No news is good news in Home Depot change

Until recently, the lobby of Home Depot’s headquarters in Atlanta was decorated with large reprints of newspaper articles glorifying the achievements of Bob Nardelli, its former chief executive.

But when visitors entered the building for the company’s annual analyst and investor conference on Wednesday, all evidence of Mr Nardelli had disappeared.

The space where the newspaper articles once hung was now occupied by pictures of ordinary employees and an organisational chart showing Home Depot as an inverted pyramid with customers at the top and the chief executive at the bottom.

The change reflects the new atmosphere surrounding the company since Frank Blake replaced Mr Nardelli as chief executive in January, following months of unrest among investors about sluggish growth and controversial executive compensation practices.

Speaking to reporters for the first time since he took charge, Mr Blake vowed to restore the entrepreneurial spirit for which Home Depot was once famous and acknowledged the tensions caused within the company by Mr Nardelli’s top-down management style.

He said store managers and employees felt there had been “too much domination rather than support” from headquarters over the past few years.

“One of the ways an executive is judged is whether people feel free to raise what their concerns are,” said Mr Blake. “I want people to feel free to send me a note if they feel I’m doing something stupid.”

Mr Blake declined to discuss his predecessor’s controversial $210m severance package.

But he said he was comfortable with his own compensation deal, which is less than half the size of Mr Nardelli’s and more dependent on share price performance.

“The right focus for me and for the board was to have my pay as something that everybody would say, ‘OK, that makes sense. It’s performance based’,” he said.

Addressing investors earlier, Mr Blake warned that Home Depot faced a worse-than-expected drop in earnings this year because of continued weakness in the US housing market and vowed to invest $2.2bn to stem losses in market share.

All the fresh investment was earmarked for Home Depot’s flagship store chain, highlighting its decision to refocus on retailing after several years of diversification into wholesale construction supplies.

The company announced last month that it was considering a sale or spin-off of its wholesale division, valued by analysts at about $10bn.

“We are first and foremost a retail business, and our 2007 plans reflect that commitment,” said Mr Blake.

Gary Balter, analyst at Credit Suisse, said the surge of investment in retailing represented an acknowledgment that the company “had moved in the wrong direction for the past five years”.

Mr Blake played a central role in Home Depot’s expansion into the wholesale sector as head of business development and acquisitions under Mr Nardelli. But he has quickly distanced himself from his predecessors’ strategy since taking charge.

He said 2007 would be a year of “focus, simplification and investment” as the company sought to close the performance gap with Lowe’s, its smaller but faster-growing rival.

Much of the fresh investment will be aimed at strengthening customer service and improving the shopping environment in an attempt to win back lost customers.

The plans came a week after Home Depot announced a 28 per cent drop in fourth quarter net profits, caused in large part by a slump in spending on home improvement projects as the housing market cools.

Mr Blake reiterated his prediction last week that the housing market would not start improving until late this year or early 2008.

“We still have high inventory levels both of existing and new homes. More time may be necessary to work off this excess inventory off,” he said.

Earnings per share would fall 4-9 per cent this year, Mr Blake predicted, well below Wall Street’s consensus forecast of a 2 per cent drop.

But he expressed confidence in the company’s long-term prospects because of continued growth in US home ownership rates, with the number of owner-occupied homes expected to grow by 6.4m by 2011.

“While the current home improvement market remains challenging, the long-term fundamentals of the company are strong,” he said. “We believe we can improve our performance and grow at, or faster than, the market beyond 2007.”

Mr Blake set a long-term annual target of 5 per cent growth in sales and earnings.

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