Retail News Update

Home Depot’s founding is corporate lore – a classic story of turning lemons into lemonade.

Bernie Marcus and Arthur Blank, fired from hardware chain Handy Dan, got their revenge by creating Home Depot, a warehouse hardware concept. The first two stores opened in Atlanta on June 22, 1979. Over the next three decades the company grew into the nation’s second-biggest retailer behind Walmart.

How we got the story
The AJC reviewed past articles and books about Home Depot, and interviewed two former CEOs, the current CEO, former and current executives and retail experts to get their thoughts on the company at 30.

As the chain turns 30 on Monday, Marcus is not bashful about burnishing the legacy.

“When you look at what Arthur and I have accomplished, today over 300,000 people are working at the Home Depot,” he said last week. “We probably lowered costs to homeowners by about 25 to 30 percent. We had more of an impact on the economy than any Congress since.”

But the milestone comes at a humbling time for Home Depot. In recent years the stock price has tumbled and expansion has ground to a halt. Internal reorganizations have forced layoffs, and the company known for its “You can do it. We can help.” ad tagline is scrambling to regain its customer service edge.

None of the founders is still on the board of directors, and in conversations last week they were frank about how the company has evolved with different leadership.

“I would say for a period of about four to five years, we lost our way through the last CEO,” said Marcus. He was referring to the December 2000-January 2007 reign of Bob Nardelli as chief executive. Recruited from General Electric, he was the first CEO brought in from outside.

Nardelli, hired to give Home Depot discipline and structure, was criticized for changing a culture that had been working. He tried to build new revenue streams by creating a wholesale division, HD Supply, intended to become the leading supplier to big infrastructure projects such as sewer lines and bridges.

“I think Nardelli came in because Arthur and I felt we had grown the business and the systems were very antiquated,” said Marcus. “We were very entrepreneurial and we needed some discipline. Nardelli provided that. But unfortunately, he had his own culture he tried to infuse into the Home Depot, and that culture didn’t work well.”

Blank, who left Home Depot shortly after Nardelli’s hiring, said, “I think the board’s decision about Nardelli clearly was not the right one.”

Pat Farrah, another co-founder who now runs garden retailer Smith & Hawken, was more emphatic.

“None of the three of us should ever have handed over the reins of the company,” said Farrah. “We knew how to do everything, and do it well and people loved us. We should still be running the company today.”

Nardelli, who left Home Depot to run now-bankrupt Chrysler, declined to be interviewed for this story.

Wall Street analyst David Schick, however, said blaming Nardelli is too easy.

“I don’t think it’s fair at all to throw Bob under the bus,” said Schick, of Stifel Nicolaus Equity Research, a firm that does business with Home Depot.

“I think the growing pains Home Depot ran into are pretty interesting glimpses into the history of American retail,” he said. Nardelli’s effort to update internal systems and diversify revenue were not mistakes, he said, but part of the company’s “life cycle.”

It’s easy in hindsight, Schick said, to say building HD Supply or Expo, a store dedicated to high-end designer items that actually pre-dated Nardelli’s arrival, was wrong.

“But when you’re 20 years old and pretty built out, it’s easy to think, ‘Lets look at other businesses,’” he said. Wall Street also wouldn’t have embraced slowing growth, he added. “It’s Wall Street’s fault too.”

If debate about Nardelli’s tenure persists, Marcus said he thinks the current CEO, Frank Blake, is headed in the right direction. He shed HD Supply, although Home Depot still owns a 12.5 percent stake, and shut down Expo. He’s emphasizing the core retailing that was the company’s original calling card.

“Frank Blake has done a yeoman’s job in two and a half years in turning that around,” said Marcus.

“Frank is not wedded to everything in the past,” agreed Blank, “but he understands the value of culture and those fundamentals.”

In the face of a housing-led recession, however, sales, profits and stock price have all been under pressure during Blake’s still-young tenure.

Excluding the HD Supply division, revenues dropped nearly 10 percent over the last two years to $71.3 billion. The company’s market cap, or the value of all outstanding shares, is about $40 billion, down from $70 billion in January 2006.

Archrival Lowe’s has wrestled with similar downdrafts, though the North Carolina-based chain is still growing its U.S. store base and has started expanding to Canada.

Home Depot plotted overseas growth many years ago, hoping to emulate No. 1 U.S. retailer Walmart and its expansion into South America, Asia and Europe.

Home Depot’s progress has been limited to 176 stores in Canada, 74 in Mexico, and 12 outposts in China. An attempt to gain footholds Chile and Argentina last decade fizzled.

“We did expand at one point,” said Marcus. “We went South to Chile and Argentina, but we didn’t do well. We were not ready for it. Frankly, we didn’t have systems to control those businesses and we pulled out.”

Now, retail expert Howard Davidowitz sees international growth as Home Depot’s next frontier.

“Home Depot is very small internationally, and that may mean a lot of potential for them to grow,” said the New York retail consultant and investment banker.

But analyst Schick doesn’t think the chain should be looking abroad.

“No, absolutely no,” he said. Home Depot “is very housing-related” and has a “different equation” than Walmart. The latter has a self-service model, while Home Depot’s calling card is helping homeowners solve problems.

“American retailers and companies often think we know how to do things here, so we can do it there,” said Schick. “You have to be very careful about assuming your model is exportable.”

What does the current CEO think? Blake said international growth is “absolutely an opportunity for us,” and that he will probably look to Latin America first – but only “when the time is right.”

Meanwhile, Home Depot’s biggest growth opportunities now are stealing market share back from Lowe’s, and in making its U.S. stores more efficient and profitable, he said.

Blake believes he can “drive” up revenues by improving U.S. stores and increasing Internet sales.

He’s working to create “advantages” for Home Depot over Lowe’s by improving inventory and merchandising systems. The company is spending hundreds of millions of dollars building new product distribution centers. Blake said company research shows Home Depot’s brand is still “incredibly strong.”

“Thirty years is still pretty young,” said Blake. “There are more opportunities to play offense here than overseas. You have to remember where you’re going to create more of your value.”

As consumers cut spending, Home Depot lowered prices last year on more than 1,000 items. This year it launched the price-conscious tagline, “More Saving. More Doing.”

Davidowitz thinks Home Depot should have capitalized more on being a “warehouse” brand during the “biggest trade down” in retail history. He said stores should have areas “where everything is $10 or less, to drive footsteps. Why don’t they have that?”

As for the next 30 years, Home Depot’s future will remain pegged to the consumer, and the economy.

“What’s tarnished is our economy,” said Davidowitz. “Home Depot will come back if we can get all this stuff back and the economy improves a little.”

Said Schick: “I do think housing will still age, paint will still crack and faucets will still leak 30 years from now. I don’t think we’ll all be levitating, so we’ll still be wearing out carpets.”