CEO Speaks: Home Depot
Robert Nardelli wants to remodel the retailer, restore a faded growth stock.
February 26, 2002: 12:55 p.m. ET
By Lisa Gibbs
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NEW YORK (MONEY magazine) - For 20 years, Home Depot made growth look as easy as changing a lightbulb. Since opening its first three stores in Atlanta in 1979, the retailer has swelled into a home improvement colossus, with more than 1,300 stores and $45.7 billion in fiscal 2000 sales.
But Big Orange hit a rough patch. Consumers, worried about the economy, cut spending on home remodeling. Plus, Home Depot became a victim of its own success, opening so many stores that it began to compete against itself for sales. After an earnings slump in 2000, the usually reliable stock nosedived from nearly $70 a share to less than $40.
Into this unfamiliar territory walked a new CEO, Robert Nardelli, a General Electric vet who'd been one of three executives in the running to replace the legendary Jack Welch as GE boss. Nardelli's history with GE was lifelong. His father had worked there, and Nardelli signed on right after college and rose to become chief of its Power Systems business.
Making turbines and generators wouldn't seem the proper training to head the country's second-largest retailer (after Wal-Mart), but Nardelli brought with him a reputation as a tough operator. He quickly set about imposing Welch-like discipline on Home Depot's famously decentralized bureaucracy, slicing out a layer of top management, consolidating divisions and instituting new programs to track performance.
Last November, after almost a year on the job, Nardelli outlined for investors his plans for the next three years, which call for throttling back on store expansions and promising instead to boost sales at existing stores. Nardelli phoned MONEY writer Lisa Gibbs from Atlanta headquarters on Martin Luther King Jr. Day to discuss his strategy.
Q. Thanks for speaking with me on a holiday.
A. You never take a holiday in retail. That's one thing I've learned during this transition -- retail never sleeps.
Q. Are you saying that you're working harder than you did at GE?
A. I didn't think that was possible, but it is.
Q. Let's get started then. Can you explain why Home Depot will be increasing its earnings and square footage at a slower pace than before?
A. We looked at about 50 different indices, such as unemployment and housing turnover. We also went through a rigorous bottom-up review of the competitive landscape, including demographic shifts, consumer buying patterns and other trends. Then we put together a picture of the industry going forward.
This showed a flat 2002 for the industry, with modest improvement in 2003 and 2004. So we decided that a reasonable projection for new stores would be about 200 a year over each of the next three years. Yes, that's lower than previous expectations, but in that time we will have built more new stores than our closest competitor has in total today.
Q. You're still predicting earnings growth of 18 percent to 20 percent through 2004. In a flat economy, isn't that too aggressive a target?
A. We've got over $17 billion of assets, and I think we have an obligation to drive more sales per square foot of existing assets. How will we do that? By gaining share. The industry's top five competitors have only about 17 percent of the market. There's 83 percent of the market that represents opportunity.
So how do we attract that customer base? One of the ways is services. We're the largest retailer of carpeting in the U.S., and we want to be the largest installer. Our tool-rental business is having phenomenal growth. While we're No. 1 in home improvement, I want to make sure we're No. 1 in every segment of home improvement.
Q. How big can services really get?
A. Currently, we're running about $2 billion to $3 billion. We've targeted a 40 percent compounded average growth rate over the next three years, which gives you somewhere between $8 billion to $10 billion of topline growth. This isn't a sideline for us. We see service as a long-term growth opportunity for extending our core business.
Q. How are you addressing complaints that your faster-growing competitor, Lowe's, is a nicer place to shop?
A. We've got to make our stores more shoppable, more navigable. We have moved some of the tasks done during the day to off-hours to enhance customer contact time. We've also added what we call a "racetrack manager" at every store, who will continually lap the high-flow aisles making sure every customer is being attended to -- that's probably one of the most significant cultural changes we've gone through. We're starting to get good feedback.
Q. You tried attracting more upscale customers with your fancy Expo Design Centers, but they haven't done as well as hoped. Why stick with them?
A. I personally believe in Expo. I think it offers an unbelievable convenience to the consumer, the architect, the builder. We're shaking out some of the operating issues and efficiencies, and we've changed the way we're rolling out the stores.
The Home Depot strategy always was to basically populate an area. We have three Expos in the Atlanta area, for example. We're now going to stick to the top 100 markets, building one store in each, so we'll get national leverage on advertising. We've also moved down the demographic scale for the customers we're trying to reach, from $75,000 in annual household income to $55,000 or $60,000. This more than doubles our target population.
Q. What about international growth? A lot of maturing companies have pursued business overseas, but with mixed results.
A. I'll never look as smart as I do today on exiting Argentina back in October. We just weren't going to have enough size and scale, as opposed to what I saw in Mexico, which represents $12.5 billion in opportunity. We've made an initial acquisition, and we can quickly assimilate there, because we have tremendous business already from Mexican border shoppers, so in true retail fashion all we're doing is bringing the shop to them.
In Europe, it will be an opportunistic acquisition. Accumulating real estate there takes too long and is too cumbersome to do alone. Bottom line, I'm not going to expand to buy topline growth. Expansion will represent a sound economic value for shareholders. 
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