Home Depot in Disrepair

Six months isn't a very long time to assess the quality of an investment -- and just less than five months even less so -- but so far, my choice of Home Depot (NYSE: HD) as the Best Retail Stock for 2007 doesn't seem to be panning out all that well.

In January, I laid out the case for the Big Orange Box as follows:

• Its CED -- Chief Executive Distraction -- Bob Nardelli was gone and replaced by Frank Blake, who had the opportunity to put his own stamp on the home-remodeling icon.

• It was twice as large and had twice the profits of archnemesis Lowe's (NYSE: LOW). And with its large international footprint, it had the chance to continue boosting sales as it weathered any temporary housing-industry slowdown.

• Despite its size, it was still a formidable financial powerhouse, able to go toe-to-toe with Lowe's on most metrics.

As upbeat as I was about the prospects, I understood that Home Depot had some challenges, including low employee morale, disaffected customers, and dissatisfied professionals.

The law of inertia
Here we are, with not even half of the year over, and I'm ready to throw in the towel. Why? Newton's First Law of Motion says that an object at rest tends to stay at rest while one in motion tends to remain in motion unless acted upon by another force. For me, that describes Home Depot.

I had expected that Blake's appointment would result in some swift, dramatic measures that would put forces on the business to change its motion. Instead, we still have a lumbering, laconic business that seems either unable or unwilling to change what's wrong and implement policies to make things right.

Sure, the downturn in housing is putting a squeeze on the company, but I'm actually willing to excuse those forces in assessing its potential. It's far more qualitative than that.

Employees? What employees?
I have to admit, I still dread going into a Home Depot store. I've written previously that with several Home Depots, two Lowe's stores, two of Sears Holdings' (Nasdaq: SHLD) Sears locations, and a local hardware store all within minutes of my house, I have plenty of options as to where I can shop. Even Sears Hardware ranks higher on my list than Home Depot, if for no other reason than there are usually no customers at all in the store and I can get help from an associate when I have a question. The local shops, though, remain the best place to go for knowledge and service, even if they can't compete on price. Paying more to get more is often worth it.

Perhaps I've been spoiled by the Lowe's experience. I've had two stores open near me in the past year, and they are clean and well stocked, and the employees are helpful, if not always the most knowledgeable. I like to joke that it's only because everyone is so new at their job that they're helpful. Wait till they've been around for a while, like those at Home Depot, and then we'll see what they're like.

Still, even with five Home Depots within a 20-minute drive, I'd rather rap my thumb with a hammer than go there. The stores are cluttered and dirty. You can't find half the items you need anymore, and asking an employee to help is an adventure all its own.

When I worked at Home Depot, the rule was that not only did you not leave your department, but you also didn't hide behind the order desk. Management wanted you on the floor helping customers, and woe to the employee who was seen pointing customers to an item instead of walking them there.

Today, assuming you can find employees who aren't also surly -- no doubt from being harried because staffing is so low -- they rarely know where an item is, and you'll be lucky if they point you in the right direction. Clean stores and helpful employees have long ceased to be the norm.

No shake, rattle, and roll
Home Depot has more than 2,100 locations in the U.S., Puerto Rico, Canada, and Mexico, so I realize that my five-store sampling is small. Yet those stores cover quite a lot of territory in a metropolitan area, so I doubt that my experiences are unique. And that's what has me troubled.

I had expected new management to shake things up. I expected to see directives come down that a return to customer service was going to be a top priority. With so much at stake for Home Depot, I fully anticipated Blake and Company to do what was necessary to return the business to its vaunted spot at the top of the do-it-yourself warehouse heap.

So although five months isn't a very long time to say an investment will fail, it's an eternity when it comes to a company needing to change what's broken. The scary part may be that the upper echelon doesn't see what's happening in the stores. While it mends fences with major investors, customer relations continue to fall into disrepair.

Its stock is trailing Lowe's, Sears, and even Builders FirstSource (Nasdaq: BLDR) at this point in the year, and I'm hard-pressed to think it can eke out a win against the competition, let alone the market. While Home Depot can still rebuild its reputation, I'm thinking we may have to wait a while longer to see the new coat of paint.

Home Depot and Builders FirstSource are recommendations of Motley Fool Inside Value. Let lead analyst Philip Durell and the Inside Value team give you the opposing view with a 30-day free trial subscription.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.