Carol Hymowitz, senior editor at The Wall Street Journal, interviewed Mr. Nardelli.
CH: What did you find when you got to Home Depot?
RN: It was a very rapid transition from General Electric to Home Depot. It took place in about a week. It was the first time in the history of this company that an outsider was CEO. Home Depot is a very young company. We're the youngest retailer to reach $30 billion, $40 billion, $50 billion. And this year we’ll reach $60 billion. It is a company that had grown up with its co-founders. But, my assessment was that what got us here wouldn't get us where we wanted to go in the future. We had a very decentralized business model. What I found was that the fundamental infrastructure needed for sustainability in a variety of economic cycles was missing. The decentralization that had served the company well was a disadvantage going forward.
CH: At that point, you had about 1,000 stores, each operating as a separate entity?
RN: By design. The co-founders would go on a road trip and say "If you've got a fax from corporate, tear it up. If you get a voice mail, dump it. You're out here running the business.” This was a company in start-up mode for 22 years. What I found was a need for some very strong infrastructure to put some pilings underneath this house called The Home Depot.
When I was transitioning in, there was a tremendous amount of anxiety. If there is one message I can leave you here tonight, it is think about succession planning. I was an outsider. This is a company that prided itself on internal promotions, a family.
CH: How did you handle it?
RN: I have moved 11 times in my career. I had gone through it before. About 75 percent of what you learn is portable. The rest is something you have to immerse yourself in. This was like taking a dry sponge and immersing it in a bucket of water. You just have to absorb a plethora of things. While at the same time you're learning, you have to continually calm the waters that this new guy is not going to wreck the culture and bring order and discipline to a very entrepreneurial environment. When I came in December of 2000, I could not send an e-mail to every store manager. We have fixed that, of course.
CH: While you were going through this transition did you hit some snags?
RN: When I stepped in, this was a company that had had eight consecutive quarters of downward spiraling comparative sales. I visited nine different buying offices and I found different pricing, different terms and conditions. So we put in vendor buying agreements. We went from negative $800 million in cash when I got there in December, to $5 billion in cash today. That's after a $2 billion stock buy-back last year. And we will achieve another billion-dollar stock buy-back this year. We increased dividends last year over 20 percent. We've increased dividends this year over 20 percent and a quarter early. It's working, but it wasn't without a lot of skepticism. We've had to make a lot of changes. We changed merchandising. We changed operations. We changed systems. You are either going to be e-literate or you'll be illiterate. We're planning for the long term but we're delivering on the short term with some tremendous technology. We are reinvesting 100 percent of every hour of increased productivity. We'll spend about $400 million this year in technology, and we'll do that for the next two to three years to get caught up.
CH: You've also made a lot of people changes.
RN: I think you have to identify your strategy and then organize to support it. The real differentiator is resource allocation, both human capital and physical capital. At the leadership level we are going through a major transformation. But one of my strongest division presidents is a 20-year associate. He started as a lot attendant. I think we're getting a wonderful blend of experience and culture to form this new team.
CH: What competitors worry you and what competitors do you learn from?
RN: I have a great deal of respect for Wal-Mart. A couple of months ago Tom Coughlin, the head of Wal-Mart’s U.S. stores, invited me down to the Saturday meeting at Bentonville and introduced me as “the enemy.” I admire them because I think they have great logistics, they've got great operating systems, they have tremendous commitment and passion on the part of their associates. I think Target does a wonderful job in presentation. I think one of the things that has happened to Home Depot is success breeds complacency. Complacency breeds arrogance. Arrogance causes failure. Consumers today are stressed. We want to provide them with what I'll call the orange experience. When a customer walks into Home Depot, it's aesthetically pleasing. It's well lit. It's shoppable. It's navigable. We have to have a restlessness towards improving upon everything we do.
CH: Can you talk a little bit about your own background?
RN: I had a wonderful set of parents who are first-generation Americans. They instilled in me a tremendous work ethic. I had one older brother. As a younger sibling, you're always in competition. I felt a need to compete both in high school and in college. I had great experiences in those academic environments, and I learned a lot about myself in athletics. I played high school football, got a scholarship and played college ball. I enjoyed the fact that you had to do your job as an individual, and you had to make sure the team was coordinated. So it's all about you, and it's about us. It gave me a great advantage from a leadership standpoint. Never ask anybody to do something you wouldn't do.
I've always believed in horizontal promotions to make your base as strong as it can be. For the trauma that it created, the wonderful thing about being new to Home Depot was that I wasn't tied to the past. I had a respect for the past. The toughest thing to change is what you put in place.
CH: You spent a great many years at GE, but at one point, you left GE for a while and went to a smaller company. Tell us about that.
RN: It was a gut-wrenching decision. I'm a second generation GE-er. Between my Dad and me, we've got over 50 years with General Electric. Leaving was emotional for me. And, I never left with the notion that I would come back. Then I got a call a couple of years later to come back to GE, which was one of the best days of my life. In typical Jack Welch fashion, of course, I was exiled. I went up to Toronto and ran the Canadian appliance manufacturing company for a year. He could not bring me back and put me in a position that might reinforce that that is the way you get promoted. So I went up and did my penance in Toronto. I did that for nine months and then came back and took over GE transportation in Erie, and then a couple of years later took over GE power systems in Schenectady.
CH: What was it like to be in the succession race at GE for several years and then not get the top job?
RN: It's the Super Bowl, the last two minutes for two years. It's very tough. The pressure, the environment. You know that you're being looked at through a magnifying glass every day. For me it was about "How do I take a $5 billion business and broaden it?" We grew the business from $5 billion to $20 billion. We were the strongest cash generator in the company. We were the most profitable segment in the company. We had a phenomenal time during that three-and-a-half-year period.
CH: You have said that being a leader, you're judged on your accomplishments, not on the time you put in. But you do put in an awful lot of time? What is your schedule like?
RN: To use a sports analogy, at the end of 60 minutes, it's not about how hard you played, it's about whether you won or not. For me, having moved a number of times, I always felt that I was in a learning curve. You have to continually challenge yourself. My goal is not to meddle, but to understand. The more I understand, the more processes and systems I can put in place so that we have a continuum of performance improvement. Retail is very demanding. In the industrial sector on Friday nights, you kind of wind down. In retail, you build to a crescendo. The transactions happen Friday, Saturday and Sunday.
I met my wife while we were at school, in 1971. We've been together since then. She has been unbelievably supportive. I've got a great family. I've got one daughter and three sons. They have been supportive. I think it's a cop-out for you to look back and say, "could have, should have, would have." You know exactly what you're doing. Are you going to take four, five hours for a round of golf, or are you going to spend time with one of the children you haven't seen for a few days because of business demands? You have to make tradeoffs. You've got to set priorities.
CH: What are the global opportunities for Home Depot?
RN: Let's talk about North America. We'll open our 100th store in Canada this month. In Mexico we went from zero to number one in 18 months. That's a $12.5 billion market. If we look to Europe, I don't think it's any surprise real estate is pretty well taken. If we go to Europe, it would be an opportunistic acquisition of someone that is in the market over there. If you look to Asia, you're going to go to China. It is where the population and the economy are booming. The investments that U.S. companies have made in China are creating a tremendous financial base over there. I think when it's done, there will be three trading blocs. There will be the European trading bloc. There will be the Americas. There will be Asia. Somehow we've got to be able to coexist. We've got to create the globalism that allows three major trading blocs to get along. China is where we were at in the Industrial Revolution, head down, working hard. They are aspiring to be where we are today.
CH: What are you trying to do at Home Depot to assure good governance?
RN: I'm very fortunate. I have a great board. We had a tremendous amount of corporate governance to start with. Before it became the vogue or mandatory, we required every director to walk our stores so they had a sense about what was going on out there. Every board meeting had an outside director's meeting without me there. Every director has to stand for re-election every year. Those are some of the things we already had in place and we're continuing to do it. In the last two and a half years I have personally set up teams of directors to visit our division presidents without me. Every quarter we're rotating our directors so that they have unfiltered access to our leadership team. We have put in a whole new compliance review process. We set up an entire new corporate compliance process where employees can go straight to the head of our audit committee if they have concerns about corporate governance. And, we have communicated it so that every associate, every leader has the comfort that they can get to the board.
CH: What do you look for in young managers when you're hiring?
RN: What we're looking for is someone that has demonstrated a tremendous amount of energy, who has an ability to energize, who has demonstrated the ability to balance academic and social. In this business, you've got to love people. We're looking for people who want to continue to learn, who understand the importance of individual accountability, but with the ability to think laterally.
Q: Will Home Depot be expanding into Manhattan?
RN: We are going to put two stores in Manhattan. There are three customers that we're looking to serve here. First are the residential customers, people that live in this area. The second customer that we are excited about is the building superintendent. It's going to be very important to provide merchandise and service to that building superintendent. The third customer that we're excited about is the commuter. The commuter shops in the morning, shops at noon, shops at night, and then has it delivered. We may elect to deliver out of one of our local stores.
Q: What sort of macroeconomic trends are you seeing now from your seat at Home Depot?
RN: One of the first things I did when I got there was put together my own economic model. We look at about 50 different indices. So what are we seeing? We are seeing sequential improvement in the economy today. One, because of the low interest rates we see tremendous family formation relative to housing. It is the American dream. People want to own a home. We're more excited about housing turnover than we are new housing at this point. We're seeing consumer confidence. What we saw post-9/11 was people were staying home. They were doing projects, but not big projects. But we're seeing bigger projects come back now. We have seen, since the fourth quarter through the second quarter of this year, a significant improvement in overall same-store sales. We saw sequential improvement May to June, June to July, July to August, August to September. We'll be reporting our earnings in a couple of weeks, and we're feeling good about the momentum and the direction, not only of our business, but the sector that we serve.
Q: How do you retain a quality workforce?
RN: What are we doing to make sure that our associates don't feel the need for third-party representation? One, we pay above industry average, at least 15 percent against market wages in those communities. Two, we offer one of the best benefits packages. We’ve implemented benefits for part-time associates for the first time in the history of the company. We accelerated tuition reimbursement. We put in what I'll call success sharing. That means if you hit the sales plan and other metrics within your store, you'll get a financial reward. Sixteen million dollars went to associates through that program. I firmly believe that when you invest in an associate, that skill is portable. We hope they stay with us and use it but it's something they can take wherever they go. We have a real passion, a real commitment about attracting, motivating and retaining a high-performance workforce.