Repair Work for Home Depot

It was early January when CEO Robert Nardelli took his $200-million-plus walk-away from Home Depot (NYSE:HD). However, the company's new leader, Frank Blake, is quickly putting an end to the Nardelli era. Blake agreed to add a new board member, David Batchelder, who is the co-founder of Relational Investors LLC (a shareholder activist firm). In exchange, Relational will drop its proxy fight. It's all encouraging news, no doubt, but Blake still has some tough challenges ahead.

Some background
Founded in 1996, Relational now manages roughly $6.6 billion. According to its website, the firm has "materially outperformed" the S&P 500 over its history.

Relational's other co-founder, Ralph Whitworth, has extensive experience with turnarounds, such as Waste Management's (NYSE:WMI) comeback in the late 1990s. He was also part of Mesa Limited during the 1980s, where he learned a lot from legendary activist shareholder T. Boone Pickens.

Batchelder was also part of Mesa, but his strong operational background made him more than just a financier. What's more, he currently serves on the boards of Washington Group International (NASDAQ:WGII) and ConAgra Foods (NYSE:CAG).

The move on Home Depot
Relational, which currently owns about 1.2% of the outstanding shares of Home Depot, definitely has some recommendations for the retailer, as can be seen in various SEC filings.

First, Relational has referred to Nardelli's performance as "inferior." As a result, the firm called for Home Depot to form a board committee to explore strategic alternatives, such as a restructuring or even a buyout.

Relational also thinks Home Depot should focus on its core retail business. After all, Nardelli had spent roughly $7 billion to expand into such areas as wholesale and professional supplies, where results so far have been lackluster.

Takeaway
A spinoff of the non-core businesses would probably be a good move. It would mean less distraction, and more freed-up capital could allow for more share buybacks or investments in existing Home Depot stores.

However, the retailer still has difficult problems. Same-store sales have been anemic as the housing slowdown continues (in the third quarter, same-store sales were down 5.1%). Moreover, the competition from Lowe's (NYSE:LOW) and other rivals remains intense.

But the board appointment of Batchelder is a strong indication that Home Depot is serious about shareholder value and open to new ideas. And that's a big step.

For a company the size of Home Depot, it will take time to make the changes and get results. The good news is that Blake is wasting no time in building goodwill with shareholders.

For more do-it-youself Foolishness:

• Home Depot: The $100 Billion Dream Deal?
• Home Depot Hit by Housing: Fool by Numbers
• Squeezing Home Depot's Orange

Fool contributor Tom Taulli does not own shares mentioned in this article.

Home Depot is a Motley Fool Inside Value recommendation. Discover more of the market's best bargains with a free 30-day trial subscription. The Fool's disclosure policy loves those orange buckets.