Building hope for an economic recovery

    The Home Depot has seen sales drop for four years, but now, they're "falling less." CEO Frank Blake explains.

    By Jennifer Reingold

    On April 9, Fortune's Jennifer Reingold sat down with Frank Blake, CEO and Chairman of The Home Depot (HD, Fortune 500), to get a sense of how one of the nation's bellwether companies is weathering the economic storm. The message: It's not over yet.

    Please tell us you're seeing some good news out there.

    Well... It's our fourth year of negative comps (change in sales at the same stores from year to year). Our comps are less bad, but they're still negative. They're falling less. So it's not a jump up and down and be thrilled situation, but it's not as bad as it could be. The economy as a whole needs to see housing values stabilize and then start eating through the overhang in inventory.

    Will spending at Home Depot improve as overall consumer spending improves?

    I think there were a couple of things that impacted our business that probably won't return in the near term. First, the pretty intensive house flipping activity at the height of the bubble, and then credit availability. Credit will normalize, but the flipping will probably be out of the market. We've looked at the same data point for a while: Housing construction and remodeling spending as a percentage of GDP. The 60-year average has been 4.75%. At the height of the bubble, it got up to 6.25%. The 60-year low was 3.25%, and we ended the fourth quarter of 2008 at 3.1%. We still think it's going to get lower, something like 2.8% or 2.75%. That's a big correction.

    Any surprising shopping trends out there that reflect the change in the economy?

    In the winter, we saw a pickup in the higher end of our snow throwers. The theory is that people are doing away with their snow plow contracts. And sales of seed packs for vegetable gardens are way up.

    Are you gaining market share in this environment?

    We're doing better on market share. In lumber, for example, there are a lot fewer lumberyards than there were a few years ago. Patio is another area where we have improved. Three to four years ago, it was 'what kind of white vinyl did you want?' We don't have the same amount of footage as a specialty store, but it's a better deal, better value and a pretty broad array of product.

    Overall, though, you've also reduced the number of products in the store to save money.

    I think we're down about 8% on SKUs. We understand that there are 300 different hammers, but really, what's the right mix?

    You have linked employee satisfaction with customer satisfaction. Is it difficult to keep your employees happy when times are so tough?

    Think about how bad the last half of 2008 was. Still, we had our highest percentage of stores participating in what we call success sharing (bonuses) for our hourly associates. We said look, this is a tough time, so we lowered the qualifications to making 90% of plan from 95%. This is a way to say to our associates that we get it, and that we want to take care of you. Although we froze salaries for officers, we didn't freeze salaries for the rest of the organization. We continued to provide bonuses and maintained our 401(k) match. We've tripled what we pay out in our Homer Fund, which is an internal fund for associates that have economic and health dislocations.

    What's going on with your new supply chain initiative, [meant to better manage inventory by creating regional distribution centers rather than sending most goods directly from the manufacturer to the store]?

    It didn't start well in 2008. We decided to do rapid deployment centers, and piloted one in 2007. But the first one we did just unspooled. So we stopped and took three-to-five months to get to what we thought the root causes were. Then we started rolling them out again during the last half of the year. Now we're back on track.

    What is happening with your advertising as newspapers continue to shrink and fold?

    A lot of our business really flows around the tab (the weekly sale supplement) -- what's the deal on the front page and the back page? There's still power to the tab: We just ran a $199 Weber grill and that was just an amazing deal and we sold out. But you look at the newspaper business and you wonder, where's it going to be in five years? I don't have the answer.

    Any other type of advertising that's more effective?

    Generally speaking, radio. But radio is much less product intensive.

    I understand you have a new tagline.

    Yes: More Saving, More Doing.

    Have you given up the other one -- You can do it, we can help?

    We're not guillotining it or anything, but it's not going to be around. This one is a little more reflective of the times.