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Analysts: Home Depot must change culture

ATLANTA --With Bob Nardelli gone as chief executive, the challenge facing Home Depot Inc. is to turn its stores back into the irresistible shopping destinations they were a decade ago -- making them more customer-friendly, with more knowledgeable employees, cleaner aisles and better stocked shelves. That, industry analysts say, will require a change in Home Depot's corporate culture.

The world's largest home improvement store chain has not revealed any of its plans since Wednesday's sudden announcement that Nardelli had resigned. Analysts hope to gain some insight into the Atlanta-based company's future at an investor conference next month -- but no one is expecting a miracle cure.

"They're not going to wave a wand and instantly have a change in course," said Jeff Sonnenfeld, a professor at Yale School of Management.

Nardelli believed in centralizing functions and running a tight ship. Profits and revenue soared under his six-year tenure, but customer service was often a sore spot. Some Home Depots looked tired and disorganized, and finding an employee to help locate items could be a chore at times.

Home Depot has pumped millions of dollars into trying to resolve those issues over the last few years, but observers, and even Nardelli before he departed, said more needs to be done. The company's profit dropped 3.1 percent in the third quarter, while sales at stores open at least a year fell 5.1 percent; Home Depot has also warned that 2007 would be challenging. Fourth-quarter results will be released Feb. 20.

Industry observers say Home Depot would benefit from allowing store managers more of a say in serving their local markets and by improving the morale and training of its employees. Analysts suggest the company return to some of the strategies that made it so successful in the 1990s.

"Instead of having people that really knew electric, knew carpentry and were around to help you, they disappeared," Sonnenfeld said, noting that Home Depot's salespeople "ended up to be overworked store clerks you could get anywhere."

Sydney Finkelstein, a management professor at Dartmouth College's business school and author of "Why Smart Executives Fail," said Home Depot once had a culture where employees enjoyed coming to work and the shelves were filled with world-class merchandise.

"They created a place where people were energized, excited," Finkelstein said. "Nardelli comes in and puts in a set of systems, processes that do have the potential to work very well but ran up against a very tough situation at Home Depot, which was a much more entrepreneurial, retailing organization."

Besides having to solve its internal problems, the company also faces fierce competition from Mooresville, N.C.-based Lowe's Cos., which has surpassed Home Depot in some regards.

Craig R. Johnson, president of Customer Growth Partners, a retail consultancy in New Canaan, Conn., said Home Depot still has far to go to cater to new classes of home improvement shoppers: female shoppers and the do-it-for-me consumers, rather than the do-it-yourselfers who fed the company's earlier success.

"Home Depot has made improvements, but Lowe's keeps raising the bar," said Johnson.

Patricia Edwards, a retail analyst in Seattle for Wentworth, Hauser and Violich, agreed, noting that despite some improvements, "Home Depot is much more of a warehouse. Lowe's is much more of a shopping experience."

She called Home Depot stores "cluttered, dark and dirty."

Edwards recalled how she recently waited more than a week for a delivery of a door lock from Home Depot although she had been told she would get it the next day. She also said she did have a positive experience last week, when a rush order for material for her outdoor deck arrived on time.

Finkelstein said successful retailing is about picking the right products, marketing them and selling them.

"There's not a lot of science that goes there," he said, adding that Nardelli, who had spent a good part of his career rising through the ranks at General Electric Co., might not have been the best fit for Home Depot.

Nardelli's replacement at Home Depot is Frank Blake, another former GE executive who was elevated to the CEO's job after serving as Home Depot's vice chairman.

Home Depot said in a statement Friday that Blake "plans to spend the next several weeks engaging with associates at all levels to listen to their ideas and input and relate his vision for the business going forward." He said in a memo to employees Wednesday that "commitment to the customer" is the company's No. 1 priority.

The Home Depot board made a point of saying when it announced Nardelli's abrupt resignation that it was confident in its current strategy. Industry watchers are mixed on whether there will be changes in that strategy.

Credit Suisse analyst Gary Balter said in a research note to clients Thursday that while Nardelli's departure is a positive move, he believes the near-term winner will still be Lowe's.

"Blake is unlikely to do anything radical in retail, and given that he was behind much of the strategic direction is unlikely to reopen the spigot into either more hours or lower pricing to drive sales," Balter wrote. He's hoping what Home Depot executives say at the company's February analyst meeting will give investors the answers they are looking for.

Sonnenfeld, meanwhile, expects changes on Home Depot's board.

"It's good to get a fresh start, some new direction, some new faces on this board," he said. "They need some fresh blood."

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AP Business Writer Anne D'Innocenzio contributed to this report from New York.

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On the Net:

http://www.homedepot.com

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