Home Depot knows when to call it quits

October 26, 2012: 10:35 AM ET

CEO Frank Blake went against the grain and pulled the plug on building more stores in the U.S. and China. And he and his company are reaping the benefits.

Home Depot CEO Frank Blake

Home Depot CEO Frank Blake

FORTUNE – The business world is a slave to growth stats. That's how most analysts and other company watchers gauge a firm's success. If you run a retail operation, growth often means building more stores. And if you want in on the best growth rate, you'll head to China. That's where the new middle class and wealthy consumers are. "Grow and grow in China," urges the Greek chorus of corporate spectators.

Home Depot (HD) has balked at all of this. CEO Frank Blake decided to close the hardware chain's operations in China and refrained from building new stores  in the United States. And the company has benefited  At the end of 2011, Home Depot had earned $70.4 billion in revenue, up 3.5% from 2010. As of this October, a share of Home Depot costs more than $60, an increase of nearly 70% from the same time last year. How did Blake pull this off? Part of it has to do with calling it quits on growth.

Of course, pulling the plug on big projects for the good of the company isn't the only skill Blake has brought to Home Depot. He also made key operational changes when he replaced Robert Nardelli in 2007. Nardelli had slashed employee benefits and focused on expansion and acquisitions. Blake reversed that tactic and set to get the company's damaged customer service reputation back up to snuff and cut costs without killing morale.

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Blake realized that returning the company to its employee-empowered roots would take a great deal of work. So much, in fact, that building new stores didn't seem like the best use of money, despite the general pressure to grow. "Frank looked at the world and said, 'We're fully stored, why don't we focus on improving the existing stores that we have rather than growing for growth's sake?'" says Gary Balter, an analyst who covers Home Depot for Credit Suisse. Blake saw, he says, that growing to placate Wall Street didn't make good business sense.

Similarly, Home Depot had announced plans to expand in China in 2004 under then-CEO Nardelli. But the company's do-it-yourself hardware approach never took off in the region, Blake says. Much of this was due to a combination of having the wrong regional leaders at the company, challenges adopting its big box model to China's distribution system, and a cultural mismatch. In China, Blake recently told Fortune, "Doing it yourself is not a point of pride."

Home Depot stores in the region were losing money. And while many companies have an "if you build it, they will come" mentality, Blake wanted to improve Home Depot at home. On September 13 of this year, the company announced it would close its seven big box stores in China.

"The next person could go, 'what a moron, how could this guy walk away from the largest consuming population in the world?'" Blake says. But he admits he is not the person to lead Hope Depot's overseas expansion. The CEO feels the same way about other emerging market, high-growth countries. "We can afford not to be in Brazil," he says, "but we cannot afford not to have the best interconnected retail experience in our space."

And Wall Street, which often pushes companies so hard to grow, seems to love him. "He's done everything a little bit so-called 'against the grain,'" Balter says, and analysts have come to not only expect that behavior from Blake, but reward it.

Still, it takes guts to stop drinking the "growth or else" Kool-Aid. Starbucks (SBUX) CEO Howard Schultz also had to pull the reins in on his company's expansion. In 2008, he took over a company that had over-saturated the market with its coffee. One of his first moves was to close 800 stores and lay off some 4,000 employees, then rally employees behind the idea of a more ethical coffee corporation. Now, Starbucks is back to a growth strategy and, unlike Home Depot, has global growth plans. In fact, Starbucks just opened its first store in India in October.

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For other leaders, calling it quits means taking more drastic measures, like stepping down. Take Bill Ford, who served on his company's board since 1999, and was then made CEO in 2001. After several years, he realized that he wasn't the right person to lead the company. Instead, he took the position of executive chairman and brought on former Boeing executive Alan Mulally as CEO in 2006. "Boy there's a good example of a guy that recognizes his own lack of skills," says Jerry Cavanagh, a professor of business ethics at the University of Detroit Mercy. Ford Motor (F) made it through the crisis, and was one of the few American auto companies that didn't receive bailout money. Cavanagh credits both Alan Mulally and Bill Ford for this.

Schultz and Ford halted growth and stepped aside, respectively. But Blake took a totally different path than the traditional one Wall Street has outlined for success. That takes guts, but it also reveals a counter-intuitive truth. "If you make decisions for the company, Wall Street will like you sooner or later," Balter says. "Don't do short-term things that you think [are] going to please analysts." The same can easily go for the business press. In other words, listen to us, but don't let us run your life.

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Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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