Gretchen Mails It In

Gretchen Morgenson on Nardelli:

Even though the board gave him $20 million that was not a part of his employment contract, perhaps smoothing his way out the door, the departure seemed to be a watershed. No longer can executives demand — and directors happily grant — contracts worth hundreds of millions of dollars without at least some shareholders uttering a peep.

How much would you bet that she went back and forth between “watershed” and “wake-up call”?
This is what I wrote over the summer on HD.

Oh for the love of carbs, people. This Home Depot (HD) nonsense is getting out of control. I can’t believe what I’m seeing. The stock’s popularity is somewhere between Hamas and Diptheria, and it’s getting worse. In the less than three months, shares of HD have plunged over 20%. And the stock made another 52-week low today.
Now there’s a lynch mob after CEO Bob Nardelli. He’s even getting blamed for things he’s had nothing to do with. To quote Hoover from Animal House: “They confiscated everything, even the stuff we didn’t steal!”
To be honest, I’ve never been terribly impressed with Nardelli. He was one of Jack Welch’s protégés at GE. Nardelli rose through the ranks at GE to lead its Power Systems division. He did a great job there but I think he’s a bit too rough around the edges to be the corporate face of Home Depot, or any other company for that matter. Perhaps that’s why Jack Welch passed him over to be GE’s next top dog. In any event, Home Depot jumped at the chance, and made him their CEO in December 2000.
There’s an important point to remember. Nardelli didn’t start Home Depot. He was the rock star manager brought in to take over from the founder. Just because he thrived in the GE system, doesn’t mean he’ll be effective at a major company in an entirely different industry. In fact, it doesn’t make much sense at all.
Sadly, the loudest protests concerns Nardelli’s pay. This is really a lame issue. Last year, he raked in $32 million, and over $120 million in the last five years. Yes, yes, I know. It would be great to see CEOs get paid the same as teachers. Give me a petition and I’ll sign it, but I’m not going to pretend that CEOs can be found on the cheap.
The fight against CEO pay has probably caused shareholders more problems than the pay itself. In 1993, Congress capped the tax deductibility of salaries at $1 million, so CEOs fought back by issuing stock options. This led to companies slashing dividends payments which, in turn, increased the market’s volatility. Then we had the battle to expense stock options. Now we have the battle on back-dating, which in some cases, is perfectly legal. Chris Cox said that the 1993 law deserves “pride of place in the museum of unintended consequences.” Let’s keep the pay issue is proportion. Nardelli’s compensation last year works about to about 1.6 cents a share. This isn’t exactly soaking a $34 stock.
The anti-Bob furor got even louder when the company said that it would no longer provide same-store sales figures. Again, I’d prefer to see this number. (Except that, Lowe’s (LOW) always creams HD’s same-store sales.) But when I hear these critics yell and scream, I don’t think they understand what Nardelli is trying to do.
Let’s look at HD’s position from management’s point of view. They have a maturing retail business and strong competition from Lowe’s. The difficulty is that they’re running out of prime retail spots. So Nardelli is shifting HD’s strategy. If they decide to go to war with Lowe’s and play the game of “who can open up the most new stores,” Home Depot will lose, and lose badly. Remember what happened to Rite Aid?
Instead, he’s doing something different. He’s focusing the business on commercial customers. This is a huge market segment, and it makes sense for HD to shift the battle to this front. I didn’t quite “get it” until HD made its bid for Hughes Supply. This was Home Depot’s largest acquisition in its history. Now I see how committed HD is. Plus, the company has been quietly snatching up several smaller wholesale suppliers, even one in China. Notice how they’re acting before the problems get worse.
While, I’d prefer to see HD report the same-store sales figures, I understand why they’re not doing it. It’s simply not going to be a key component of its business strategy. Last week, however, Nardelli back-tracked and told Maria Bartiromo that HD may go back to reporting same-store sales.
The really big showdown came at the company’s annual meeting in May. This was a PR disaster. None of the outside director showed up. The meeting was just 30 minutes long, and Nardelli refused to answer any questions about his pay. Shareholder activists were furious and they urged shareholders to withhold their support of HD’s directors.
In the past, the company has given the results of the votes at the annual meeting. Um…not this year. The company eventually said that 10 of the 11 directors saw over 30% of their votes withheld. That ain’t good. Of course, shareholders have another way of voting—they can sell, and that’s what’s been happening.
But Home Depot is not like Dell. The company is still doing very well. In fact, Home Depot has beaten Wall Street’s estimate for the past few quarters. The company has also reiterated its earnings guidance. We’re not seeing those ugly earnings warnings that have hit so many others. In May, Home Depot said that it expects earnings growth of 10% to 14% this year, which translates to per-share earnings of $2.99 to $3.10. This means that HD is going for just 11 times this year’s earnings. That seems pretty darn cheap to me.

Posted by on January 4th, 2007 at 11:02 am


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