Home Depot (HD) CEO Bob Nardelli got axed on Wednesday after shareholders demanded a change in management.
Still, since Nardelli joined the company in December 2000, the home improvement retail giant's stock has fallen about 5.6%. Over that period, Nardelli managed to pull in $123.7 million in compensation. (Source: Forbes)
We know about the negative claims, but do we know the direct cause of the lagging stock performance?
Was it Nardelli's poor performance or fierce competition from a comparable home improvement store that led to the negative stock gains?
That fierce competitor is Lowe's home improvement stores (LOW), a firm that's stripped away at Home Depot market share ever since Nardelli's tenure began.
Let's rewind back to 2000:
|Company Name||Market Cap in 2000||Stock Price in 2000|
|Home Depot||$115 Billion||Around $50-$60|
|Lowe's||$18 Billion||Around $10-$12|
Home Depot dominated the home improvement industry at the turn of the 21st century.
Lowe's stock gained momentum, and increased its competitiveness to battle against Home Depot on a larger stage. Lowe's plan to steal market share worked. Refer to the 5-year charts below – you'll see a trend begin to develop.
HD, LOW, and DJIA performance over the past 5 years
Home Depot, the green line, took the worst of the 2002 beating, while Lowe's shares rebounded rather quickly. It's hard to stay that Lowe's is “head and shoulders” above Home Depot in terms of quality and service. Both companies offer comparable products and service at reasonable costs. Both firms experienced large revenue increases, yet stock performance reflects a different environment.
If you look at the end performance for 2006, you'll notice that Lowe's gained around 45%, and Home Depot lost around 15%, which is equivalent to the 5-year Dow gain of around 25-30%. The difference in stock performance is awfully close to the Dow Jones gains. Growth investors swapped out of the Home Depot stock for shares of Lowe's stock.
Projected 5-years Earnings Growth
- Home Depot – 12%
- Lowe's – 16%
Now, let's refer back to the same table as before, but this time look at 2006 numbers.
|Company Name||Market Cap in 2006||Stock Price in 2006|
|Home Depot||$82 Billion||Around $34-$43|
|Lowe's||$49 Billion||Around $32|
Lowe's fought for 5 years to increase its market share. Guess what? It worked.
Lowe's is closing the gap on Home Depot! As always, sector competition remains the #1 concern for all firms. Home Depot suffered from a narrow moat, and gave Lowe's an opportunity to play catch up in the home improvement industry. This explanation takes a lot of the heat off of former CEO Bob Nardelli, who probably saw this day coming 4 years ago.
If you cannot beat the competition, why not fatten up your pockets in the process? It's unethical, but let's try to understand this situation from Nardelli's point of view. If competition was kicking your butt, would take the corporate salary bait or just stay honest until your pink slip came?
Some investors have misunderstood the whole Home Depot debacle, but not us. It's about the ongoing struggle for market share in the home improvement industry. A definite problem that Home Depot would rather not talk about because Lowe's has won the battle.
But who will win the war?