Shares gained Monday amid indications the retailer may shed its building-supply unit
The Home Depot (HD)'s new CEO Frank Blake is trying to make peace with the enemies of his predecessor, Bob Nardelli. The Atlanta home improvement retailer said Feb. 12 that it's thinking about selling the supply business unit that Nardelli had championed in the face of criticism.
David Batchelder of Relational Investors, an activist investment firm, had already suggested that Blake sell the division called HD Supply. Months ago Batchelder had also criticized Nardelli's management and called on the board to review the company's direction in areas like "strategy, operations, capital allocation, and governance." On Feb. 5 Blake invited Batchelder to join the Atlanta home improvement company's board, a move that defused a potential proxy battle with Relational.
Now Home Depot has hired Lehman Brothers for advice on whether there are strategic alternatives with respect to HD Supply that would optimize shareholder value, including a possible sale, spin or initial public offering of the business. "We are undertaking this action today because of our desire to increase our focus on our retail business," Blake said in a press release Feb. 12.
Blake is likely to appease more than Batchelder with this move. After the news on Feb. 12, Home Depot stock gained 1.2% to $41.47 per share on the New York Stock Exchange.
When Wall Street analysts focused on Home Depot's sales at stores open more than a year, Nardelli had countered that their metric was out-of-date because Home Depot was no longer strictly a retail operation; HD Supply provides services to professional contractors. Credit Suisse First Boston (CS) analyst Gary Balter said Nardelli didn't get along well with Wall Street because he was unhappy with analysts' skepticism of the move away from consumer retailing and into servicing professional contractors. "He blamed a lot of his problems on Wall Street," says Balter. "But Wall Street wanted to see results, and they just weren't there" (see BusinessWeek, 1/15/07, "Out At Home Depot").
Nardelli and his team had invested more than $7.6 billion to build the business, which accounted for 15% of total Home Depot sales in the third quarter of 2006 and now generates annual revenues of around $12 billion.
"While we believe that business lowered HD's dependence on residential construction, we note that its (profit) margins are lower and that the company's focus on growing it may have taken some focus away from the retail store operation," said Standard & Poor's Corp. analyst Michael Souers in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Souers kept a strong buy opinion on the stock.
Home Depot has separated Blake from Nardelli in another important way. Blake gets no provisions for severance pay, compared to the $210 million retirement package with which Nardelli decamped. Not to mention other crucial differences, like Blake's target bonus tied to performance and a base salary at $975,000 instead of Nardelli's $2.25 million (see BusinessWeek.com, 1/25/07, "Home Depot's Newfound Austerity").
No matter what Blake does next, people are unlikely to gripe about his pay package as they had with Nardelli's. Now Blake gets to find out whether his recent efforts will also make him more friends.
Brian Grow in Atlanta and Pallavi Gogoi contributed to this report