Armando Codina On CNBC

What do Home Depot, GM, American Airlines and Merrill Lynch all have in common?

Armando Codina, the Florida real estate tycoon, sits on each of their boards.

Is this a good thing? Well, nearby is a Yahoo-sourced, five-year price chart for each firm and the S&P500 Index.

What do you think? Armando's firms all trail the S&P over the past five year period.

What's really scary is to listen to his expound his views, as I did this morning on CNBC. Here are some of the chestnuts I heard:

-Lehman should be saved, in some capacity, and continue to exist, because it is such an 'important' financial institution.

-GM's CEO, Rick Wagoner, has the full support and confidence of the board.

-GM should be given assistance from the US government, in the form of aid in raising capital, which may include loans, in order to invest in 'green' technologies and buy time to return to financial health.

-GM and the rest of the American auto makers are more important now than when then-GM President Charlie Wilson uttered his famous remark, "What’s good for the country is good for General Motors, and vice versa." Thus, we must save GM.

This isn't an exhaustive list of Mr. Codina's shocking remarks, but they are the ones I most vividly recall.

What we see, from his comments, is a board member of four large, ailing American companies who believes companies should never die. If they are in danger of dying, even from their own misguided actions, they should be given a stay of execution by the Federal government. No large company, it seems, should be allowed to fail.

Evidently, Mr. Codina never heard of Joseph Schumpeter and ideas on the dynamic nature of capitalism. Companies rise and fall, are born, and die.

From his roots as a real estate developer, it's believable that Mr. Codina just doesn't really understand the realities of the larger system of American business. In real estate, land generally remains in existence. People need places to live. Businesses need places from which to offer goods and services for sale.

But businesses such as Home Depot, Merrill Lynch and the other firms on the boards of which Mr. Codina sits, can and do fail. Their business models may fail to adapt to new competitive or market realities. Or they simply may no longer offer attractive merchandise for sale to consumers.

Just because they fail does not mean that you can't buy a car, fly to another location, trade equities or bonds, or buy a tool for home use. If it's a profitable need to fill, someone else will still be around to offer competing goods or services.

It's instructive to hear the actual views of a live, sitting board member of ailing firms like these four. Now we can better understand why they have no shame. They overpay underperforming executives, wait too long to fire them, and see no wrong in, having badly overseen the management of the firms on the boards of which they sit, approaching taxpayers, via the Federal government, for help in remaining solvent.

Makes you sick, doesn't it?

Home Depot Again: Stories from the Front Lines

This weekend, I had the pleasure of seeing old friends who are the parents of one of my daughter's friends. Having moved about an hour away, several years ago, my visits with Jon and his wife are now, though less frequent, longer and more involved.

Jon has had success in startup ventures in the past, and is currently busy with another one. An engineer by training, he fills a number of roles in the venture, including that of supply officer for the firm's various hardware, testing and building materials needs.

This was news to me. Jon related how he has become a regular at the Home Depot located within a few miles of his firm's offices in Northern New Jersey. Typically not that observant of details at stores, such as Home Depot, so Jon says, he has noticed a number of things this summer that corroborate my many posts describing the building supply chain's woes.

For example, he cited the many times he wanders the aisles, while knots of orange-aproned employees are busy talking among themselves, leaving him to fend for himself.

The aisles, he says, are far from presentable. I think he described them as cluttered and messy, when the shelves weren't empty.

But the best story he told involved product mix changes. Specifically, a ban saw.

His group does lots of research and experimentation, so they need power tools for building things on their test benches. Jon had recently bought a ban saw. Within a few weeks, they'd worn the blade out, and he returned to Home Depot for replacement blades.

No luck. It seems that the supply chain had switched product lines, and now markets, as Jon puts it, a decidedly cheaper ban saw.

Well, he was there for blades, not another saw, right? So, no problem.

Ooops! Home Depot told him they don't carry legacy parts for the old saws- meaning spare blades. None. Nada. Zippo.

So they sell him a fairly expensive power tool one month, only to drop support of the consumable blades the next month. No offers to search other stores, or order the blades, or even provide contact with the manufacturer.

My friend was both displeased, as well as bewildered as to how a major chain such as Home Depot could engage in such dysfunctional and unsupportive behavior.

At least when Apple dropped the price of its iPhones, the old ones still worked. In this case, Home Depot simply drops support for their customers who are foolish enough to buy a fairly expensive tool which requires spare parts support.

The nearby Yahoo-sourced chart displays prices for Home Depot, Lowes, and the S&P500 Index, for the past two years. While HD and LOW have moved very similarly over the period, there's no mistaking that HD has diverged very sharply from the index in 2007.

Lowes seems to have popped up a bit more from its recent bottom, coincident with the summer mortgage-based woes, than has Home Depot. Looking more closely, Lowes was back to a positive return when the housing finance crunch hit, whereas Home Depot was in the red. Then it appears that market forces hit Lowes, as well, from which it rebounded a bit better than Home Depot.

What really struck me, of course, was that my friend could instantly detect serious failings in Home Depot, from his perspective as a customer. It echoed what I have seen in the performance data for Home Depot for at least the past year.

I have a feeling that the firm's troubles now run deeper than simply an arrogant, overpaid, now-departed CEO. And that it may be a while before Home Depot is back on track, both with consumers, as well as investors.

Hello Atlanta

The Sitemeter counter on the bottom of my main blog page provides me with some rather detailed information. While I never record them, individual IP numbers for each visitor are shown, along with the IP provider, web browser, computer operating system, time, date of visit, length, number of pages read, entry page, and a few other items.

That's how I know that someone from Home Depot's Atlanta HQ visits my blog every morning between 7 and 8AM.

I'm guessing that, due to the stream of posts I wrote about the ailing firm while it suffered under mediocre management by Bob Nardelli, someone in the public relations function is tasked with monitoring my blog, among others which have featured the firm.

It may even be an automated blog crawler, as my partner suggests, rather than a live human.

Either way, this post is for you, Home Depot.

As Nardelli's exit has partially removed the spotlight from your firm, it's quite possible that it may be months before I write about your firm again. Most of the interest was in comparing the egregious behavior of Nardelli with his inability to operate Home Depot in a manner which earned consistently superior total returns for shareholders. Something it actually had done for years prior to his arrival. In fact, in those days, I owned and profited from owning the company's stock. I wrote a post about it, here, last July.

However, if Frank Blake would like to know what I know about what level and patterns of operating performances will increase the probabilities that Home Depot's stock will consistently outperform the S&P500, I'd be happy to share my proprietary knowledge with him.

Although I now use my proprietary research for equity portfolio management, it was, in fact, originally developed as a knowledge transfer product. It has been applied to one large financial institution whose then-CEO is, even now, a well-known figure in US business circles. As I did with that firm's senior executives, I am quite sure I can help Blake and his colleagues understand what sort of fundamental operating performances are likely to lead to Home Depot's return to consistently superior total return performances.

Just post a comment here with contact directions, and we can discuss the matter privately.

Business Media & Schumpeterian Dynamics

Today's "Financial Insight" column on the back page of the Wall Street Journal's Money & Investing section discussed Dell's recent foray back into retail, via Wal-Mart.

Essentially, the computer maker has deigned to sell some desktop units through the giant discount chain. Notably absent, however, are its notebook products. I wrote this post last fall, discussing how mistaken I believe Dell's strategy is in this respect.

At the end of the short piece, the authors wrote,

Dell has tried this strategy before, and it failed. In 1993, it began selling PCs at Sam's Clubs, a division of Wal-Mart. One year later, it pulled out. The reason: "This is a no- or low-return business," said Michael Dell. "We like to be in businesses where we can make money, and we know how to do that in the direct business. He must be hoping history doesn't repeat itself"

Guys, it never does.

What puzzles me is why much ink is even spent on this sort of Dell action anymore. History assuredly won't 'repeat' itself, in the larger sense, in that Dell is history. Its phenomenal total return and sales growth run is history. It has become just another datapoint sustaining Joseph Schumpeter's keen observations, early in the last century, on the nature of the rise and fall of businesses in a technologically-based, fast-moving capitalistic economy.

Home Depot is essentially the same. It, too, is now a market-saturating, mature company. The salad days of rapid, profitable growth and consistently-superior total returns are over.

Why can't the people in the business media see this? Companies are born, some develop strongly, they mature, then they age and go gently into that good night.

From an industrial structure point of view, aging sectors tend to consolidate, in order to preserve some vestiges of profit margin, amidst slowing or declining sales volumes and revenues. Very rarely, if ever, do leaders in a non-cyclical sector rise again, without drastically changing their business focus.

Dell and Home Depot are now, hopefully, just interesting, Schumpeterian footnotes in business history. I wish I could write that we won't hear a lot about them anymore, but that's probably not true. Because business writers and reporters don't seem to know all that much about business theory and reality over time. At bottom, business "news" and reporting seems to be more about entertainment than providing useful insights and information.

Home Depot & Relational Investors

There were amazing developments at Home Depot last week. According to Alan Murray's comments on CNBC on Monday afternoon, here's what happened.

First, Relational apparently got the Home Depot board to agree to revisit the 'supplier' business which Nardelli and his lieutenant, now CEO, Frank Blake, built and acquired.

Second, in presenting their analysis, Relational allegedly corrected a prior mistake in calculating this unit's ROI. This part is just amazing. So Blake and Nardelli, two exorbitantly-compensated senior executives, couldn't even do the basic math to correctly determine the return to HD of a new business? Can we say "mediocrity?"

Consequently, third, the board is now agreeing to consider getting rid of the unit. Maybe a good idea, maybe not, as some note, because they would be selling 'at the bottom,' the housing sector being as weak as it is just now.

How can the board actually retain a CEO, even a new one, who was responsible for incorrectly providing the basic arithmetic of calculating operating performance for the new business unit, and presenting it to the board? For more thoughts on this, see my post on MBAs this week, as well as this one on a recent application of a very old marketing management method at GE/NBC. It's easy to see why I am so sceptical of the value of an MBA, isn't it? Somehow, common sense was simply lacking, even among GE-trained senior operating executives. Neutron Jack would be so proud.

Does the Relational Investors saga make you wonder what else is going on at Home Depot that smacks of grade school ineptitude? Not to mention how little spine the Home Depot board seems to have, bending to whomever has pushed on it with the most force most recently?