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An
'infinite' opportunity for growth
Posted 7/27/2005
9:49 PM Updated
7/28/2005 3:55 AM
An
'infinite' opportunity for growth
By Lorrie Grant,
USA TODAY
WASHINGTON — Bob
Nardelli says he knew within his first
year running The Home Depot (HD) that
the chain was missing a major growth
opportunity in sales to big construction
contractors and home builders.
He went after it
and, about five years later, is
beginning to cash in, thanks to some
half-dozen acquisitions that have
increased the chain's strength outside
the orange boxes, as its stores are
called. "The orange box was a
convenience location for the commercial
and industrial customer. To be a
destination, we had to do some things
differently," says Nardelli, 57,
during a store visit here.
For example, mass
home builders wouldn't buy carpet from
Home Depot because it used outside
contractors to handle installations.
Home builders wanted a single company to
handle both.
"We went out
and bought three of the top five
carpeting companies in the country, and
basically, we now have penetrated the
mass builders," Nardelli says.
Today,
Atlanta-based Home Depot, the
second-largest U.S. retailer behind
Wal-Mart, is on pace to hit sales of $80
billion this year, helped in part by
growing sales to commercial and
industrial customers. Annual sales were
$46 billion — mainly from
do-it-yourselfers and small contractors
— when Nardelli joined the company as
CEO in December 2000.
"Aside from
someone needing a hammer, Home Depot
wasn't really a supplier to the builders
of bricks and mortar," says Donald
Trott, a retail analyst at Jefferies.
Now, newly
acquired companies that have been
leaders in the commercial and industrial
sector — including National
Waterworks, White Cap Construction
Supply and Economy Maintenance Supply
— form The Home Depot Supply division.
"We buy the
marquee player," says Joe DeAngelo,
president of Home Depot Supply.
Building on the
strength of its brands, the Supply
division touches 80% of the professional
builder market at least three times a
week, he adds. Sales are usually made
directly to contractors via Internet or
catalog, as well as through the branch
offices of some of the subsidiaries.
Products are delivered directly to the
job site. The division is expected to
bring in about 14% of Home Depot sales
this year.
The company aims
to grab more of the professional
contractor market, estimated to be $231
billion.
Nardelli doesn't
see penetrating this market as a stretch
for the company. "This is not
stepping outside our know-how,"
Nardelli says.
He says this fits
into the company's overall vision: to
encompass the lives of consumers.
"Home Depot
will provide components to the
infrastructure around your home. There
will be materials provided from Home
Depot in the road around your home. The
water you drink will be transported
through valves and pipes that Home Depot
will supply. The hotel room that you
stay in will be supported by Home Depot
from construction to décor."
Serving big
builders has been just one part of
Nardelli's overall plan to renovate the
home-improvement chain and raise sales,
earnings and the share price.
The company
forecasts sales will grow 9%-12% this
year, while earnings will rise 10%-14%,
to $2.49-$2.58. Its shares, which closed
at $43.35 on Wednesday, are up about 30%
in the past 12 months.
The chain also
plans to add 175 stores this year to its
1,950. About half its projected cash
flow of $7.5 billion this year is
scheduled for capital spending.
Nardelli came to
Home Depot after a 30-year career at
General Electric. He was last CEO of GE
Power Systems, GE's largest industrial
unit, which he grew from a $5 billion
business to $20 billion.
In the beginning
of Nardelli's reign at Home Depot, the
non-retailer's aggressive plan to revive
slowing growth and battle increased
competition from chief rival Lowe's
(LOW) drew some criticism.
"He was
buckshotting. He saw so many targets and
was trying to hit them all at
once," Trott says.
He had missteps.
A shift of the staff mix on the sales
floor to 70% part time from 70% full
time led to a less experienced workforce
and less service, Trott says.
Nardelli learned,
he says. "He reversed himself and
went back to the more traditional and
heavier staffing with full-time career
people."
But as Lowe's
gained strength, Nardelli ramped up
store remodeling, buying more
distinctive merchandise and technology
upgrades that included self-checkout and
better point-of-sale systems.
The payoff has
been an increase in the average ticket
from $48.64 in the first quarter of 2001
to $58.25 today. The $9.61 difference
translates into nearly $10 billion of
additional annual revenue based on the
1.3 billion transactions made a year.
"Some of the
steps he took that looked painful at the
time are fruitful now and are paying
off, making Home Depot a stronger,
nimble company ... in the 21st
century," says Alan Rifkin, senior
retail analyst at Lehman Bros.
Home Depot also
has been looking outside the USA. It has
stores in 10 Canadian provinces.
Last year, it
bought Home Mart, then the No. 2
home-improvement retailer in Mexico, and
turned it into the leading chain, with
50 stores.
Plans are
underway for stores in China, where the
company now has two buying offices and
is acquiring other interests. Openings
could come as early as 2007, but
Nardelli is proceeding cautiously.
"I'm not
going to commit to a date and do a dumb
deal or build a bad store," he
says. "So we're going to do it when
we have the comfort and confidence in
place to do so."
The company does
not have a presence in Europe, which
gives the retailer more growth
potential.
"I've never
run a business where the opportunity for
growth is as infinite as it is
here," he says.
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USA TODAY
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