I admit it. I may have been a bit early on my call back at the start of 2007 that Home Depot (NYSE: HD) would be the retail Stock of the Year.

At that time, my thinking was that the main distraction to future performance -- Bob Nardelli -- was gone, and that his newly installed replacement, Frank Blake, would move to put his own imprimatur on the company. I also believed that Home Depot's size would serve it well, and I thought the company's acquisitions in the supply business could help curb cyclicality from the weakening housing market. What's more, Home Depot had the financial strength to meet, if not beat, its rival, Lowe's (NYSE: LOW), if the two ever went at it in a death-cage match.

Well, the year's come and gone, and Home Depot has been a retail disappointment. Falling further than even Lowe's and comparable to the performance at Sears Holdings (Nasdaq: SHLD), where Eddie Lampert lost his magic touch, Home Depot's shares tumbled 36%.

The housing quagmire was deeper and stickier than I and many other analysts had imagined. New-home construction continues to slide, and with the credit crunch making personal finances tight, remodeling is not getting done, either. In a chain-reaction fashion, demand for Lowe's and Home Depot has plummeted, and their demand for goods from suppliers such as Masco (NYSE: MAS) and USG (NYSE: USG) has dropped, too.

I continue to have complaints about the company at a store level. For example, I still find too many employees being abrupt -- when you can find employees at all. Lowe's, in contrast, seems to have courteous people everywhere. Home Depot's stores and aisles are still cluttered, particularly when compared with Lowe's, whose shelf identification system I think Home Depot ought to steal outright.

As for those employees, Home Depot has always been able to offer professional expertise to do-it-yourself customers, since each store is staffed with workers specialized in particular trades. That's an advantage that played a crucial role in the company's early success. But even with this ace up its sleeve, the company lost its customer-service edge during Nardelli's reign. When new management stepped in, it refocused on providing superior customer service by ramping up wages and broadening its Success Sharing program -- an incentive-sharing initiative for hourly employees. Thanks to encouraging signs like this, I've not completely given up on Big Orange, even though it still needs to recover internally.

The good news is, Home Depot is hard at work trying to win back its customers, remodeling store locations, and changing the product mix. Of course, turning around as large a ship as Home Depot takes time. Change will be met with resistance, even among the same employees who chafed at the way Nardelli ran things. Home Depot didn't have what it took to be Stock of the Year last year (and it probably won't this year, either), but I at least see the beginnings of a runner-up in the works.

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Fool contributor Rich Duprey owns shares of USG but has no financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.