Home Depot CEO making his mark
By Maxine Clayton
Bloomberg News Service
ATLANTA — When Home Depot Inc. tapped Robert Nardelli in December as its new chief executive, analysts and investors were surprised that an outsider with no retailing experience was picked to run the largest home-improvement chain.
As head of General Electric Co.'s power-systems unit, though, Nardelli came with impressive credentials. In five years, the 52-year-old executive had more than tripled sales of power-generating equipment. Some wondered whether he could sell plywood and table saws as well.
At Home Depot, Nardelli has applied the cost-control lessons he learned so well from his former boss, General Electric CEO Jack Welch. That helped fiscal first-quarter profits beat forecasts by 2 cents. What Nardelli has yet to prove is whether he can lift sales and deliver the profit growth investors have come to expect from a company whose stock has risen more than 11-fold in the past decade.
"GE has been notorious for how it can maintain costs," said Crit Thomas, a portfolio manager at National City Corp., which owns Home Depot shares. "It's never been tested at the retail level, and this could be (Nardelli's) legacy if he can do it."
To keep a lid on costs, Nardelli is scaling back the company's store openings. Home Depot will open 200 stores this year, a decline from the 225 stores previously planned. He's also looking for new ways to boost sales.
Home Depot said last week it signed a purchase agreement to buy the 8.5-acre Ke'eaumoku "super-block" in Honolulu after Wal-Mart backed out of a deal for the site near Ala Moana Center. A store on that site would be Home Depot's fourth in Hawai'i.
Home Depot turned to Nardelli as the company faced one of its toughest periods in years: business was slowing as rising fuel costs, interest-rate increases and stock-market declines curbed consumer spending on remodeling projects. Profit also was being hurt by rising lumber prices.
Nardelli quickly began making his mark. He flattened Home Depot's chain of command by eliminating the position of group president.
"I felt the need to get closer to my direct reports and to the customers," Nardelli said in an interview. He also combined the Eastern Great Lakes and Western Great Lakes divisions to form the Midwest unit in an effort to increase efficiency.
"I think service is a big growth opportunity for us," Nardelli said in the interview. "We're already the largest retailer of carpeting in the world. Why not be the largest installer?"
It's this fresh look at the company's business, investors said, that will help Home Depot weather the economic doldrums and boost profit. Investor confidence that Nardelli is the right man for Home Depot is on the rise. Atlanta-based Home Depot shares had gained 13 percent since his appointment on Dec. 5.
The company, however, isn't likely to see the kind of profit growth it experienced in the past, investors said. Net income rose 11 percent in fiscal 2001, compared with an average annual increase of 34 percent in the previous four years.
"They aren't the hyper growth story they were in the past," said analyst Bill DeRosa at Seattle-based Badgley, Phelps & Bell Inc., which owned about 433,630 Home Depot shares as of December.
The home-improvement chain reported that fiscal first-quarter profit increased slightly to $632 million as sales rose and expenses were kept in check. Per-share profit was unchanged at 27 cents, beating forecasts of 25 cents, the average estimate of analysts polled by First Call/Thomson Financial.
"Nardelli said he would focus on inventory and expenses and he did it," said CIBC World Markets analyst Peter Benedict.
The company gave investors more encouragement when it said second-quarter profit will meet analysts' forecasts for 37 cents a share. However, same-store sales, which declined 3 percent in the first quarter, aren't likely to show much improvement. The key retail measure will be unchanged or fall slightly, Home Depot said.
Bernie Marcus and Arthur Blank founded Home Depot in 1978 and opened three stores in Atlanta the following year. The retail chain now has 1,178 stores in the U.S., Canada, Chile and Argentina.
Only the economy was able to slow down Home Depot. Last year, consumers had to contend with higher fuel prices and six interest- rate increases by the Federal Reserve since June 1999. The stock dropped 34 percent last year — the first decline in seven years.
"Home Depot will have a couple of quarters where they will have to work through" the economic slowdown, said analyst David Schick of Robinson-Humphrey Co. "You will see some pockets of strength in the second quarter. The third quarter will be palatable."
"The fact that the company's new CEO made good on his original promise (of 26 cents a share) should not be taken lightly," UBS Warburg analyst Aram Rubinson wrote in a report. "It is as good a sign for the future as we can hope for."
