ATLANTA — How does the nation’s largest home improvement retailer weather the worst housing market in a decade?
With a pack of cigarettes, a cup of coffee and an inflatable Halloween decoration.
As Home Depot grapples with an economy that is stacked against it — the number of new building permits plunged by 6.3 percent in September alone — executives here are rushing to renovate the company’s strategy by selling more than just home improvement products.
The shelves are still jammed with nails, drills and light switches, but Home Depot is displaying a growing willingness to stray from the single-minded focus on kitchen renovations and roof repair that turned the chain into the nation’s second-largest retailer, after Wal-Mart.
A new convenience store, being tested in the parking lots of Home Depot stores in Tennessee and Georgia, dispenses gas, washes cars and sells Camel Lights.
Inside the main stores, space for seasonal decorations, once an afterthought for the chain, has doubled, resulting in $60 mummies at the end of the paint aisle.
If that was not enough, there are candy bars at the checkout counter — anathema to company founders, who zealously protected the chain from products that did not, as the chain’s motto intones, improve home improvement.
The experiment with everyday products — and a $350 million program to overhaul the look of 500 stores — exemplifies the belief of the chief executive, Robert L. Nardelli, that Home Depot can not only survive a downturn in the housing market, but can exploit the situation by plowing money into the chain.
“It’s counter to everything you know about retail,” Mr. Nardelli said. “But we want to gain market share in a down market.”
Mr. Nardelli, a former General Electric executive who owes no loyalty to the retailer’s founders, is unapologetic about the changes. “You’ve got to make sure your intellectual arrogance doesn’t get in the way of selling something,” he said recently at a store outside Atlanta.
But even company insiders concede the flurry of witches and Snickers bars has left them uneasy. “I lose some sleep over that,” said Tom Taylor, the former executive vice president for merchandising who now consults for the company. When employees proposed expanding the Halloween display at the front of the store, Mr. Taylor recalled, his response was “Guys, you are kidding me.”
Much has been made of Mr. Nardelli’s decision to spend more than $7 billion over the last five years bulking up Home Depot Supply, which provides pipes, lumber and concrete to professional builders, cracking open a lucrative new market for the company. The fast-growing division accounts for about 13 percent of revenue, or $12 billion of Home Depot’s $90 billion in annual sales — and is on track to contribute $25 billion by 2010, company executives said.
But to kickstart Home Depot’s stagnant stock price, Mr. Nardelli has to persuade investors he can steer the retail division through a housing slump with no end in sight. Home Depot’s share price closed yesterday at $36.50, up 26 cents; shares were trading around $45 when Mr. Nardelli became chief executive in late 2000.
“Maybe diversifying the business is a good long-term move,” said Timothy M. Ghriskey, chief investment officer of Solaris Asset Management, which sold all of its Home Depot shares in June. “But only rising same-store sales would get this stock price up right now.”
To improve same-store sales — revenue from stores open at least a year — Mr. Nardelli is remodeling product displays in 500 of the chain’s busiest stores, producing more detailed signs, arranging merchandise on easier-to-access shelves and offering a broader range of products.
And he is ratcheting up staffing in the stores. In the second half of the year, traditionally the time when home improvement chains reduce employee workloads to match slower customer demand, Home Depot has added 5.5 million hours — the equivalent of 2 to 3 additional employees per store — to the payroll, at a cost of about $100 million.
Mr. Nardelli called the store investments “gutsy calls,” given the state of the housing market, and notes that Home Depot’s archrival, Lowe’s, has reduced staffing since the summer, as it does every year.
It is unclear which strategy will prevail — bowing to market realities and cutting back or plowing money into stores and hoping customers notice the improvements.
“If the overall home improvement business shrinks,” Mr. Nardelli said, “by having an aggressive strategy, you have a chance of at least holding on to your position.”
There is no doubt the business is shrinking. Existing- and new-home sales have slowed, prices are sliding and housing industry experts foresee a slump that may last well into 2007.
Mr. Nardelli is not shy about discussing the troubles. “We have a close relationship to home builders,” he said, “and I have never seen them so aggressive to pull back.”
The slowdown, he said, “impacts us directly.”
