The division could be worth between $8 billion and $13 billion

HD Supply's sales were about 15 percent of Home Depot's total 3Q 2006 sales

“We are undertaking this action today because of our desire to increase our focus on our retail business,” said Frank Blake, the company’s CEO and chairman.

With its retail store sales lagging and its stock going nowhere, Home Depot has been under pressure from investors to take a fresh look at its operations. Getting rid of HD Supply, if such a move were to go forward, represents a huge step away from the nonretail business strategy of Blake’s predecessor, Robert Nardelli.

Nardelli left the company in January after six years in charge. His $210 million severance package on top of $225 million in pay, bonuses and other incentives for six years got the most attention at the time, particularly considering that Home Depot stock was priced 8 percent lower on the day he walked out than on the day he walked in.

Blake already has taken a number of steps to distance himself from Nardelli, including cutting his pay, getting rid of executives recruited by Nardelli and even putting an investor critical of the wholesale business strategy on his board of directors.

Renewed focus on retail is long overdue, say most analysts who follow the company. However, without HD Supply, Home Depot would be getting rid of its fastest-growing business, which contributed practically all the company’s sales growth recently.

Analysts believe HD Supply could be worth between $8 billion to $13 billion. While Blake’s announcement added the company might decide to do nothing at all, the announcement also mentioned that the move “is a continuation of a strategic review we did in November.”

Wholesale Side

The idea still has merit. Through consolidation, Home Depot could create a major “second” customer, the professional contractor. In other words, Home Depot would do to the fragmented wholesale-distribution industry what it had already done to the one-time fragmented DIY industry. Just consider how many mom-and-pop hardware stores there are today vs. 15 years ago.

“We have reached a defining moment in the history of this company as we broaden our market view from the traditional $200 billion retail market,” Nardelli told The Wall Street Journal last August. “What we really are doing here is repositioning our company so we can continue to have sustainable, predictable growth.”

Most notably for our industry was his $3.2 billion purchase of Hughes Supply, Orlando, Fla., almost a year ago. That move alone doubled its business to the professional trades. At the time, Nardelli called Home Depot and Hughes an “ideal strategic and operational fit.”

Last September, the company renamed its wholesale business HD Supply. Nardelli predicted that HD Supply would account for 20 percent of Home Depot’s business by 2010. It didn’t have that far to go. In the third-quarter of 2006, for example, HD Supply sales were $3.5 billion, or about 15 percent of total quarterly sales.

Nardelli was so adamant about the growth of HD Supply that Home Depot separated out the wholesale financials from retail. For a short time last year, Home Depot even stopped reporting same-store sales, a standard for any retailer, that measures sales from stores open at least one year.

The metric was outmoded, Nardelli insisted, since the company was no longer just a retailer. “We pose a real challenge for traditional retail analysts to understand our business model,” he told The Wall Street Journal.

However, Home Depot did relent after analysts and investors condemned the move. But when the company reported it again in the second quarter for 2006, same-store sales were down 0.2 percent and down 5 percent in the third quarter. (With a fiscal year ending in January, the company hadn’t announced its fourth-quarter results at press time.)

Retail Suffers

“He blamed a lot of his problems on Wall Street,” Credit Suisse First Boston analyst Gary Balter told Business Week recently. “But Wall Street wanted to see results, and they just weren’t there.”

People like Balter pointed out that the margins in wholesale were too small to have a dramatic effect to turn around the entire company. In its third quarter for 2006, for example, Home Depot stores reported an operating profit margin of 11 percent vs. 7 percent for HD Supply.

That retail margin could be fattened up, too. As Home Depot’s share price stagnated, most investors and analysts figured that the billions spent on the supply side could have been better spent reinvigorating the retail stores.

Here again, some of the policies Nardelli put into place at the retail stores didn’t win any popularity contests.

As part of a cost-cutting program, Nardelli cut rank-and-file employment hours at the stores from a 60/40 ratio of full-time to part-time staff to a 50/50 ratio, as well as trimming total store employment.

Out went the experienced help and in came the teen-aged novices. That turned the typical do-it-yourself customer into a “find-it-yourself” customer - no small task given the typical cavernous Home Depot store.

Meanwhile, other Nardelli policies alienated upper-management, resulting in massive turnover at corporate headquarters. Amazingly, almost all of Home Depot’s top 170 executives are new to their positions since 2001; more than half are from outside the company. Business Week recently reported that so many of these new executives are, like Nardelli, from General Electric that insiders dubbed the company “Home GEpot.”

For a company that once prided itself on customer service, Home Depot found itself in last place among specialty retailers in a 2005 American Consumer Satisfaction index, a well-regarded benchmark done by the University of Michigan.

That news must have meant a lot to executives at archrival Lowe’s. In that same study, Lowe’s came in second. What’s more, in 2001, as Nardelli’s tenure began, Lowe’s and Home Depot received the same scores.

At Lowe’s, the aprons aren’t orange, but investors aren’t seeing red over its financial performance. Lowe’s stock price has gone up more than 200 percent since 2000. With about 450 fewer stores and half the sales of Home Depot, Lowe’s has slowly but surely taken business away from its biggest competitor.

Most consider Lowe’s store design to be much brighter, less of a warehouse and more appealing to women shoppers. As Home Depot went from a friendly helper to a cold corporation, Lowe’s store outpaced its rival in same-store sales for much of this decade.

Not All Bad

While same-store sales fell flat early on his watch, they increased from 2003 onward. They have stumbled lately, but so has Lowe’s as both contend with an economic slowdown.

The bright spots weren’t reflected in the company’s stock price, but one reason may be that the shares were as over-priced when he took the job as they are under-valued when he left.

Get rid of HD Supply and the company still faces the same problem Nardelli faced when he started acquiring wholesalers: how to grow the business. In the third quarter of 2006, for example, HD Supply contributed $2.1 billion of the $2.3 billion in sales growth over the third quarter of 2005.

MarketWatch.

In related news, Home Depot is shutting down its Floor Store concept as it shifts resources back into regular stores. Home Depot opened its first Floor Store in 2000 in Plano, Texas, and later added five satellite showrooms in that area and added another store in Margate, Fla.

The Floor Store sold carpet, tile and wood flooring to professionals and consumers. Floor sales will continue in the regular stores.