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Get Four
|  | JANUARY 9, 2004
By Dean Foust Home Depot's Remodeling Project After two years of distracting renovations, the DIY giant is ready to unveil its new design. Will it be enough to hammer rival Lowe's? As Carol Tomé strides into the Home Depot (HD ) store in Smyrna, Ga., a suburb of Atlanta, a few days before Christmas, it isn't to do some last-minute holiday shopping or plot a new home project. That's because this isn't your normal Home Depot store, and Tomé isn't just another shopper. She's Home Depot's chief financial officer, and she's here to provide a reporter with an exclusive walking tour of this prototype store -- which Tomé feels holds the key to better times ahead for the nation's second-largest retailer. As 2004 kicks off and the broad market continues to rise, Home Depot shareholders would find that prospect heartening, because the past three years have been trying. When its board in late 2000 decided an outsider -- Robert Nardelli from General Electric (GE ) -- would succeed then-CEO Arthur Blank, performance was already starting to slip. At the time, Home Depot blamed the sharp slowdown in revenues and profits on deflation in lumber prices, but the real issues were much bigger than the price of plywood. While Blank and co-founder Bernie Marcus slapped up stores in breakneck fashion over the 1980s and 1990s, they underinvested in the systems and technology to manage the sprawling retail empire, which now stands at 1,675 outlets. CRUCIAL YEAR. Nardelli immediately put Home Depot through a sweeping restructuring, but it has been a bumpy ride. His efforts to trim the fat out of inventory levels resulted in shortages -- and lost sales -- during parts of 2002, prompting him to reverse course and build inventories back up. That, coupled with Nardelli's efforts to reshuffle store staffing and initiate disruptive makeovers of older stores, caused sales at most of Home Depot's locations to turn negative for two quarters. The result: The stock, which had already fallen by nearly 30%, to around $50 when Nardelli arrived in late 2000, slid as low as $20.10 in early 2003. It has rebounded to around $35.50 as of Jan. 8, as sales and profits began to climb over recent months. This year, Nardelli and his team must prove they can sustain that momentum and demonstrate that the makeover is paying off. Tomé -- one of the few senior executives who survived the management changeover -- is confident as she strides through the Smyrna store. FOREIGN CONTRACTORS. While the disruptions and lost sales unnerved many investors, Tomé contends the wrenching overhaul was necessary to set the stage for the next round of growth. Nardelli, she recalls, "has said what got us to the first $50 billion wasn't going to get us to the next $50 billion. We had to change a number of things." As she speaks, Tomé points to a prominent display of Ridgid power tools. It's a symbol of the increased emphasis Home Depot is putting on pushing its proprietary brands, many manufactured by low-cost contractors in Asia, rather than simply stocking wares by the likes of Black & Decker (BDK ). Already, 9% of revenues come from its own imported lines -- up from 7% a year ago. Among the early successes: Hampton Bay ceiling fans, which Home Depot sources in Asia, that have helped the retailer garner half of all ceiling-fan sales in the U.S. SINK SINKAGE. Home Depot is hoping for similar success with Ridgid, produced under contract by Emerson Electric (EMR ) and for sale only through Home Depot and some industrial-supply shops. "Ridgid is our brand," Tomé says flatly. By working with Emerson on design and then shifting production to Asia, Tomé says the new line, launched last October, has "better product attributes, a lower price -- and higher margins for us." Tomé cuts through lumber to a display of door locks. Where Home Depot simply once stacked its merchandise on shelves up to the ceiling, it has lowered many displays to allow consumers to try out the products -- in this case, letting customers tinker with a panel of door locks to see and hear how easily each model closes. "You'll see a lot more of our sets come down. It makes for a better shopping experience," Tomé says. She points to the new layout of high-end Kohler sinks and tubs. While Home Depot once simply hung such merchandise on massive hooks, it now displays these products at eye level as well in hopes of inspiring more bathroom renovations. "We used to do more kitchen displays than bathrooms, but you know, there are more bathrooms than kitchens in most houses."
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