Last week, investors found out that home-improvement retailer Home Depot (NYSE:HD) would be getting a new CEO. The whole thing was pretty simple: Bob Nardelli offered his resignation, and the board of directors accepted. And, oh yeah ...Nardelli will be collecting a $210 million severance package. That's making many critics hate him even more than they already did -- if that's even possible.
The man
Robert L. Nardelli was born in Old Forge, Penn., in 1948 to a General Electric (NYSE:GE) plant manager. Nardelli earned his B.S. at Western Illinois University in 1971, then got his MBA by taking night classes at the University of Louisville while working at GE. Though Nardelli wasn't a standout student, he was a very good athlete, attending Western Illinois on a football scholarship.
Starting as a manufacturing engineer, Nardelli worked at GE in various capacities until 1988, when he butted heads with GE CEO Jack Welch and quit when Welch refused to put him in a general-management spot. After spending a few years with Case Corporation as a general manager, Nardelli found himself back at GE in 1991. By 2000, Nardelli had risen to senior vice president at GE, and Welch was preparing to retire. Welch chose Jeff Immelt to head GE over Nardelli (who took the Home Depot job almost immediately after the decision) and James McNerney (who went to 3M (NYSE:MMM) and is now Boeing's (NYSE:BA) CEO).
The company
Home Depot was founded in 1978, when Bernard Marcus and Arthur Blank found themselves jobless after a management shakeup at home-improvement retailer Handy Dan. Marcus and Blank had the idea to pursue the large but underserved do-it-yourself home improvement market by creating stores that only offered reasonable prices, had a huge assortment of products, and were staffed by extremely knowledgeable salespeople. By making products and knowledge more accessible for customers, the Atlanta-based concern quickly took hold.
The company ramped in a big way. By 1986, it operated 50 stores and had passed the $1 billion revenue mark. In 1989, the company passed competitor Lowe's (NYSE:LOW) to become the largest home-improvement retailer in the US. By the late '90s, the company was nearing $40 billion in revenue and was one of the largest U.S. retailers overall. And the founders did all this using a largely decentralized governance that focused on performance through encouragement and growth mainly through increasing storefronts. As the company matured, though, eyes started to turn toward the profitability and operational efficiency of the company.
The Nardelli era
Bob Nardelli came to Home Depot aiming to transform it from a growing, though somewhat disorganized, company into a well-oiled beacon of corporate excellence. By using management techniques from GE and bringing Six Sigma best practices to the company, Nardelli wanted to compliment the business's growth with sharp and efficient execution. With the new CEO came new systems, new centralized governance, and a new way of doing things that was typified by the ex-military officers he hired to run the stores.
Completely overhauling a corporate culture does not come without its growing pains, though, and Home Depot under Nardelli had some growing agonies. Fiscal 2003 marked the end of Nardelli's second year at the helm -- and the second year of flat same-store sales results for Home Depot. Perhaps even worse, the stock was down more than 20% since the beginning of 2001 -- and this was a recovery from the lows it hit in early 2003, when it was trading at less than half its 2001 share price.
A reemergent Lowe's was also on the horizon, making waves by offering a more comfortable atmosphere for both men and women to do their home-improvement shopping. Lowe's also took advantage of Home Depot's slipping customer service, because a high percentage of part-time staff manned its stores after Nardelli took over.
Investors expected more from the new boss, principally because he had been granted such a lavish pay package. An article from The Economist in early 2003 titled "A do-it-yourself disaster" cites frustration over the perceived lack of performance in 2001 in light of the $24 million the chief was paid, as well as the $21 million Nardelli's human-resources head took home.
With the stock price somewhat recovered, but still more than 10% lower than when Nardelli took over, shareholder frustration came to a head at the company's May 2006 annual meeting. None of Home Depot's external board members showed up for the meeting, and Nardelli kept strict time limits on all questions. He also wouldn't touch questions pertaining to the $100 million-plus he had been paid over the preceding five years. After the meeting, the company tried to right some of these slights, but Nardelli's resignation suggests the effort was less than successful.
The crime
Home Depot got back out of the woods in 2003, at least as far as same-store sales. After two years of flat results, same-store sales were up 3.8% in 2003, 5.4% in 2004, and another 3.8% in 2005. But there was more -- during the Bob Nardelli era, revenue increased at a compounded rate of about 12% per year, and earnings per share grew at an even higher 18% per year. That's including the recessionary period in 2001 and the slow economic growth in 2002 and early 2003. Bottom-line profitability increased under Nardelli, as did return on equity, which ticked up from 17.2% in 2000 to 22.1% for the current trailing 12 months. And look back at the Economist article from 2003, which expressed skepticism that the executive would deliver on his promise to double sales and more than double the bottom line by 2005: Though sales were only up 78% by 2005, profits were up 126%.
But critics seemed to overlook the company's performance, focusing instead on discrediting the frosty and sometimes acerbic CEO. Aside from his personality, many employees and shareholders disliked the changes that Nardelli brought to Home Depot, and the perception that the company had gone from being a friendly supplier and helper for do-it-yourselfers to a cold corporation with a constant focus on the bottom line. Most of all, investors begrudged Nardelli for the handsome sums of money he took home while their investment bled.
Rather than a terrible deterioration at the company, the real crime here seems to be contraction of the stock's trading multiples. If the stock traded today at the same P/E multiple as in early 2001, it would be trading at around $115, and investors would be up more than 160% for Nardelli's six years. The Home Depot of today seems to be a better-organized, more profitable, and more stable company. That's not making investors any happier, though, and it's sure not getting Bob Nardelli his job back. Could Nardelli have done more? Perhaps more to the point, should investors have really expected him to do more? Last I checked, Nardelli didn't control the stock price.
Is Home Depot a good opportunity today now that Nardelli is gone? Or is there another lesson to learn from this saga? Stay tuned, Fools, for Part 2 of "The Vilification of Bob Nardelli."
More related Foolishness:
Home Depot and 3M are Motley Fool Inside Value recommendations. To find out these investment theses, click here for a 30-day free trial.
Fool contributor Matt Koppenheffer encourages feedback and loves to hear about readers' favorite value stocks. He does not own shares of any of the companies mentioned. The Fool's disclosure policy is always well-constructed and never overpaid.
