January 4, 2007
Home Depot Boots CEO Nardelli
By Del Jones and Matt Krantz
2006 was not a good year for Bob Nardelli, who lost his job Wednesday.
For one, the Western Illinois University Leathernecks football team blew a halftime lead in the final game to lose to Missouri State and finish the year with a losing record. Western Illinois is Nardelli's favorite team; it's where he was a star player 25 years ago and dreamed of going on to the NFL, but he was too small.
He replaced that dream with the dream of running a giant company. In 2000, he was a top-three finalist to replace Jack Welch as CEO of General Electric in perhaps the most-anticipated and most-hyped changing of the guard in America's corporate history.
He lost out to Jeffrey Immelt.
His next decision may have led to his downfall Wednesday. He weighed many offers and chose to become CEO of Home Depot, a company that had already grown so large, so fast, that it barely went noticed when in six years Nardelli made it twice as big and into the 14th-largest Fortune 500 company and second to Wal-Mart among retailers.
Net income in the most recent quarter, ended October 2006, was up 129% and revenue was up 100% from where they were in the same quarter of 2000, just before Nardelli joined. Net income and revenue of companies in the Standard & Poor's 500 were up about 65% during that time.
However, when Nardelli arrived, Home Depot had reached the $40 billion revenue mark faster than any retailer in history, even Wal-Mart. Investors and employees who remember those heady '90s have been unimpressed ever since. Employees have balked at his attempts to fix what they did not see as broken, and much of Home Depot's executive team resigned because they had become wealthy from stock options and didn't want to deal with change.
The second former GE executive who lost out to Immelt for the GE job was James McNerney, who did well at 3M before moving over to Boeing, where the stock is up 250% since March 2003.
In a September interview, McNerney said Nardelli's job was tougher because Home Depot had grown at an "ungodly rate" for 20 years. He said Nardelli should be measured not on the stock price but on how well he did in a tough situation.
The stock price has languished, most recently because of the slowing housing market and projections that Home Depot's growth is about to stall. The stock price is up 6% from when Nardelli took over, and that includes the 2.3% rise to $41.07 a share Wednesday on the news that the former altar boy, Boy Scout, class officer and ROTC cadet had been replaced by Frank Blake, Nardelli's longtime right-hand man.
By comparison, the S&P 500 is up 7.7%. Competitor Lowe's is up 230% since Nardelli joined Home Depot.
About the only good news for Nardelli is that Home Depot is giving him a $210 million severance package, whose terms were set in the employment contract he received in 2000. But that leaves him as the most visible target for Democrats now in control of Congress. House Financial Services Committee Chairman Barney Frank, D-Mass., pounced on the figure as more evidence that Congress needs to intervene in executive pay, and the Laborers' Union on Wednesday asked Home Depot to adopt a proposal requiring that the board get shareholder approval for what it called extraordinary retirement benefits.
Shareholders' growing clout
John Challenger, CEO of his own outplacement consulting firm that tracks CEO turnover, says the Nardelli resignation was another sign of growing shareholder power. "We will likely see more and more shareholders revolt based on compensation issues," he said.
To Nardelli, such criticism is not new. Even as Home Depot stock remained stagnant, he was paid $124 million in his first five years, not including stock options. AFSCME, the government employees union whose pension fund owns nearly 23,000 Home Depot shares, estimates he will wind up with nearly $360 million total for his six years, including options' gains.
Nardelli enraged shareholders at Home Depot's annual meeting last spring when many came armed with tough questions about Home Depot's performance and direction and Nardelli's pay. But Nardelli surprised them by being the only board member to attend the meeting, and he restricted their comments to a total of 30 minutes and gave no response.
That caused activist shareholders to go on the attack. Ralph Whitworth's Relational Investors firm has a 0.6% stake in Home Depot and is demanding a meeting and wants to nominate two board members.
Nardelli's ouster "shows that you cannot be an ostrich when it comes to investors," says Nell Minow, editor of The Corporate Library, a shareholder research firm.
Nardelli has since said he believed corporate annual meetings in general had become little more than forums for attacks by labor unions, not true shareholders. But his strategy to change the way they are conducted backfired and fed into his reputation as being gruff and unresponsive.
Home Depot has also been at the forefront of an ongoing controversy over the backdating of stock options, which has spread to about 200 companies. Home Depot has admitted routinely changing the dates of options grants to benefit employees from 1981 until just before Nardelli became CEO in 2000. Nardelli was cleared by an internal investigation, and the company says it is cooperating with the Securities and Exchange Commission. Indeed, Nardelli appears to be stepping down as one of but a few prominent CEOs in recent years to exit without ethical baggage.
Neither Blake nor Nardelli were available for interviews Wednesday, but in an interview with USA TODAY published in July, Nardelli defended his compensation.
"In five years, we achieved records in sales, gross-margin expansion, earnings per share, average customer ticket and return on capital," Nardelli said.
Stephanie Hoff, a retailing analyst at Edward Jones, said Home Depot was performing well and that by firing Nardelli it had "caved" to critics, who were able to enlist the news media in making Nardelli's blunders overblown. She said it's unfair to blame Nardelli for his compensation package because it was put together by the board, and she hopes the board has taken more care in crafting Blake's package.
Minow also blames the directors for the exit package. "They overpaid him when he arrived. They overpaid him while he was there. And they overpaid him on the way out the door," she says. "They've handled this horribly from beginning to end."
Hoff predicts little if any strategy change at Home Depot under Blake because none is needed. "The only difference is that Blake is not Nardelli," Hoff said.
Some Home Depot customers, however, see room for improvement. An informal survey of USA TODAY's shopper panel found members critical of Home Depot's customer service. Several said it was so hard to find help that they were shopping more at Lowe's.
Such complaints now fall to Blake. At 57, he is one year younger than Nardelli and was prelaw at Harvard when Nardelli was studying business at Western Illinois. Blake was getting a law degree at Columbia when Nardelli was getting an MBA at Louisville. Blake was Nardelli's go-to executive when Nardelli was growing GE Power Systems from $770 million in operating income to $2.8 billion over six years.
Nardelli's biggest problem was that Home Depot's performance was constantly being compared with Lowe's, a competitor able to grow faster partly because it is smaller and not yet in every community.
The rival home improvement retailer's net income and revenue have jumped 254% and 149%, respectively, between the quarters Nardelli was heading Home Depot. Lowe's earnings for this full fiscal year are expected to be 205% higher than in the year Nardelli took over Home Depot.
Home Depot's growth, while impressive, has cooled. Revenue and earnings growth slowed to 17.1% and 17.9%, respectively, during the fiscal year ended Feb. 3, 2002, the first full fiscal year Nardelli was at the helm, says Standard & Poor's Capital IQ. That was down from the more than 27% average annual growth rate in revenue and earnings from 1991until Nardelli joined.
Looking ahead, things are going to get much worse. Earnings growth in the current fiscal year that ends Jan. 28 is expected to be 4.9%, the slowest in the company's history. Earnings are expected to grow 2.8% in the fiscal year that ends Feb. 3, 2008, says Capital IQ.
The slowest earnings growth prior to Nardelli's reign was 10% in the fiscal year that ended in January 2001.
Rumors that Home Depot is setting the table to be bought by a private equity firm have gone unsubstantiated. "Can you finance a deal of this size and order of magnitude?" asks Ed Mullane of merger and buyout tracking service Mergermarket.
Hoff also considers the sale of Home Depot remote. It would approach $100 billion, rivaling AT&T's $102 billion acquisition of BellSouth, the largest deal in 2006.
A native of Old Forge, Pa., Nardelli likes NASCAR and football. Leading is like coaching football, he told USA TODAY in July. You review the film, find deficiencies, fix what you can, and sometimes get a new quarterback, Nardelli said.
Contributing: Jayne O'Donnell, Greg Farrell and Sue Kirchhoff. (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc. <>>