Thursday, November 16, 2006

De-Layering and De-Customering at The Home Depot


I’ve walked stores with Bernie Marcus, and it’s an experience.

If you don’t know who Bernie Marcus is, he’s one of the two geniuses (the other being Arthur Blank) who invented The Home Depot.

Bernie was a whirlwind: loud, brash, and eager to help any potential customer who walked in the door, even if it meant turning his back on whatever number of Wall Street's Finest were getting the store tour at that moment.


Just to help the guy find what he was looking for.


Bernie seemed to know every sales associate who ever walked the floor—and for good reason, because he'd hired them and trained them. And it was within the sales associates that he'd also imparted his passion for helping the customer so well that it made his company what it became: a place where people who don’t necessarily know how to use a hammer could come in and get help and advice so that they could actually install a door or fix a faucet or add a deck—meanwhile spending oodles of dollars in the process.

Not for nothing the motto was “You Can Do It, We Can Help.”

Now, it is ancient history to point out that the Home Depot under Bernie and Art developed growing pains, and that the founders stepped aside for a new breed of operations-based management under ex-GE big Bob Nardelli.


And it is old news that today's customers may have less free time and be less inclined to do it themselves, and are, therefore, more apt to want somebody to do-it-for-me, requiring an updating to the original Home Depot motto.

And in any event it may soon be ancient history to talk about the Home Depot as a public company, what with rumors sweeping Wall Street that Sears Holding’s Eddie Lampert has been looking at adding Home Depot to his real-estate rich retailing empire, plus all the private equity money desperate to buy anything with cash flow, which Home Depot has in spades.

But it is, nonetheless, worth keeping up with how Home Depot has been doing under the Nardelli regime, and if this week’s earnings call proves anything, it proves that Nardelli is masterful at spinning his story to Wall Street’s Finest.

He begins right away, in his opening remarks:


Thanks, Diane. In August, we predicted that the third quarter was going to be soft, and it was actually more challenging than we anticipated. We felt the impact of the U.S. retail home improvement market slowing significantly.

Note how Nardelli manages to paint himself and his company as both prescient (“we predicted”) and a victim (“we felt the impact…”). This is masterful spin-doctoring: it’s as if nothing bad happening at Home Depot is the fault of management.

But that’s not the whopper.

The whopper comes in the very next sentence:


However, during the quarter, we did stay on strategy by accelerating our investment in our core retail business and growing our supply businesses.

Right now I’ll bet there’s a would-be customer—I’m one myself, so I know how this works—trying to figure out which size floodlight to buy for his stupid kitchen ceiling lights, who is walking around the cement floor of a huge cavernous Home Depot looking for anybody wearing an orange apron with a “You Can Do It, We Can Help” button that isn't already being trailed through the store by four or five desperate fellow potential-customers with hollow eyes looking like those émigrés in “Casablanca” following around somebody who has their visa papers.

And I seriously doubt that would-be customer is thinking,

“Well, I may not be able to find somebody in an orange apron who can help me figure out which size floodlight to buy for my stupid kitchen ceiling because apparently this is a store run by self-service checkout robots, but at least they’re staying on strategy.”

Yet even Nardelli could not spin away the fact that staying “on strategy” didn’t prevent Home Depot from earning less money this year than last:

In the third quarter, consolidated sales were $23 billion. That is up 11% from last year, and our diluted earnings per share were $0.73. That is up 1%, while consolidated net income earnings were $1.5 billion, down 3%.

Now, it is a fact that Bob Nardelli runs a company called The Home Depot.

And it is a fact that the home-building industry has, of late, smacked head-first into a brick wall after several years of increasingly testosterone-charged home-building CEOs telling doubters on Wall Street that, like the Internet skeptics of the late 1990s, “you just don’t get it” when it came to understanding why the Housing Bubble wasn’t a Bubble.

And it is a fact that recent results at vendors such as Masco (faucets and kitchen cabinets) and Mohawk (carpets and tiles) demonstrate the difficulty facing anybody selling anything that goes into one of those D.H. Horton or Toll Brothers or Ryland spec homes now sitting empty out in the scorching Las Vegas desert (sales brochure slogan: “It’s the desert so why would you need a yard?”).

So the fact that numbers at The Home Depot are a bit light is not reason alone to pick nits with the sort of spin-doctoring conference call you’d expect from a guy who very nearly made it to the top of one of America’s most ferociously management-by-numbers companies, GE.

(True story: I was at the Greek diner one morning recently when two GE-ers, who clearly worked together several job assignments ago but hadn’t seen each other in some time, began talking, and I am not making this up:

“So how are things?”
“Good. We made our numbers.”
“Good! You made your numbers?”
“Yep, we made our numbers—how about you?”
“Oh, yeah. We made our numbers.”

It wasn't until then that they got into family, kids and other apparently less important stuff. That is the DNA of the guy in charge of Home Depot.)

And while Home Depot had outgrown its systems and needed serious work behind the scenes to support what Bernie Marcus and Art Blank had created from not much more than a passion for their customer, the GE Culture is not necessarily the kind of culture that’s going to keep retail customers happy.

So it should be no surprise that, unless all the former Home Depot store managers I run into are making up stories about reduced money for staffing labor at stores—what they call “earn hours”—as well as a Sears-like bureaucracy taking over the Atlanta headquarters (which, as far as Marcus and Blank were concerned, took its orders from the stores, not vice-versa), there’s no arguing the Home Depot has changed, for the worse, from a customer-driven operation to a numbers-driven operation.

But don’t take my word for it. Ask anybody who used to shop there. Anybody. I’ll bet we come up with more horror stores than Dell (see “Dell Screws Up a Good Thing” from this site).

Nevertheless, the numbers-agile crew now in charge at Home Depot didn’t get to where they are by not having whatever data could support the upbeat “message” handy in their PowerPoint presentation, and Nardelli did indeed offer up customer satisfaction numbers that seem completely at odds with every anecdote I’ve heard recently:

I want to thank our associates for their hard work and focus on taking care of our customers. Every week, we hear from 250,000 customers through our voice of customer survey. We have seen significant improvements in our survey results. Key customer service attributes, including customer engagement, waiting to check out, find and buy, likelihood to recommend, and associate availability were up over last year and showed sequential improvement this quarter. Overall satisfaction with our company, as measured by scores of 9s and 10s, is up over 2004 and 2005 levels.

Lest anyone think this “voice of customer” might be something he is hearing inside his own head, Nardelli delved into these numbers later in the Q&A with just enough color to make you wonder about how much they reflect reality, or not:

Mark, I think two points, just to be real clear. What we talked about is that overall customer satisfaction, or voice of customer, as we call it, is up across the entire network of stores, and that is the 250,000 customer shopping experiences, that they go online and call and score us on associate availability, ability to find and buy, et cetera. We have seen a sequential improvement month over month in the third quarter for sure, and we would expect the same thing to continue in the fourth quarter. In other words, the customers that are scoring us 9s and 10s.

I may be wrong, but customer surveys—especially online customer surveys—might not be the best way to find the customer who went into a store, couldn’t find anybody to help who wasn't already under siege from four or five other desperate individuals, picked up the wrong-sized floodlights for his stupid kitchen ceiling, spent ten minutes in line because there weren’t enough live human beings at the registers…and then vowed never to come back again.

Still, Nardelli appears to have great faith in management-by-numbers. He even boasts about a new “organizational structure” that has been in place all of thirty days.


I am not making that up, either:

Before I turn it over to Craig, I just want to comment on our new organizational structure. It has only been in place 30 days, but I could not be happier with the focus, alignment and speed of decision-making we have gained as a result of de-layering. I have a great and experienced team.

What on earth this might have to do with making customers happy is beyond me…yet so it is that “de-layering,” “voice-of-customer,” and “staying on-strategy” are the new buzz-words at The Home Depot.

But it’s the “de-customering” that should have them worried.



Jeff Matthews
I Am Not Making This Up


© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.




20 comments:

Gordogekko100 said...

(this isn't a comment except on your spellchecker--it is "siege" not "seige" a la seize.)

I am a spelling nut-don't feel too bad.

MDNY17 said...

For what it's worth, I used to work in Store Operations for THD, and it always seemed like the dis-satisfied customers reached out to our customer service operations more so then those who were happy or satisfied with theis experience at a store. I'm not disputing that the current system is not perfect, but especially on the store level, when a manager was called it was usually not to commend our availability of associates or stocking the correct flood light bulb.

Jeff Matthews said...

If "Archer" would edit out the curse words (shows you how he feels about Home Depot!) and resubmit his comments, we would have the benefit of his own observations.

I cannot edit posts, so if Archer needs a copy of what he sent, just send an email.

Peter Leppik said...

As the founder of a company which measures customer satisfaction for call centers, I'm always very suspicious of self-reported satisfaction scores.

Satisfaction surveys can be very easy to manipulate, and companies have to be extremely careful about how the survey is designed and implemented. Otherwise, the data won't measure customer satisfaction, it'll measure how skilled the people in the company are at manipulating the survey.

As for Home Depot: I've actually seen signs in a local Home Depot store which were clearly designed to skew the satisfaction survey. I don't think this was corporate policy, but I suspect the local store manager was told to improve his satisfaction scores or else, and the solution was to deliberately bias the survey.

whydibuy said...

You forgot to add that the stock roared higher by 4.5% on that glowing c.c. by HD. I guess wall street gets all excited when they hear that the ceo sees no end in sight to this contraction in home improvements and reduced spending on homes following the largest mania in housing this country has ever experienced. Let the good times roll!!!

TheColonel said...

Dark, Dirty, Disorganized. That's how I describe my local Home Depot lately. It seems the enthusiasm of the sales associates has waned, too

Lowe's is building a lot of new stores in this market (Central Fla.) now, and I prefer their stores.

Jason said...

Jeff,

As a herbie homeowner who spent his teenage years working at an Ace Hardware, I have become quite the customer for home improvement stores. A few years ago, I had become disgusted with HD for the reason you cite, it was impossible to get any help finding anything in ridiculously large stores. After a while, I started driving much farther to the closest Lowe's, or even more often stopping off at the local Ace or True Value on the slim chance that they might actually have an item in stock that I could overpay for.

Things have changed in the last year where I live. Shockingly. I can go into any of four HD stores around me, an old one, about to be closed, an old & smaller store that will be replaced eventually, a nice new format store around for a few years, and a brand new store open in 2006. In any of these stores, on Saturday at 11 AM or Tuesday at 3PM, or Friday at 8:00PM, there are multiple sales associates asking ME if I need help. It has increased my visits to the Depot, cut down on the amount of time I spend in the store, and probably increased my spend.

Maybe its not happening in the NE, but out here in the provinces, its a huge improvement over what was a slow moving disaster. I don't know what has caused it; I don't think they've staffed up. A floor manager told me a year ago that HD was trying to change procedures so that more associates would be on the floor and not in the back doing whatever. This is consistent with HD mgmt rhetoric today.

I love your site, and you put up great material ripping managements for their spin sessions, but in this case my personal experiences are telling me that your take on HD floor service might be the "old news".

I hope you get lots of comments on this one b/c it would be useful to hear other experiences.

Thanks for all the great blogging.

Lee_D said...

Fantastic editorial, Jeff.

I wish I knew what it was about service sector companies that, as their success grows, their ability to continue being successful declines.

What's the key ingredient in the business plan of "selling stuff to people?"

To paraphrase an old adage: "it's the customer, stupid."

Quite frankly trying to tap dance about how great your customer comments are when your numbers stink is like Nero saying "Sure, Rome is aflame, but look at this great new toga I just bought!"

Frankly I would think that a "numbers guy" like Nardelli would know better than trying to snow hawks and analysts with fluff like that!

Off topic, but I once terminated a salesman whose numbers had been unacceptable for a long time, and he came back in his own defense with how well he maintained the showroom. It didn't work.

Back on topic, the only things that really matter are top-line revenue, and bottom-line net income. All the other metrics retailers use to measure themselves are tenuous yardsticks at best, and delusional sophistry at worst.

The two worst offenders are sales per labor hour, and sales per square foot. You don't have to be a genius to realize that you can fudge those numbers by a) putting less staff on the floor, and b) devoting less sqft to a product category. It's possible for your entire company to be going down in flames, but gosh, your sales$/lab hr and sales$/sqft look great in your quarterly report.

I tend to get into a lather over this subject, so I appologize for the verbosity and vitriol.

Nelson Yu said...

Jeff, I don't disagree with anything you're saying, but the story has been around as long as the Old Testament. Wall Street has been telling us this stuff since 2001. Ultimately, the customer experience is going to be what makes HD go or not, and I think Nardelli, despite his missteps and shortcomings, isn't an idiot, and he realizes this too. The thing is, that despite all these problems, despite all the customer complaints, despite the Wall Street rhetoric, earnings have grown high teens compounded since Nardelli took the helm. And the free cash is real and showing up in the piles of stock they're buying back (almost $3billion worth bought back over the last two quarters, and unlike tech stocks, it isn't going out the back door in options). Frankly, I wouldn't mind if the stock stayed dormant for another couple of years so they could keep buying it back at these prices. While Marcus and Blank were running the show, the stock was a total darling and always traded at 25 forward or higher, usually trading in the mid 30s and occasionally above 50 forward. Today it's about 12 forward and 7-8 times cash flow minus maintenance cap ex. You make a comparison to Dell, but Dell is trading more than 20 forward. HD also sits on about $30billion worth of real estate value, which represents almost 40% of their market cap. What this story most reminds me of is how Wall Street felt about McDonalds in late 2002, early 2003 - "the food sucks, the service stinks, the bathrooms are filty", and all the franchisees were unhappy. I remember Ed Walzack of Vontobel, a decent value guy, coming on Wall Street Week, and saying that things had changed for good, and he was selling. The stock was around 12-14 then, and since has tripled. Would I like it if Nardelli, after having rationlized purchasing and logistics, handed the reigns over to a better "merchant", like Steve Odland of Office Depot? Sure, and I would think that Ken Langone has considered that. But even if Nardelli stays, he didn't get to be one of Jack Welch's top lieutenants over two decades by being a buffoon. He's plenty smart, and it looks like he's learning from his mistakes. The slowdown in residential real estate is going to last awhile, but it won't last forever, and over time, plenty of homes will be built, and will change hands, and will be remodeled. If anyone wants to bet me that home sales will be lower five years from now, I'll take that bet.

Lee_D said...

Oh, and one more thing. Up here in Canada, I shop at Home Depot only because Rona, our homegrown equivalent big box HW store is even more of a sad sack. Imagine your worst US Home Depot experience, and crank the knob on the mediocre-meter up six notches, and you have Rona.

Sad, really.

Aaron Koral said...

Jeff - I listened to that conference call and realized what I never knew about HD:

A) I never knew hurricanes could make for good business a year ago but cause tough sales and earnings comps now - guess this gives new meaning to the old cliche "One man's pain is another man's gain.";

B) I never knew that HD has 36% of its supply business in helping water utilities;

C) I never knew HD "cannibalized" some of its lesser-performing stores to take pressure off of its higher volume stores;

D) I never knew that a "labor model" could be "highly engineered" (if that isn't soul-less, GE six-sigma business-process speak, I don't know what is!!!); and

E) I never knew a company could be so bold as to increase its CapEx spending this year and next in areas such as resets, technology and inventory (!) despite a current slowdown in the home improvement markets where growth was fastest such as the NE, Florida, and California that doesn't look set to end, IMHO.

Maybe it's me, but I think HD is trying to use dividend increases and stock buybacks to "engineer" EPS growth and, ultimately, investor demand. I wonder whether investors in HD today are truly contemplating whether today's price is a bargain discount or a markup ready for a serious markdown? I don't know one way or another, but I could be wrong in my analysis...

BTW, I thought GS's Matt Fassler's (?) question on what gave HD "conviction" in subsequent improvement for Q406 numbers from Q306 numbers was a good one.

P.S. - On a lighter note, I guess I'm one of the few (?) who has pleasant experiences shopping at HD. I was helping a female friend with taking a door off its hinges. When I called the local HD store for help, the rep I spoke to talked me through the procedure. I went from being Tim "The Toolman" Taylor to Bob Vila in 90 minutes! And I can say that even though the stores are cavernous and somewhat poorly laid out, I always find what I'm looking for, and in stock, no less.

My thought here is that maybe one's experience with HD (or any retailer for that matter) would be dependent on the people as well as the store you go to.

Lee_D said...

Nelson Yu, I am chastened and sobered by your thoughtful, high level analysis of Home Depot's direction. That's good stuff, and excellent perspective. I need to pan out to the big picture more often, rather than get bogged down in the immediate.

The commentary on this blog never fails to make me think.

Oldnative said...

Jeff - I find myself going to Home Depot only when I need a large volume of a commodity type item (e.g.,fertilizer, potting mix, etc.). My experience has been that their customer service and product knowledge is weak. For anything that calls for answers to questions on products or how to do something, the locally-owned Ace store is vastly superior. Paying up for knowledge and service is fine with me.

rvb1977 said...

Jeff - I know nothing, really, about Home Depot, other than the fact that it's impossible to find things. But, as a former GE'er who has left to get into the investment business (from Engineering) I want to say that your thoughts here couldn't be more dead on about the culture within "the meatball". As a result, I own no shares of the thing. This whole concept of making the numbers no matter what has simply gone too far.

Keep up the great blogging.

Dan said...

A civil discussion both pro and con? No attacking the messenger? Miracles never cease! Anyway, what are your thoughts on what happens if foreclosures continue to rise? These properties are traditionally not well maintained and often require many trips to a home improvement store. When fence-sitting buyers begin to purchase these properties, does it start to help the situation for Lowes and Home Depot? And will their performance give us the first signal to the bottom of the housing slump?

Jeff Matthews said...

"Dan" has discovered what long-time readers know: we try to keep what Basil Fawlty called "the riff-raff" off these pages (meaning Yahoo Message Board-type foul language and name-calling) in order to generate good dialogue among well-informed adults, for the added value of all.

This does not mean dissenting opinions are discouraged or deleted.

On the contrary, all comments are posted as submitted, except for those which make their point using foul language or through name-calling. (Fortunately these are few and far between--less than one in thirty or forty.)

On message boards, as in the economy, the bad drives out the good, and that will not happen on these pages.

Thus it is that the observations from "rvb1977" are especially welcome, for he (or she) adds a real-world perspective that should be of value to all readers, whether they are fans of HD or GE, or not.

My thanks to all contributors for your thoughtful observations.

Lee_D said...

Is it a coincidence that four old-guard Home Depot board members are retiring? Looks like perfect timing for HD to go looking for a new Vision.

http://dealbook.blogs.nytimes.com/2006/11/20/langone-to-retire-from-home-depot-board/

BelowTheCrowd said...

Jeff,

Your comment could not have been more timely. Today KNBC aired a major expose of the questionable (some have alleged fradulent) tactics employed by HD in selling remodeling and repair services.

And the thing driving these questionable activities? If you said "pressure to make the numbers," you'd have guessed right.

The full report is available at http://www.nbc4.tv/homedepotinvestigation/index.html

I would be surprised if this does not result in both class action suits representing former customers as well as some official investigations.

And the de-customering will continue.

BelowTheCrowd said...

And once again, they'd rather make the numbers than do what it takes to make the shopping experience even remotely pleasant.

Unfortunately, the long-term impact of this is to ensure that the future numbers have to keep coming down.

http://www.nypost.com/seven/11302006/business/sales_falloff_kills_staff_increase_plan_business_suzanne_kapner.htm

Diane said...

I work at a home depot. I take offence to a comment posted about sales associates hiding in the back. Because of the number game the stores are all under staffed and the employees are all over worked. When you are hired for a specific department you’re told to find time to take e-learning courses to increase your product knowledge. This is a catch 22 for the sales associate who has just worked eight days straight with different hours every day and is the only person on the floor in the department. Home depot has turned in a communist country for the worker.