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Nardelli’s Departure Raises Questions On Home Depot’s Future

Atlanta — Yesterday’s surprise resignation of Home Depot chairman, president and CEO Bob Nardelli begs the question of what’s next for the country’s second-largest retailer.

Analysts believe the company may stay the course under his successor, former vice chairman and executive VP Frank Blake; bolster its management team with more seasoned merchants; or explore strategic alternatives that could include a leveraged buyout.

Goldman, Sachs analyst Matthew Fassler described one outcome in which the current management team — which also includes chief financial officer Carol Tome and newly promoted COO Joe DeAngelo — gels and expands. “We have enormous respect for Frank Blake, a top-flight strategist,” Fassler wrote in a research note. “That said … he has never run a company or one of Home Depot’s major operating businesses. As a result, further changes are possible.”

David Strasser of Banc of America Securities described the lack of retail leadership within the organization as a matter of “some concern,” and suspects that Home Depot may need to “look outside the company to bolster its retail management bench strength,” perhaps reaching out to its former merchandising and marketing guru Tom Taylor.

Lehman’s Brothers’ Alan Rifkin expects the company to continue to follow its current operating plan, but believes Nardelli’s resignation arose from “differing philosophies and forward-looking strategies” between him and Home Depot’s board, increasing the potential for “strategic alternatives.” One possible alternative: a leveraged buyout, rumors of which had circulated through Wall Street late last year. But Goldman Sachs’ Fassler believes an LBO is “relatively unlikely,” given the unprecedented size of such a deal.

Also unclear is the reason behind Nardelli’s sudden resignation, although theories abound. While Rifkin suggested diverging philosophies, Fassler believes the board reacted to investor activism, tied to Nardelli’s generous compensation package, Home Depot’s falling share price, and his refusal to take questions or review the company’s performance during its last annual meeting.

In addition, while most analysts generally applauded Nardelli for earnings and cash flow growth he generated during his tenure, the former GE exec was reportedly loathed by store level associates across the chain, which may have dampened sales.

Either way, Strasser sees his departure as a positive for archrival Lowe’s, given Home Depot’s current state of flux.