. It will convene in the next couple of weeks. It is 25 to 30 of the top officers in the company. We have had great internal and external learning. For example, [Fannie Mae CEO] Frank Raines has been here, and [General Motors CEO] Rick Wagoner has too. This next program, I have [eBay's] Meg Whitman coming and Michael Dell. Every district manager in this company has now gone through an immersion program in business and business leadership.

Let's discuss revenues. Two years ago you talked about $100 billion by 2005. Are you really going to make that goal?

We won't be there by 2005. But we will be there.

In these more sober times, do you regret setting such far-out revenue goals?

I think what has served us well is setting not unrealistic goals but challenging goals. If you set aggressive stretch goals and develop a plan and put the right leadership in place, you start to see realization. Now, will we get there as fast as we want to? Maybe not. But we will get there faster than we would have.

How big can Home Depot get?

We laid out a $900 billion--plus market opportunity. There's about $175 billion in the do-it-yourself market. There's $110 in installation--labor only--and another $100 billion if you add material to it. There is about $290 billion in the professional small repair and remodel area. There's another couple of hundred billion dollars in the higher-end professional. We looked at each of those segments and looked at who was a player. That's what gave us the confidence to enter new areas, such as the at-home services business. We now have about 25 national programs where we install everything from roofing, siding, fencing, windows, decking, sheds.

In retrospect, if you could do anything differently, what would it be?

I wish I had moved faster.

Really? You know there's a view out there that you moved too fast.

I know that I got a tremendous amount of--well, I don't want to say criticism. There was a lot of dialogue that I was moving too fast. But finding the strategy and being able to bring it to life--I wish I could have done it faster. I wish I could have modernized the stores faster. We were not as quick and agile as a retailer must be. The modernized stores are performing better than the nonmodernized stores in a market area, so obviously if we could have moved faster, we could have seen results sooner.

Apparently investors wanted results sooner. The stock price was around $40 when you took the job in December 2000. Today it is trading at around $38. Are you frustrated?

If the stock price frustrated me, I would have come off strategy. I think the stock price will catch up with the strategy. Here's a company that has 6% debt to equity. [Through stock buybacks and dividends] we are returning well over 50% of our net earnings to our shareholders. The industry median is 20%. We purchased $6 billion of our stock back. We've increased our dividends over 20%. I think the market will catch up to us. I'm not going to come off strategy because the market hasn't quite responded to the business model.

What's your view of the economy, and how is the economy affecting you?

There are some very good signs of industrial expenditures--people reinvesting in capacity. We are optimistic about the second half of this year. With concerns about safety and security and higher gasoline prices, people tend to stay home. That bodes well for us. We raised our earnings forecast for the second time this year at the end of our second quarter.

Does the thought of the housing bubble bursting [see cover story] keep you up at night?

No. It really doesn't. When we look at interest rates--we did a regression analysis--there is no correlation between interest rate fluctuation and our sales. We are more interested in housing turnover than we are in new-housing starts. That's why we have been so aggressive [in targeting people who are relocating]. For example, we just secured an exclusive three-year arrangement with the U.S. Postal Service where we will get information on any individual who is going to move. Then we can do direct mailings. That will start Jan. 1.

You still face lots of challenges. Everybody hears service complaints about Home Depot, for instance.

Our survey data show that customer support has improved significantly in the past three years. We do 1.2 billion transactions a year. Even if you took 99.996 times 1.2 billion, you will have customer complaints. But we now have an organization and a culture that takes that very seriously.

Why have your Expo Design Center stores struggled so much?

We made some mistakes because we followed a Home Depot model. For Home Depot customers, convenience is key. So we will often put a store in between two other stores. But people will drive farther to an Expo Design Center than they will to a Home Depot. We put Expo stores too close together when we should have gone to new metropolitan areas. We cannibalized ourselves. Now we are making sure we are taking advantage of the size and leverage of our merchandising departments and making sure we understand fashion-forward trends and the aspirational desires of customers in that segment.

What lessons have you learned from competing with fast-growing Lowe's?

Clearly our stores got old and stale. We got locked into a model that had served us well. It got us to around $40 billion [in revenues], but it wasn't going to get us to $100 billion. The lesson learned is that we've got to keep them fresh, and we've got to keep them vibrant. We've got to make sure that we are collecting good market data. We have to make sure we have distinct and innovative merchandise. Just because you are No. 1, you can't act like it.

It's been said Lowe's caters to female shoppers better than you do, and that's been one of its big advantages.

That may have been an accurate statement three years ago. But not today. We have the same percentage of woman shoppers as Lowe's. The one thing for sure is that we are not dropping a gender to chase a gender. We think the pro business--which represents 30% of our revenue--is just as critically important going forward as the decor shoppers. We do recognize the need to have cleaner, brighter, and more shoppable stores. We are moving at that at very aggressive speeds.

In June you announced that you would enter China. What's the plan?

We have had people on the ground in China for several months looking at the opportunities over there. Two years ago we opened offices in Shanghai and Shenzhen to get more customer data and to understand the supply chain. We think it is a tremendous opportunity. Look at housing over there. Chinese consumers basically buy a frame, and there's a porcelain bowl and a toilet in there, and they must outfit the entire inside. If they pay $60,000 to $70,000 for the cube, then they will spend another $12,000 to $17,000 to outfit it.

What is the biggest challenge you face in China?

It is probably no different in China than it was for us in Mexico. While there's a core model, you must localize it. We will make sure that we don't try to impose "build it and they will come." There has to be some customization. We've all heard horror stories about companies that try to translate advertisements directly and it becomes an embarrassment or really conveys the wrong message. So we have some local nationals on the ground who will help and advise us.

You've said that you will hire 25,000 to 30,000 new people next year. How do you find good ones who can help you improve service?

We formed a first-ever hiring partnership with AARP [American Association of Retired Persons] in February. [Older people are] an excellent applicant pool. And we will probably hire at least 10,000-plus military veterans this year. First of all, it is good for America. No. 2, it is good for business. Military men and women are well disciplined. They understand the importance of the team and working together. They understand challenge. We've had tremendous success with them.

Apparently you also like to hire athletes. You were a major sponsor of the Summer Olympics, and many of your employees competed. How did they do?

We did great. Fifty of our associates competed in the Olympic Games this summer. They brought home ten medals: five gold, two silver, and three bronze. It is a record for us. If we were a country, we would have been somewhere around 21st out of 202 countries.

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