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In his first week as chief executive officer of Home Depot Inc. in December 2000, Robert Nardelli tried to e-mail the home improvement chain's 1,100 store managers. That simple task wasn't possible, it turned out, because the world's third largest retailer lacked a computer network to link its stores.

Store managers, who had run their businesses as independent fiefdoms for two decades under the entrepreneurial mandate of co-founders Bernard Marcus and Arthur Blank, didn't want to hear from Atlanta headquarters.

"I was told I couldn't -- and shouldn't -- e-mail everyone," says Nardelli, 56, who joined Home Depot two weeks after losing a three-man race to succeed Jack Welch as CEO of General Electric Co.

The e-mail episode was just one eye-opener for Nardelli as he took over a company that, after revolutionizing the U.S. home improvement industry and seeing its stock price increase 1,000-fold in 19 years, had begun to founder.

"When Nardelli started, the company needed a transformation," says Daniel Poole, an analyst at Cleveland-based National City Corp., which owns 4.7 million Home Depot shares. "They had grown into a huge company without having coordination, logistics and centralized procedures a big company needs."

Founded in 1978, Home Depot took on the fragmented $300-billion-a-year U.S. hardware business, made the orange aprons its clerks wear an instantly recognizable retail icon and became the youngest retailer in history to reach $30 billion, $40 billion, $50 billion and $60 billion in sales.

In its wake lay scores of mom-and-pop hardware stores and local lumberyards.

Investors got rich along the way. At Home Depot's initial public offering in 1981, 1,000 shares cost $12,000. On Dec. 4, 2000, the day before Nardelli took over, that stock was valued at $12.2 million -- even after having fallen 42 percent in the previous eight months.

Nardelli has focused on sprucing up stores and updating technology, which hadn't kept up with growth. Only in the past two years, after Home Depot installed 99,000 Hewlett-Packard computers in its 1,781 stores, could its CEO e-mail store managers.

Nardelli says he isn't finished remodeling Home Depot, and he says he will spend $3.7 billion in 2004 to continue the job. Two years ago, it took 20 days to run 200 computer programs and churn out end-of-the-month sales figures. It now takes five days.

Nardelli says he wants daily sales tallies of Home Depot's 35,000 products. The company also has self-checkout registers in half of its stores; Nardelli says he wants them chainwide to speed up transactions and free up clerks to help customers.

The biggest expenditure this year -- $2.9 billion -- is earmarked for building new stores and modernizing older ones, many of which were dimly lit and cluttered with stacks of boards and plywood. The company overhauled some 500 stores last year; in the previous two decades, Home Depot had renovated only two.

"There have been visible changes at Home Depots," says Daniel Popowics, an analyst at Fifth Third Asset Management in Cincinnati, which owns 4 million Home Depot shares. "They have upgraded the merchandising in their stores. They put a heavy emphasis on employees being more accessible and greeting customers. They have definitely improved."

Along with invigorating his own company, Nardelli is keeping an eye on main competitor Lowe's Cos., which has been the home improvement industry stock to own in recent years. Its shares have risen 146 percent since the end of 2000.

Mooresville, N.C.-based Lowe's, with 975 stores, has outperformed Home Depot by designing stores with wider aisles and brighter lighting and by offering high-end brands such as Alexander Julian rugs, Baldwin brass doorknobs and Jacuzzi whirlpool baths. Lowe's presents a stern challenge to Nardelli, says Barbara Allen, an analyst at Natexis Bleichroeder Inc., which owns 25,000 Lowe's shares.

"This year is a real test," Allen says. "Nardelli has gotten the company on a far better track, but now comparisons get harder, and Lowe's is not going to go away."

When Nardelli took over Home Depot in 2000, sales at stores open at least a year had slowed for six consecutive quarters and earnings were falling, snapping a 15-year streak of gains.

"The company was screwed up," says Kenneth Langone, a Home Depot director since the company's inception in 1978.

It was Langone, 68, who provided Marcus and Blank with $2 million to start the company. In 2000, Langone, a GE director, helped recruit Nardelli to Home Depot. "Nardelli, in my opinion, saved Home Depot," he says. "That's an emotional statement, but it's one I will stand by."

New York State Attorney General Eliot Spitzer sued Langone in May for playing a key role in setting the pay of Richard Grasso, former head of the New York Stock Exchange. Langone, an NYSE board member and a longtime friend of Grasso's, headed the exchange's compensation committee for three years. The suit is pending.

At the helm of a company for the first time, Nardelli moved to clear clutter in the stores, ordering the removal of wooden pallets on the floor and banning forklifts from 8 a.m. to 8 p.m. He centralized purchasing from nine offices to one.

Nardelli cut five group presidents, eliminating a management layer. He filled executive ranks with outsiders from Delta Air Lines Inc., Yahoo! Inc. and GE.

Mitzi Carletti, of Seattle-based Badgley, Phelps and Bell, was one investor who criticized Nardelli for going too far. "People have lost confidence in Nardelli," she said in January 2003.

Nardelli moved to reverse that view by halting the slide in sales at stores that had been open at least one year -- reporting positive results in four straight quarters. In 42 months, the number of stores increased more than 50 percent.

Home Depot's cash has risen to $4.3 billion from $200 million over the same period. Gross margin, the share of sales after subtracting the cost of goods sold, is up to almost 33 percent from less than 30 percent, as Home Depot has controlled inventory, sold higher-priced products and reduced supply costs.

Sales rose more than 40 percent to $64.8 billion in 2003 from $45.7 billion after Nardelli's first year as CEO. Only Wal-Mart Stores Inc. and France's Carrefour SA are bigger retailers.

Within a mile of headquarters, at the Cumberland Parkway Home Depot, the early results of Nardelli's transformation are visible.

Walking briskly through the airplane-hangar-size warehouse, which was remodeled in January, Nardelli points to changes being made across the franchise. Floors are waxed after being dull-finished and splattered with paint for years; more and brighter lights have been installed. Aisles are numbered with large signs and showcase laminated posters of tips on choosing merchandise. Self-checkout lines let shoppers scan bar codes and pay by credit card, speeding up transactions.

At the front of the store, displays showcase $2,000 green-and-yellow John Deere lawn tractors and $500 Maytag Skybox soft-drink dispensers for the home -- new items that helped to boost first-quarter sales by 7.7 percent, the company's fastest rate in five years.

A paint-mixing center has been set up to let customers pick their own colors of Disney or Ralph Lauren brands via a computer touch screen. There's a Dunkin' Donuts store aimed at luring contractors who typically stop by in the early morning, though Nardelli sips from a Starbucks coffee bought on the way to the store.

Nardelli, who began his GE career loading televisions into boxes during college, lingers in the appliance showroom, pointing out $1,099 GE Adora refrigerators and opening the door on a $1,199 Maytag Neptune dryer to show how clothes can be steamed dry on hangers.

Three years earlier, big appliances were hidden in boxes and stacked in racks, and Nardelli says that some executives tried to convince him that was the best way to sell them. Nardelli, in the early 1990s, headed up GE's Canadian appliance manufacturing unit.

"I know something about the appliance business, having been in it a few years," Nardelli says, adding that Home Depot has gone from 2 percent of sales of major appliances -- washers, dryers, ranges, refrigerators, dishwashers -- in the U.S. to No. 3, with almost 8 percent in the first quarter.

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