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Stock Research – Home Depot - Great Manager Blows HIMSELF UP

By Richard Stoyeck

Republish: EasyPublish™ Published: 12Jan2007 Word count: 1157 Viewed: 279 time(s) Get Free Content For Your Site

Stock Research and Home Depot are in the news again. This is a result of the firing of the CEO, Bob Nardelli, and what a story it is. You have to step back for a moment and think about any company's history that you are doing stock research on. You must have an understanding of the company's history. As a professional investor, when I think of a company's history, I am more concerned about corporate culture than just about anything else. History shows that a great corporate culture will produce great results. The opposite is true as well.

I was involved with Home Depot in the beginning. I watched and almost participated in the original private placement for the company over 25 years ago. That's another $100 million I am never going to have. What made this company really go, were the two founders, Bernie Marcus and Arthur Blanc. They created an entrepreneurial store atmosphere where a lot of what went on rested in the hands of the store manager.

For more than 20 years, the company had a spectacular run. It was one of the greatest stock market performances in modern history. It all came apart during the stock market bubble of 2000. Yes, the stock price was inflated, and the company brought in a new CEO Bob Nardelli, who was in the running to become CEO of General Electric. He was passed over by Jack Welch and the Board, and Jeff Immelt, won the slot to run GE.

As is the case with all top guys at GE when they are passed over, they leave, sometimes for greener pastures. Nardelli was recruited to run Home Depot, and successfully brought GE's template for how to grow a business over to Home Depot. That was his first problem, his second was execution. There is no question that Nardelli was successful in creating great numbers for Home Depot. He failed everywhere else.

When he started, the sales were about $46 billion. By the end of 2005, they were approaching $82 billion. During his tenure however, the stock price is overall down about 6% or so, while profits doubled. At the same time, its principal rival Lowe's Companies has seen its stock more than triple.

If it ain't BROKE – Don't FIX IT?

Nardelli was a self-made victim. It's one thing to come into an ailing company, and turn it around using modern management techniques. It's another thing to come into one of the best stock market performers in history, and start changing things that don't need changing. The result is the self-destruction of a seasoned corporate manager – Robert Nardelli. Don't feel too bad for him, he walked out with a very rich $200 million severance package.

He never got it though. He never figured it out. He's sitting in his home right now sipping a martini, licking his chops, and living in a fantasy world about what went wrong at Home Depot.

Here's the REAL DEAL

Nardelli went after the wrong issues at Home Depot. Yes, the company may have been a bit "shoot by the hip" in terms of giving those 2000 plus store managers authority to run the show – BUT IT WORKED, and it worked well for decades. The imperial CEO tried to wring them in – GE style, and the new template just wouldn't work. General Electric is the army of the corporate world, and don't kid yourself, the army wins the wars.

Home Depot was more along the lines of Special Forces – a lot of authority went to the guy on the floor running the store. After all, these are the guys that deal with the customers on a day to day basis. The customer buying a screwdriver, or the contractor buying drywall never got to see Nardelli. They only saw his procedures in place, and the procedures no longer worked.

Take the handoff for example. For years if you walked into Home Depot and couldn't find what you were looking for, you could ask any employee. Whoever you asked, would then walk you over to the aisle where the item was located. The employee would then look for the worker in charge of that aisle, and say, this gentleman would like a screwdriver. The second employee would then show you where they were located, even help you select one. The key is that the first employee would hand you off to the second employee personally.

Nardelli destroyed this practice, and with it – that flair that made Home Depot different than everybody else went down the tubes. There's something about a customer business that's radically different than General Electric's business plan which is to engage with other companies (manufacturing) rather than people. Nardelli didn't get it, and the stock went to hell.

Have you ever noticed that when you walk into a Wal-Mart, you can pick up any item and than find a bar code scanner in the store that will tell you the price of the item? You would think that Nardelli would have installed similar bar code readers in his stores during the five years that he ran the company. Nope, forget about it. Half the items in Home Depot have no price sign attached, or nearby. The customer is completely at a loss to determine what he is paying for an item.

Abusing Shareholders too

Nardelli's ultimate downfall came after he started to abuse Home Depot's fabulous shareholder base. On May 28th of this year, Nardelli ran the annual shareholder's meeting in Wilmington Delaware, absent the Board of Directors. He told them not to show up. He only allowed the meeting to go 30 minutes. There was a digital clock at the meeting to time the questions. You had 60 seconds and then boom, the microphone went dead automatically. They probably put a sadist in charge of the cut off switch.

In the final analysis, this brilliant GE trained executive blew up his own career. He alienated the shareholders, the employees, and Wall Street too. He would appear antagonistic when I would attend the analyst conference calls when he would be quizzed about same store numbers. He couldn't understand our infatuation with comparables.

Right now, he is probably realizing that we weren't the ones operating on another planet. Nevertheless, he does have that $200 million severance package to ease his pain. It's not the end for him however. I understand Congressman Barney Frank is about to launch Congressional hearings, and Nardelli will be brought before the Congress to explain the justification for the CEO pay packages today. Nardelli will have to bring his own lawyer this time, on his dime. There won't be a single one of the 330,000 Home Depot employees there to support him either.

Goodbye and Good Luck

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