Home Depot: The best-performing stock in the S&P 500 since IPO (Audio)

1. 0:00 – 0:43

   Start

   1. BGBen Gilbert0:00

      I'm sorry, I got tripped up. You used, uh, power tools-

   2. DRDavid Rosenthal0:03

      [laughs]

   3. BGBen Gilbert0:03

      ... David Rosenthal?

   4. DRDavid Rosenthal0:05

      I built this whole door. I got the, the blank door from Home Depot. I had to cut it down to size to fit a non-standard size door opening in my studio. I drilled-

   5. BGBen Gilbert0:14

      Wow

   6. DRDavid Rosenthal0:14

      ... the door handle. I put the doorknob on myself. It all works great.

   7. BGBen Gilbert0:18

      We, uh, we gotta get you to the pro desk.

   8. DRDavid Rosenthal0:20

      Yeah. [laughs] And it's been part of every Acquired episode since.

   9. BGBen Gilbert0:25

      All right, let's do this.

   10. SPSpeaker0:26

       Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth?

2. 0:43 – 5:32

   Intro

   1. BGBen Gilbert0:43

      Welcome to the Fall 2026 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

   2. DRDavid Rosenthal0:51

      I'm David Rosenthal.

   3. BGBen Gilbert0:52

      And we are your hosts. Home Depot is an astonishingly large company. Before I started this research, I thought of it as a big store at the middle of a bunch of shopping centers, but not really, like, an important company to the world. But I was wrong, and the stats are, uh, large-

   4. DRDavid Rosenthal1:13

      Yes

   5. BGBen Gilbert1:13

      ... David.

   6. DRDavid Rosenthal1:14

      Large. [laughs]

   7. BGBen Gilbert1:15

      It is the world's largest specialty retailer. The only retailers larger are general, not in a specific vertical like home improvement. So think Walmart or Amazon or Costco, those are bigger, but the other vertical ones are not. In fact, Home Depot is the 45th most valuable publicly traded company in the world, period, with a $350 billion market cap. So that's more valuable than Netflix or Alibaba or Goldman Sachs or LVMH.

   8. DRDavid Rosenthal1:47

      Or Disney that we just covered.

   9. BGBen Gilbert1:49

      Yes.

   10. DRDavid Rosenthal1:50

       Which is wild because unlike all of those other companies, Home Depot is only in North America.

   11. BGBen Gilbert1:56

       Yes. Home improvement is just a massive category, way, way bigger than I realized. So here's a fun stat. Home Depot went public in 1981, one year after Apple Computer, and astonishingly, if you put $1,000 into Home Depot and Apple and their IPOs, and you held them all today, your investment in Home Depot would beat your investment in Apple. And if you reinvested the dividends that it paid out, it has compounded at nearly 25% per year for 45 years. I mean, imagine if your stock portfolio did that.

   12. DRDavid Rosenthal2:33

       Yeah. Home Depot is an all-timer. I kinda can't believe we haven't done this episode yet.

   13. BGBen Gilbert2:38

       Right? That makes it the number one performing stock in the S&P 500 in total investment return from the day that it went public to today. So that $1,000 invested in the IPO would be worth about $17 million today.

   14. DRDavid Rosenthal2:54

       Not bad. Not bad. Well, we're gonna get into, as we go, um, who holds that equity 'cause it's actually a critical part of the company's strategy, or at least it was.

   15. BGBen Gilbert3:04

       Yeah. And listeners, if you're trying to contextualize, well, 45 years is a long time. You know, how does that 17 million stack up? Ben and David love their index funds. You know, we love Vanguard here. If you had bought the S&P 500 with that same $1,000, instead of $17 million today, you would have 170,000.

   16. DRDavid Rosenthal3:23

       [laughs] Wow.

   17. BGBen Gilbert3:24

       Today, we will tell the story of how it happened. It is an unlikely story of two guys who got unceremoniously fired from their old jobs with little savings and no retirement funds, who then had a revolutionary idea to build a home improvement store in giant warehouses, five times more square footage than any other hardware store at the time, which seemed risky at best, unthinkable maybe. And we'll try to answer the question: How and why did that idea become so large? I mean, of course it's bigger than Lowe's, but also IKEA, Trader Joe's. It's bigger than nearly all dedicated grocery store chains, and today they employ an astonishing 470,000 people. That's more than any big tech company in the US, except for Amazon, more than any bank in the world, more than almost every car company, hotel chain, more employees than any restaurant chain also, including Starbucks. So listeners, this is the story of Home Depot.

   18. DRDavid Rosenthal4:26

       Woo. Let's go.

   19. BGBen Gilbert4:27

       So for all of you who have been asking for visuals to go with our episodes, you are in luck. We are making our companion PDF a regular thing now. So you can click the link in the show notes or go to library.acquire.fm to get access to all the charts and tables and illustrations from key concepts in this episode. You can join the email list at acquire.fm/email. That's where we'll send out all the behind-the-scenes photos of research and past episode corrections, and vote on future episode topics. That is acquired.fm/email. Join the Slack. Come discuss it with David and I at acquired.fm/slack. And before we dive in, we wanna thank our brand-new presenting partner, Sierra.

   20. DRDavid Rosenthal5:08

       Yes. Sierra helps the great companies of the world build better customer experiences and drive stronger business outcomes with AI, and we are so excited to be working with them.

   21. BGBen Gilbert5:17

       That's Sierra, S-I-E-R-R-A. So with that, this show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. David, take us in.

3. 5:32 – 15:58

   Bernie Marcus's Early Career and meeting Arthur Blank (1972)

   1. DRDavid Rosenthal5:32

      So the story of Home Depot is kinda like the Acquired version of, like, a Avengers movie.

   2. BGBen Gilbert5:37

      [laughs]

   3. DRDavid Rosenthal5:37

      There are these four business and retail superheroes that come together and, you know, save... Well, they don't save the world, but they save customers a lot of money.

   4. BGBen Gilbert5:45

      They provide extreme value propositions to-

   5. DRDavid Rosenthal5:48

      Yeah

   6. BGBen Gilbert5:48

      ... uh, the American consumer.

   7. DRDavid Rosenthal5:49

      Yes. Yes. So we start first with Home Depot's founding CEO, Bernie Marcus. Bernie comes from a poor family of Jewish immigrants- In the rough neighborhoods of Newark, New Jersey in the 1930s during the Depression, Bernie was actually in a gang as a kid, which I discovered hilariously reading Bernie's book, Kick Up Some Dust, uh, the forward of which was written by his good friend, the rapper Pitbull.

   8. BGBen Gilbert6:18

      [laughs]

   9. DRDavid Rosenthal6:19

      Uh, uh, like amazingly, the two of them like bonded and became good friends later in Bernie's life.

   10. BGBen Gilbert6:24

       Yeah, when you sent me that book cover, I had a serious double take-

   11. DRDavid Rosenthal6:27

       Yeah. [laughs]

   12. BGBen Gilbert6:27

       ... at the forward.

   13. DRDavid Rosenthal6:29

       So Bernie, despite his, uh, you know, rough upbringing and gang experience on the streets of Newark, he's super smart, and he ends up being the first person in his family to go to college. He goes to Rutgers down the road from Newark, there in New Jersey for college, and his dream is to go on to medical school and become a psychiatrist. That doesn't work out because his family doesn't have any money to send him to medical school, so instead he becomes a pharmacist. That quickly leads him to becoming a concessionaire in a New York area discount store. Concessionaire, like a, like a store within a store.

   14. BGBen Gilbert7:05

       Hmm.

   15. DRDavid Rosenthal7:06

       This, uh, begins Bernie's retail education, and from there he would go on to join the, uh, New York area discount chain Two Guys. Ultimately, this leads him, a couple years later in his 30s, to an executive role at the Daylin Corporation-

   16. BGBen Gilbert7:22

       Hmm

   17. DRDavid Rosenthal7:22

       ... which was a retail conglomerate based in Los Angeles with a whole bunch of different stores. So we're now here in the 1960s. This is an exciting time for retail. All sorts of new concepts are popping up all over the country to replace the outdated general store model.

   18. BGBen Gilbert7:41

       Hmm.

   19. DRDavid Rosenthal7:41

       Uh, there are shopping malls being built everywhere in the suburbs across America here in the post-war period. Sears is building big anchor tenant stores attached to these new shopping malls. Kmart is rising across the country as a discounter. Sam Walton and Walmart are starting to emerge down in the rural South, and they're building a powerhouse. The landscape in retail is dynamic. The post-war 1960s baby boom American suburbs are alive and well with their shopping.

   20. BGBen Gilbert8:11

       [laughs]

   21. DRDavid Rosenthal8:11

       And Daylin was this holding company that operated almost like, I don't know, like a portfolio or an index fund on all these retail concepts. So they would go out and acquire small chains of all of these types of post general store concepts serving the American suburbs. So yeah, they had pharmacies, hardware stores, clothing, home furnishing, discounters, you name it.

   22. BGBen Gilbert8:34

       And for the most part, all retail in America at this point, except for Sears, Kmart, some department stores, you really didn't have these big national retail giants the way that we do today. It was kind of these regional chains.

   23. DRDavid Rosenthal8:47

       Yep, yep. So Bernie's now a corporate executive at Daylin. He has no equity in the company. He's just a employee. But it's a stable job. He's doing well. He's certainly moved up in the world from his upbringings. And then he gets an opportunity. In 1972, Daylin makes Bernie the CEO of its Handy Dan subsidiary, which is a chain of hardware stores that's also based there in Los Angeles. So, uh, again, he has no equity. He's the CEO, but he's just an employee.

   24. BGBen Gilbert9:20

       And also he comes at it from the retail side, not the hardware expertise side. This is kind of my favorite part of this whole story, is of the people who would go on to found Home Depot, n- none of them are like general contractors or grew up in the hammer manufacturing business. It's people who just, who knew retail.

   25. DRDavid Rosenthal9:38

       These are retail guys, exactly.

   26. BGBen Gilbert9:40

       Yep.

   27. DRDavid Rosenthal9:40

       [laughs] Well, retail and, uh, finance guys, as we'll see.

   28. BGBen Gilbert9:43

       Yes.

   29. DRDavid Rosenthal9:43

       So once Bernie becomes CEO of Handy Dan, he quickly recruits another younger company man from within the Daylin empire, a financial whiz named Arthur Blank, to come over to LA and join him as his CFO at Handy Dan. And Bernie, you know, he, he knows himself, as, as we'll see. He is an incredible retailer, an incredible CEO, an incredible leader, but his weak spot is finance. Now, you might be wondering, oh, wait a minute, if Handy Dan is a subsidiary of Daylin, why does it have its own CEO, CFO, management team? Because Handy Dan was also a standalone publicly traded company.

   30. BGBen Gilbert10:29

       And Daylin didn't own all of it, right? It just owned the majority of the shares?
4. 15:58 – 33:08

   Ken Langone & Handy Dan (1970s)

   1. DRDavid Rosenthal15:58

      let's flash back over to the East Coast to a completely different character, the New York investment banker, Ken Langone.

   2. BGBen Gilbert16:08

      This is your, uh, your third superhero.

   3. DRDavid Rosenthal16:10

      Yep.

   4. BGBen Gilbert16:10

      You've got Bernie Marcus, the retailer. You've got Arthur Blank, the sort of finance and operations genius, and now you've got Ken Langone in New York City.

   5. DRDavid Rosenthal16:18

      Yep. And, uh, Ken, I think a lot of listeners will probably know who Ken Langone is. He is basically the GOAT investment banker. He came up from nothing as an Italian kid on Long Island, talks his way onto Wall Street, and basically, while he's still a kid, he ends up winning the sole IPO manager position for Ross Perot's company, EDS. Uh, people today remember Ross Perot as, like, oh yeah, that guy who ran for president in the '90s. But he was kinda like Larry Ellison of his time. EDS was this giant company.

   6. BGBen Gilbert16:52

      Yeah, and I was trying to th- think about the best way to frame EDS. Maybe like a Palantir. They were very involved in government contracts. I mean, Ross Perot's history, we gotta do a whole Ross Perot episode at some point, but f- from his time at IBM, he kinda saw people are buying all of these mainframes, but they have no idea how to use them. I actually have to start, like, a-

   7. DRDavid Rosenthal17:11

      Yeah, he was a top salesman at IBM before starting the company

   8. BGBen Gilbert17:14

      ... a deployment and service arm for enterprise computing and government computing, and that sort of led him down this whole crazy path of building what was then an empire in EDS. Would be small by today's standards, but he was a technology enterprise business magnet at the time.

   9. DRDavid Rosenthal17:33

      Yep, totally, and based in Plano, Texas. EDS has this long history. They ultimately get acquired by Hewlett-Packard and become, uh, HP Enterprise Services, so yeah, Ben, exactly what you're talking about, data centers, mainframes, et cetera, et cetera. So fast-forward on Ken. He'd end up sitting on the boards of the New York Stock Exchange, General Electric, many other great American companies, and famously, Ken has this total loyalty to every customer and every entrepreneur that he works with. He never sells a share of almost every company he's ever been involved in.

   10. BGBen Gilbert18:08

       [laughs]

   11. DRDavid Rosenthal18:08

       And we're gonna talk about the almost in just a minute. So all right, back here, we're in the mid-1970s after the EDS IPO. Ken has just taken public a Philadelphia-based- ... hardware chain, you know, one of these other regional players, a company called Panel Rama. And like everyone else, they've fallen on hard times. So Ken goes down to Philadelphia to see the CEO, and, uh, Ken's like, "All right. Well, who can we look at in the industry that's actually good? Like, what does best look like in this industry?"

   12. BGBen Gilbert18:40

       'Cause it should be a good business. I mean, it- we- th- we'll spoil it now, David. We spent some time with Ken prepping for this episode, and his comment was, "God is good as it pertains to hardware and home improvement." It's the gift that keeps on giving, that we've built tons and tons of houses in America, and they need just an endless supply of stuff. It's almost like a subscription of, uh, recurring revenue if you're in this business to keep working on a home as the weather and, and time acts on it.

   13. DRDavid Rosenthal19:09

       And market and, you know, whatever changes. The rule of thumb is that homeowners need to reinvest about 1% of the house's then market value into their home every year just in maintenance, before you get into improvement.

   14. BGBen Gilbert19:23

       Right. But in post-war America, they were building more and more houses every year. The old houses they built were getting old. It's a great business to be in, or it should've been anyway.

   15. DRDavid Rosenthal19:32

       Should've been. Should've been. So Ken says to the CEO of this company, a guy named Gary, he says, "All right, Gary, who's the best operator here in the business?" And Gary said, "Oh, easy. Handy Dan out in California. Those guys are the best." And Ken's like, "Handy Dan? What are you talking about? I know Wall Street. That company's going bankrupt." And Gary says, "No, no, no, no, no. Their parent, Daylon, is going bankrupt, but Handy Dan is doing great." So Ken says, "Okay, wait, wait, wait. Hang on. Let me go get my Moody's Manual," 'cause this is how you checked company financials back in the day.

   16. BGBen Gilbert20:04

       [laughs]

   17. DRDavid Rosenthal20:04

       He pulls out his Moody's Manual, his little book, and he's going through. He looks, he finds Handy Dan. He looks at the financials. "Holy crap. You're right. This is a great business. But yet, it, it's trading for $3 a share, and if Moody's is right, this company is gonna earn post-tax net income of a buck 50 a share this year. So this company is trading at two years of post-tax earnings." So Ken's like-

   18. BGBen Gilbert20:34

       Something has to be wrong. Is-

   19. DRDavid Rosenthal20:35

       Something has to be wrong

   20. BGBen Gilbert20:35

       ... is there, like, an accounting problem? Is there some trick in the reporting or a gimmick here that I don't understand? I gotta dig-

   21. DRDavid Rosenthal20:41

       Yeah

   22. BGBen Gilbert20:41

       ... into this.

   23. DRDavid Rosenthal20:42

       So, so he says to Gary, "Let's get, let's get Handy Dan on the phone, like, right now. I gotta talk to these guys." So Gary calls up Bernie, gets him on the phone, and Ken's like, "Mr. Marcus, are your financial statements true?" [laughs]

   24. BGBen Gilbert20:56

       [laughs]

   25. DRDavid Rosenthal20:57

       Bernie says, "Yeah, yeah, sure. Business is doing great. It's the craziest thing that Wall Street doesn't appreciate us." Ken says, "Mr. Marcus, would you mind if I come out and see you in person?" Bernie says, "Yeah, sure, fine." Ken says, "Great. I'm booking my flight right now. I'll be there for lunch tomorrow." Bernie's in Los Angeles. Ken is currently in Philadelphia.

   26. BGBen Gilbert21:16

       This is classic Ken Langone.

   27. DRDavid Rosenthal21:18

       So the next day he flies out. They sit down to lunch. Bernie brings his lawyer with him to make sure he doesn't tell this crazy guy from Wall Street anything he's not supposed to that's not public information.

   28. BGBen Gilbert21:27

       Right. If you're the CEO of a publicly traded company, and some person who is discussing the price of your stock with you calls you and says, "I'm so interested that I'm gonna fly across the country right away," it's like, "Okay, I really gotta watch what I say to this guy."

   29. DRDavid Rosenthal21:41

       Yeah, yeah. So, uh, they have lunch, and quickly becomes apparent that Bernie is this gifted retail operator. Company's doing great. The financial statements are all correct. So Ken says to Bernie, "Do you have any equity in this company?" And Bernie says, "No, just an employee. You know, this is a Daylon subsidiary, even though we're publicly traded." Ken says, "Okay. I'm gonna go back to New York tonight, and tomorrow I'm gonna start buying every single publicly traded share of your company that I can get my hands on. I suggest that you go call up your banker and mortgage your house and do the same because your stock is about to go way, way up." [laughs] Now, Bernie, this is exposing his, his weakness here with finance. While he's brilliant and street smart, he's also kinda, like, innocent about Wall Street and finance and investing and all this stuff. He's-

   30. BGBen Gilbert22:43

       And negotiating-
5. 33:08 – 43:55

   Ken Buys Handy Dan, Bernie & Arthur Fired

   1. DRDavid Rosenthal33:08

      of Bernie, even though he's got sort of a rough exterior, that makes him a great leader, and then later on in Home Depot inspires such loyalty. He puts so much trust in other people, which steers him wrong sometimes, but it makes other people wholly trust him.

   2. BGBen Gilbert33:24

      Yep.

   3. DRDavid Rosenthal33:25

      So Ken says, "All right, Bernie, I'll do it. But just know it's your own death warrant that I'm signing." And in early 1978, Ken sells to Sigaloff. And this, I think, is basically the one time that he sells out of a company-

   4. BGBen Gilbert33:40

      Yeah, but-

   5. DRDavid Rosenthal33:40

      ... that he's invested in. [laughs]

   6. BGBen Gilbert33:41

      But David, how much does he sell for?

   7. DRDavid Rosenthal33:43

      [laughs] Well, even though he's gonna sell, Ken is no pushover here. He sells for 25.50 a share-

   8. BGBen Gilbert33:51

      Yeah

   9. DRDavid Rosenthal33:51

      ... but he started buying at 3. [laughs]

   10. BGBen Gilbert33:53

       Do you know over what period of time?

   11. DRDavid Rosenthal33:55

       I think it was only about two years, this whole saga.

   12. BGBen Gilbert33:58

       From $3... Uh, I don't... His average entry price was probably, I don't know, five, $6.

   13. DRDavid Rosenthal34:02

       Yeah, five, six, whatever. Yeah.

   14. BGBen Gilbert34:03

       Up, up to 25.50 to sell. And the story's great, where Sigaloff finally calls and says, "All right, let's just do this on the phone. You name your price. I will buy it at that price." And Ken goes, "25.50." And he goes, "Why the odd number?" And Ken goes, "I want us to look like we had some real hard bargaining here."

   15. DRDavid Rosenthal34:20

       [laughs] So good. So good. So January 1978, Sigaloff buys Ken's shares and now owns just about 100% of the company, except for the, uh, Catholic Church in Brooklyn.

   16. BGBen Gilbert34:34

       Yep. And then, just as predicted-

   17. DRDavid Rosenthal34:37

       Yep, just as predicted, three months later, Sigaloff fires Bernie and Arthur and the audit manager at Handy Dan, a guy named Ron Brill. The reason that Ron gets fired too is the pretense that Sigaloff trumps up is an accusation that the three of them had violated national labor relations rules in negotiating with unions. Sigaloff [laughs] starts a labor relations investigation against his own company to trump up the excuse to fire them. That is how bad a dude this guy was.

   18. BGBen Gilbert35:16

       Yeah. And really what was happening here is Sigaloff, I think, couldn't do this while there was still a large outside shareholder who would have disagreed with that decision. But now that he owns basically the whole company, he's like, "Great, I, I wanna consolidate power."

   19. DRDavid Rosenthal35:30

       You guys are out of here.

   20. BGBen Gilbert35:31

       "I need to be the guy here."

   21. DRDavid Rosenthal35:32

       Yep. So famously in Home Depot lore, the next day after the firing, Bernie flies out to New York to come see Ken. Kenny. They sit down to breakfast together at Peacock Alley in the Waldorf Astoria Hotel.

   22. BGBen Gilbert35:49

       This is April 1978.

   23. DRDavid Rosenthal35:51

       Yep. And Bernie is just losing it. He's freaking out. He's like, "Kenny, this is terrible. I'm 48 years old. I don't have any savings. I didn't have any equity. I can't support my family. Sandy's coming after me with this labor relations case. I don't know, I might go to jail. What am I gonna do?" And Ken says, "Bernie, relax. You just got kicked in the ass with a golden horseshoe." [laughs]

   24. BGBen Gilbert36:18

       [laughs]

   25. DRDavid Rosenthal36:20

       That's a verbatim quote, by the way. Because now we're gonna go start that company that you told me about.

   26. BGBen Gilbert36:26

       So listeners, we haven't revealed yet that in this fast and furious period, a few months before, they had had a conversation when Ken was flying around going to all these store openings, when Bernie is opening a Handy Dan in, I think it was Houston, Texas.

   27. DRDavid Rosenthal36:40

       Houston. Yep, Houston, Texas.

   28. BGBen Gilbert36:42

       And- Bernie should have been all, you know, excited about this. This is the, the best version of the story yet, and he's looking at Ken, and Ken's like, "Why are you melancholy right now?" And Bernie says, "Because someone's gonna put us out of business. I have in my head the idea of the perfect home improvement store, and this isn't it, and it's just a matter of time till someone does it, and it's gonna destroy this store, 'cause it's just a structurally better business model, better idea, better thing for customers. So, you know, this is fine, but..." And Ken's like, "Well, tell me." And, and Bernie is, is, has started to learn a little bit. He's like, "Well, well, if I tell you, then you know, and right now only I know, so I'm actually, I'm gonna, I'm gonna hold onto it." And Ken's like, "No, come on, dude, tell me." And so [laughs] now Ken knows the idea, too.

   29. DRDavid Rosenthal37:33

       The reason that Bernie's so bent out of shape about this is he'd just been down to visit one of his buddies, another retail guy down in San Diego, goes by the name of Sol Price.

   30. BGBen Gilbert37:49

       [laughs]
6. 43:55 – 51:20

   Ross Perot Almost Buys Home Depot

   1. BGBen Gilbert43:55

      Yeah.

   2. DRDavid Rosenthal43:55

      All right, so back to the money. So who does Kenny know who has a lot of money, and a lot of liquidity, and is also just crazy enough to back a new retail concept here in the '70s with all this inflation and interest rates at 20%?

   3. BGBen Gilbert44:12

      And listeners, this is the part of the episode where we tell the story of how Ross Perot almost owned the majority of Home Depot.

   4. DRDavid Rosenthal44:20

      Yeah, 70% of Home Depot. [laughs] Because Ken flies everybody to Dallas, they meet with Ross, and they hammer out a deal for Perot to put up the money for what would become Home Depot.

   5. BGBen Gilbert44:32

      $2 million.

   6. DRDavid Rosenthal44:33

      $2 million, in return for 70% of the company. Except, at the last minute, Bernie blows up the deal. He and Ross get into this big fight over management style and management philosophy, and, and, and ultimately, the sticking point, y- you can't make this up, it's all in Built from Scratch-

   7. BGBen Gilbert44:52

      [laughs]

   8. DRDavid Rosenthal44:52

      ... is the car that Bernie drives. He drives an old Cadillac.

   9. BGBen Gilbert44:59

      Which was actually his Cadillac from Handy Dan, that was his company car there, that somehow in the separation he managed to keep. But like, old. This is not a-

   10. DRDavid Rosenthal45:09

       Yeah

   11. BGBen Gilbert45:09

       ... expensive car.

   12. DRDavid Rosenthal45:09

       Not a new, you know, fancy Cadillac.

   13. BGBen Gilbert45:11

       Yes.

   14. DRDavid Rosenthal45:11

       This is an old fancy Cadillac. And Perot says, "Hey, well, this is important to me. My guys, my guys here at EDS, they don't drive Cadillacs, they only drive Chevrolets. We're scrupulous here about our costs." [laughs] Bernie's like, "Costs? What are you talking about? This is an old Cadillac."

   15. BGBen Gilbert45:28

       Right. Practically, pragmatically, this is actually exactly in line with your ethos.

   16. DRDavid Rosenthal45:32

       Yep. And, uh, Ross is like, "No, no, it's the principle of the thing."

   17. BGBen Gilbert45:35

       And it's a sticking point of two things. One, Bernie's like, "No, we should be pragmatists. We shouldn't follow some dumb-

   18. DRDavid Rosenthal45:41

       Yes

   19. BGBen Gilbert45:41

       ... virtue signaling thing." But two, you're treating this like this is a division of your company, isn't it?

   20. DRDavid Rosenthal45:48

       Exactly.

   21. BGBen Gilbert45:49

       This is-

   22. DRDavid Rosenthal45:49

       You're treating me like an employee again.

   23. BGBen Gilbert45:51

       This is our company. You're the financier. Uh, this doesn't feel right.

   24. DRDavid Rosenthal45:56

       Yep. So he blows up the deal. And this might be the most expensive disagreement in all of business history.

   25. BGBen Gilbert46:08

       Let's see. I'll do the math here live on air. So 70% of a market cap of 350 billion.

   26. DRDavid Rosenthal46:16

       Yep.

   27. BGBen Gilbert46:17

       They did a ton of dilution along the way, but then counteracted it with a ton of buybacks after that. It ends up being that the original seed investors in Home Depot today, if they held all the way through, would've had about 91% of their original percentage of the company.

   28. DRDavid Rosenthal46:33

       Yep.

   29. BGBen Gilbert46:33

       So Ross Perot insisting on a Cadillac cost him $223 billion.

   30. DRDavid Rosenthal46:41

       Yeah. [laughs]
7. 51:20 – 1:05:03

   Pat Farrah & The HomeCo Interlude

   1. DRDavid Rosenthal51:20

      So Bernie and Arthur call up Ken. They say, "Hey, I know this isn't the plan, but we already found this thing fully baked right here in LA. Fly out. Let's the three of us go talk to this guy, Pat, and see if we can just buy it from him, buy the store, buy HomeCo." So Ken flies in, and I'm just gonna read Bernie's description of what happens next here. Pat, the HomeCo, you know, owner, operator here, was an hour late getting to his own store. When he finally showed up, the wild man with the huge afro haircut was wearing a powder blue velvet leisure suit that was one size too small for him. His ass stuck out the back of his pants. His shirt was unbuttoned halfway down his chest, and he displayed a variety of gold chains and a big old gold watch. Kenny shot Arthur a look that said, "Is this your idea of a joke?" But Pat Farrah is one of the most creative people any of us had ever met. Pat is to retailing what Michelangelo was to art.

   2. BGBen Gilbert52:23

      [laughs]

   3. DRDavid Rosenthal52:24

      At least that's what Ken said by the time the meeting ended. [laughs] Or, uh, the way I've heard Ken describe this is, uh, "Pat was crazier than a bedbug, but he was a genius."

   4. BGBen Gilbert52:34

      I mean, crazy, yes, but this is the missing piece of the puzzle.

   5. DRDavid Rosenthal52:38

      Yes.

   6. BGBen Gilbert52:38

      You've got Bernie the retailer, Arthur finance and operations, Ken finds the money and is sort of the spiritual glue holding this team together, but they don't yet have the genius merchandiser-

   7. DRDavid Rosenthal52:51

      Yep. Pat is the merchandiser

   8. BGBen Gilbert52:51

      ... who is go- around to suppliers, figuring out what the best stuff you can get from them at the best terms, having a crazy nose for what consumers want, and making sure to find those items from the suppliers, cleverly figuring out how to display it-

   9. DRDavid Rosenthal53:08

      Yes

   10. BGBen Gilbert53:08

       ... and, and what the pricing and packaging looks like to whip consumers up into a buying frenzy.

   11. DRDavid Rosenthal53:14

       You gotta create heat in the store.

   12. BGBen Gilbert53:16

       Yes, yes. This is all the universe of Pat.

   13. DRDavid Rosenthal53:19

       All Pat. And, uh, oh, man, there's so many legends about Pat, including driving forklifts through walls, [laughs] et cetera, et cetera, et cetera.

   14. BGBen Gilbert53:28

       Yeah, wasn't that, like, they, they wanted to tear down a wall, but they couldn't get a permit?

   15. DRDavid Rosenthal53:31

       Yeah.

   16. BGBen Gilbert53:31

       And so Pat just drove a forklift into it, and when the inspector came out, he said, "I don't know. So someone just-

   17. DRDavid Rosenthal53:37

       "Uh, something happened"

   18. BGBen Gilbert53:37

       ... it was, it was an accident. But, but we definitely gotta take out this wall now."

   19. DRDavid Rosenthal53:40

       Yep. So despite the, uh, you know, reservations about Pat's character, they sign an LOI, letter of intent, to buy HomeCo from Pat with this new well-funded company that Bernie and Arthur and Ken have started.

   20. BGBen Gilbert53:55

       Well-funded. They got $2 million. That's not nearly enough to do anything that they know.

   21. DRDavid Rosenthal54:00

       [laughs]

   22. BGBen Gilbert54:00

       They're operating on a shoestring budget here, but I'll come back to that.

   23. DRDavid Rosenthal54:03

       Yes, yes. So they start digging in on due diligence on HomeCo, and they discover that while Pat is a genius, all the revenue, all the sales, all the customer demand, it's all real. The store itself is actually insolvent [laughs] because Pat has not been paying any of his suppliers.

   24. BGBen Gilbert54:25

       Pat needs an Arthur.

   25. DRDavid Rosenthal54:26

       [laughs] Yes. Yes, he does. He has just been ignoring the invoices that the suppliers were sending him, you know, 30, 60, 90 days later.

   26. BGBen Gilbert54:36

       I mean, that sounds malicious. I get the sense a lot of what he was doing was incompetence-

   27. DRDavid Rosenthal54:40

       Yes

   28. BGBen Gilbert54:40

       ... not-

   29. DRDavid Rosenthal54:41

       No, he, he... Yeah. Yes. It wasn't that he was trying to steal the money. It was that he genuinely didn't Know how to operate a business. He's like, "I just go, go get the stuff, and then I sell it." [laughs]

   30. BGBen Gilbert54:51

       And they bring in, as a part of the due diligence on this, auditors to look at, Hey, do, are these financial statements correct? And the auditors determine, no, the margins at this store are not anywhere near what this owner thinks the margins are. And Bernie and crew have to break this news to Pat, and Pat's-
8. 1:05:03 – 1:14:16

   First Stores & Early Model (1979)

   1. DRDavid Rosenthal1:05:03

      that leads right into the opening of the first two Home Depots in Atlanta on June 22nd, 1979. They open two stores, same day, and this all happened, like, pretty fast. This is just over one year from when Bernie and Arthur and Ron get fired from Handy Dan.

   2. BGBen Gilbert1:05:26

      And it is obvious that it happened fast when you look at some of these pictures. L- listeners, we'll, we'll put some in the email. It's very clearly a big hardware store operating inside of a Kmart. I mean-

   3. DRDavid Rosenthal1:05:40

      Yeah

   4. BGBen Gilbert1:05:40

      ... it, it looks like that. They, they describe the concept in all the books they've written and all these accounts of, of early Home Depot as this vast warehouse with tall ceilings and merchandise piled to the ceiling. But the early pictures are, I swear, Kmarts or, or even-

   5. DRDavid Rosenthal1:05:58

      Yep

   6. BGBen Gilbert1:05:58

      ... kinda JCPenneys. Like, it's pretty low ceilings. The racks that things are on are, are like standard Kmart style racks. It's, it's nothing like the Home Depot that you know of today. The floors are the sorta like l- linoleum type floors, and so yeah, they're, uh, they're selling table saws and hammers and lumber out of a discount-

   7. DRDavid Rosenthal1:06:24

      Kmart knockoff, yep

   8. BGBen Gilbert1:06:25

      Kmart knockoff, right, s- second-use real estate.

   9. DRDavid Rosenthal1:06:27

      Yep, yep, yep. There's some, uh, pretty fun legends around all this, around the first store openings, the first of which is that they decide they're gonna go big, blow a lot of the budget on a huge newspaper ad in the weekend paper That week to, you know, really drive, how you wanna drive homeowners to your store. Well, weekend newspaper delivery, highly correlated with homeownership.

   10. BGBen Gilbert1:06:56

       Which is why they did four stores, I mean, two right now, but then quickly two more in one metro because they wanted to, much like our Trader Joe's episode, amortize the cost of their advertising.

   11. DRDavid Rosenthal1:07:08

       Exactly.

   12. BGBen Gilbert1:07:08

       If you blitz one local geography's radio, TV, newspapers, then you can kinda like justify the cost of all of that marketing expense if you have stores in different zip codes around the city that can all benefit from that same marketing. And this is actually the playbook that they would run for the next 45 years, is open in one city, saturate that city, become number one, and then move to the next city. Don't, like, sprinkle some stores here and there. No, go into a city with force.

   13. DRDavid Rosenthal1:07:40

       Yep. Yep, yep. So all this sounds good on paper, except there's a mix-up and the newspaper ad doesn't run. [laughs] So they, uh-

   14. BGBen Gilbert1:07:49

       Whoops.

   15. DRDavid Rosenthal1:07:50

       Nobody knows about these stores opening. Instead, Bernie and the store associates, like the, the retail workers on, on the floor in the, in the stores, they go out into the parking lots of the two stores with a bunch of signs advertising that they're giving away free $1 bills to lure people-

   16. BGBen Gilbert1:08:09

       [laughs]

   17. DRDavid Rosenthal1:08:09

       [laughs] into the stores. Uh, inauspicious beginning to, uh, Home Depot here. The other great legend around the first store openings is that the night beforehand, the two store managers of the two locations get together, and they've got a great idea. They're gonna impress the founders. They have a cleaning crew come in and polish up the linoleum floors as a surprise for everybody coming in in the morning. It's all gonna look great. And Pat Farrah comes in at, like, 4:00 in the morning, the day of the opening. He sees the polished floors, and he goes nuts.

   18. BGBen Gilbert1:08:46

       Oh, yeah. That was, like, a, a thing with this entire company for decades, is that they all worked from, like, the wee hours of the morning.

   19. DRDavid Rosenthal1:08:52

       Yes.

   20. BGBen Gilbert1:08:53

       And it was just, like, expected of the entire culture is if you're not sleeping, you're here working, and also it's fun. Like, it's a-

   21. DRDavid Rosenthal1:08:59

       Yes

   22. BGBen Gilbert1:08:59

       ... it's a party, and we just work all the time, and all of us do it.

   23. DRDavid Rosenthal1:09:04

       [laughs] Yep. So when Pat sees these sparkling clean floors, he loses it. He calls Bernie and Arthur. He gets them out of bed, and the three of them come in, and they start careening forklifts around the store floor to scuff up the linoleum so it looks like it was busy. Pat's like, "We can't have this be clean. It looks like nobody's been in here."

   24. BGBen Gilbert1:09:24

       And it sends the wrong message. I think they-

   25. DRDavid Rosenthal1:09:26

       Exactly

   26. BGBen Gilbert1:09:26

       ... they sprinkled some sawdust, too. This is supposed to be a place where people who are actively working on projects come in the middle of their project, and they're, like, in work boots, and, you know, the store should feel like a place you're not afraid to mess up. We need it scuffed up like a Home Depot.

   27. DRDavid Rosenthal1:09:43

       Yep. Bernie's, uh, quote about this that he would write is, "Our stores are action places."

   28. BGBen Gilbert1:09:48

       Yeah. And also, I- th- we're gonna get to this later, but part of The Home Depot's business model and part of the big, giant reason that it works is if you are mid-job, The Home Depot is the place that you use for real-time replenishment.

   29. DRDavid Rosenthal1:10:03

       Yep.

   30. BGBen Gilbert1:10:03

       So sometimes that means if you are swinging by every morning on the way to your job site, sometimes it means that-
9. 1:14:16 – 1:24:35

   Home Depot Goes Public & Expands (1981)

   1. DRDavid Rosenthal1:14:16

      So the model starts to work quickly, and the f- flywheel here is getting spun up in Atlanta. And then the next year, in 1980, JCPenney calls him back again and says, "Hey, we're finally gonna pull the plug totally on this Treasure Island thing. We got a bunch of locations that are now gonna be empty down in Florida. Do you want them?" And yeah, of course, they want them.

   2. BGBen Gilbert1:14:44

      Right, right. If, if-

   3. DRDavid Rosenthal1:14:44

      Like, the whole plan here is expand nationally, and this is great real estate. Like, we should jump on this.

   4. BGBen Gilbert1:14:50

      Yep.

   5. DRDavid Rosenthal1:14:50

      There's just one problem, which is they are maxed out on capital. So in 1979, that first six-month period that the company was operating, they lost about a million dollars. So one out of the $2 million of startup capital was blown in 1979. In 1980, this next year, they made a million dollars in profit. Like, this is incredible. This shows how well the model is working.

   6. BGBen Gilbert1:15:16

      It's already profitable, and I think basically would be profitable for every year here on forward. I think they had one year where they had negative earnings, and then after that, they've been a profitable company their entire life.

   7. DRDavid Rosenthal1:15:28

      Yep. G- going like gangbusters. But that's not enough capital to take over all these leases and this great real estate down in Florida. So once again, Ken Langone says, "No problem, I got this. We'll just go public." [laughs]

   8. BGBen Gilbert1:15:46

      [laughs]

   9. DRDavid Rosenthal1:15:47

      Now, th- this is a crazy idea in any market. The pitch here, to be clear, is we are going to take a four-store chain, they've now opened the fourth store in Atlanta, public in 1981, here when interest rates are hitting their all-time peak of 20-plus percent. Can you imagine this pitch to Wall Street?

   10. BGBen Gilbert1:16:13

       You know what people don't like to do when interest rates are really high? Buy speculative new IPOs. Even though, in theory, valuations should actually be depressed when interest rates are high, so it's actually a great time to be investing because you can pick up equities and income-generating assets for cheaper than in low interest rate times.

   11. DRDavid Rosenthal1:16:34

       Ben, are you suggesting that recessions are the best time to push your chips in?

   12. BGBen Gilbert1:16:38

       Look, call me, call me Warren Buffett over here, David.

   13. DRDavid Rosenthal1:16:41

       Yeah. [laughs]

   14. BGBen Gilbert1:16:42

       But... [laughs]

   15. DRDavid Rosenthal1:16:43

       So, you know, once again, Ken is like, "I got this." But by this point in time, he is no longer an active investment banker himself. He's just a principal investor now. So he can't lead the IPO himself. He calls up his buddies at Bear Stearns, and he strong-arms them into taking on this crazy IPO. Bear agrees, and they set a target of raising $6 million.

   16. BGBen Gilbert1:17:09

       And I think Bear was not interested, but then Ken called some other investment banks who said, "Oh, we're interested," and then Bear got interested.

   17. DRDavid Rosenthal1:17:15

       Yeah. [laughs]

   18. BGBen Gilbert1:17:16

       As it always works.

   19. DRDavid Rosenthal1:17:16

       Ken knows how to get deals done.

   20. BGBen Gilbert1:17:17

       Yes.

   21. DRDavid Rosenthal1:17:18

       So of the $6 million target, the plan is that half of that is gonna be for expansion capital to go down into Florida and take over these leases, and half of that money is gonna go to the initial seed investors to cash them out at close to a 2X in, you know, call it a year and a half, two years here.

   22. BGBen Gilbert1:17:42

       Great deal.

   23. DRDavid Rosenthal1:17:42

       Great deal. Great deal, right? Fortunately for those investors, the week before the IPO, Bear calls up Ken, and they say, "Hey, we took this thing on as a favor to you, but in this environment, we can't, we can't get the full $6 million deal done. We're gonna have to cut this thing in half. We can only sell $3 million." So Ken goes back to the existing investors and says, "We're just gonna let our investment ride rather than cashing out at a slightly less than a 2X."

   24. BGBen Gilbert1:18:19

       You have to stay invested. We need all $3 million that we were able to raise to go to the balance sheet so that we can do this expansion.

   25. DRDavid Rosenthal1:18:26

       Yep. Which, if you do the math, that $2 million from the initial Home Depot investor group bought 50% of the company in 1978. By not cashing out here at a 2X return- Those investors, if they held to today, would have gotten well north of a 50,000X-

   26. BGBen Gilbert1:18:53

       [laughs]

   27. DRDavid Rosenthal1:18:53

       ... return on their capital.

   28. BGBen Gilbert1:18:55

       Which, checked my calculator, but I think it's better than a 2X.

   29. DRDavid Rosenthal1:18:57

       Yep. So the IPO gets done. They end up raising a little bit more than three. They raise $4 million in total in the IPO at a $32 million initial market capitalization post-offering.

   30. BGBen Gilbert1:19:12

       Which this, listeners, is part of the reason why it's a better investment than Apple since IPO, and, you know, since many other companies.
10. 1:24:35 – 1:46:01

    Home Depot's Unique Operating System

    1. BGBen Gilbert1:24:35

       Yes.

    2. DRDavid Rosenthal1:24:35

       So I think this is actually the perfect place to really talk about what the model is and-

    3. BGBen Gilbert1:24:44

       Yes

    4. DRDavid Rosenthal1:24:44

       ... why here, now we're in the late 1980s, there is capital available. It's the go-go 1980s. Why are- Copycats not emerging, well-funded with a lot of capital to just come eat their lunch and do this too.

    5. BGBen Gilbert1:24:59

       Well, there were copycats. I mean, there were other large format hardware home improvement stores. I mean, I'd, I'd been to a Builders Square I think when I was a kid.

    6. DRDavid Rosenthal1:25:09

       Yeah, yeah, yeah. So yes, exactly, this did happen. A lot of capital rushed into this space trying to do this. Yeah, Builders Square, HomeClub, HomeQuarters Warehouse, Mr. Howe Warehouse, these are all copycats spun up in the 1980s. None of them are around today.

    7. BGBen Gilbert1:25:28

       Okay, so why?

    8. DRDavid Rosenthal1:25:29

       The answer is that as Home Depot scales, it's not just Costco for hardware. Costco is a general merchandise retailer, like you said in the intro, Ben, and Home Depot is a specialty merchandise retailer. On the surface, these things look kinda similar, like a Home Depot store looks like a Costco store. But in specialty retailing, it's not enough just to have the classic holy trinity of price, selection, and convenience that Walmart and Costco and Amazon are all built on. You also need to serve the customer in ways that are wholly unique and specific to each specialty market. So if you think about like tire and auto shops, they need to offer fast, quality installation of tires and auto parts, right? Or beauty, right? Like beauty needs to offer in-store sampling and makeovers, or even like Apple and Best Buy, they need to offer the Genius Bar and the Geek Squad to help with troubleshooting, specifically expertise that serves the customer. Nobody's serving the customer in a Costco except at the checkout aisle. It's like you go grab your toilet paper, you check out.

    9. BGBen Gilbert1:26:46

       Right. The whole point-

    10. DRDavid Rosenthal1:26:47

        That's it. [laughs]

    11. BGBen Gilbert1:26:47

        ... is that we don't actually need to have that many people in the store serving you.

    12. DRDavid Rosenthal1:26:50

        Right. Right.

    13. BGBen Gilbert1:26:50

        That's how we can pay our associates so much. That creates so much goodness in the model.

    14. DRDavid Rosenthal1:26:54

        Yep. Yep. Home Depot basically invented what serving the customer looks like in home improvement. Before Home Depot, there basically was no customer servicing in hardware. It was like you walked into a hardware store, and good luck. If you knew where things were, good. You know, if not-

    15. BGBen Gilbert1:27:15

        And, and we're generalizing here. I'm sure there were am- amazing associates at amazing hardware stores all over the place, but there wasn't this idea that... Uh, I went to a Home Depot last week as I was prepping for this, and this was after I had, you know, read some books, and I had seen all the stuff about Home Depot's unique culture, and their obsession with serving the customer above all else, and we drop everything in order to serve a customer. And there's even stories about people at headquarters who will pick up the phone in the middle of a meeting and interrupt corporate work because they actually need to take a call from someone who is on the floor with a customer to address a customer-specific concern. I mean, the culture is this sort of service and customer obsessed orientation.

    16. DRDavid Rosenthal1:27:56

        Uh, Ben, Ben, I noticed you said, uh, headquarters there. I don't think Home Depot has a headquarters.

    17. BGBen Gilbert1:28:00

        That is correct. They have a store support center-

    18. DRDavid Rosenthal1:28:03

        Yeah. [laughs]

    19. BGBen Gilbert1:28:03

        ... because headquarters merely exists to support the stores.

    20. DRDavid Rosenthal1:28:06

        Yes. Yes. Atlanta for Home Depot, the corporate address is the store support center-

    21. BGBen Gilbert1:28:13

        Yes

    22. DRDavid Rosenthal1:28:13

        ... not the headquarters of the company.

    23. BGBen Gilbert1:28:14

        But that's powerful to name-

    24. DRDavid Rosenthal1:28:15

        Yep

    25. BGBen Gilbert1:28:15

        ... it that and sort of instill that in the culture.

    26. DRDavid Rosenthal1:28:17

        Totally. Totally.

    27. BGBen Gilbert1:28:18

        So I, I promise you I wasn't like secret shopping and trying to prod for these questions, but I was making a copy of a key while I was there, and I asked the associate how his day was going, and this was like the eighth associate that walked by, and it was chock-full of staff. And this guy, the words out of his mouth were, "It's going well. I have like eight things on my to-do list today. I've gotten to none of them because customer always comes first, and I've had so many interesting customer problems come up today." I mean, it is this like very real customer service oriented mentality.

    28. DRDavid Rosenthal1:28:49

        Yep. And I would say that's the culture still to this day, with some bumps along the road that we'll get to as we go. But what I mean, though, when I say that Home Depot invented what servicing the customer means in this segment, was that before Home Depot, nobody would teach the customers how to accomplish their projects. Like if you were just a DIY homeowner, you had no way of obtaining knowledge about how to build a deck or how to retile a bathroom. Like maybe you could go to a bookstore and buy a how-to book maybe if you found one for what you were looking for.

    29. BGBen Gilbert1:29:26

        Right. No, you're hiring a contractor who knows how.

    30. DRDavid Rosenthal1:29:29

        Right. Exactly. But people wanna work on their own homes. This is the unique thing that Home Depot figures out as they scale. They actually need to bundle education with the products that they're selling their customers. And rather than going out and hiring separate teachers that are gonna run clinics in Home Depots, they just recruit employees from the trades who are professional tradesmen, contractors, to come be their retail staff in the stores. And then they create a culture of, hey, anytime a customer comes in and asks you how to do something, stop what you're doing, you know how to do this stuff, and explain it to them. Show them. Get some products out. Show them how to build what they wanna build.
11. 1:46:01 – 1:56:07

    Arthur Blank Takes CEO & Early Cracks (1997)

    1. DRDavid Rosenthal1:46:01

       So back to Home Depot not exactly being a, a straight line from here. So at first, things are going great, as we talked about. Once the model's in place, the whole company is humming. By 1996, Home Depot is doing $20 billion in sales annually and expanding rapidly. They're averaging a new store opening every four days.

    2. BGBen Gilbert1:46:28

       They have over 600, approaching 700 stores. They have 32 international.

    3. DRDavid Rosenthal1:46:33

       Yep. That year is a big year for the company because the Olympics come to Atlanta, to their hometown, and they see it as the perfect moment to really put their foot on the gas on national advertising, becoming a big brand. So they become a major Olympic sponsor, like right up there with Visa and Coca-Cola and Nike and-

    4. BGBen Gilbert1:46:53

       Now JP Morgan.

    5. DRDavid Rosenthal1:46:55

       Yep, that's right. And, uh, Ben, as you alluded to, this era is when they really start serving the pro contractor market as well as the DIY weekend warrior. They offer business credit accounts. They're finally on solid enough financial footing that they can do that. They start carrying more pro line tools, like DeWalt or Milwaukee tools. This actually only boosts the DIY weekend warrior market, 'cause it turns out there's some segment of consumer homeowners who also want pro level tools and hardware and supplies.

    6. BGBen Gilbert1:47:31

       People with high willingness to pay for the best, or if they wanna have a tool for 20 years, sure, I, I want the one the pros use.

    7. DRDavid Rosenthal1:47:38

       Absolutely.

    8. BGBen Gilbert1:47:39

       They also hire dedicated salespeople to handle pros. They stand up a pro desk-

    9. DRDavid Rosenthal1:47:44

       Yep

    10. BGBen Gilbert1:47:44

        ... in a lot of their stores. They offer, this is a, a big change for them, pro pricing.

    11. DRDavid Rosenthal1:47:50

        Yep.

    12. BGBen Gilbert1:47:50

        So they s- start offering bulk deals if you are coming to the pro desk.

    13. DRDavid Rosenthal1:47:55

        I think importantly, though, that bulk pricing is available to DIY customers too. You just have to buy in a certain amount.

    14. BGBen Gilbert1:48:04

        Right. They also start offering for the first time job site delivery, since not everyone wants to come into the store for everything, especially if you're building a shed, like the one you're recording in right now, David.

    15. DRDavid Rosenthal1:48:16

        [laughs]

    16. BGBen Gilbert1:48:16

        You know, you don't wanna have to go to the store and load up a car with all of that or rent a truck. It'd be nice to just have it delivered to the job site.

    17. DRDavid Rosenthal1:48:22

        Yep.

    18. BGBen Gilbert1:48:23

        And pros would go on to be this just giant driver of the business, whereas, and this is a 2015 stat, so we're flashing forward, but I think it's still a, a relevant data point. The average Home Depot DIY customer interacts with the company about five times a year, spends about $330. The average professional customer would interact 66 times a year-

    19. DRDavid Rosenthal1:48:50

        Yep

    20. BGBen Gilbert1:48:51

        ... with an annual spend of six and a half thousand dollars.

    21. DRDavid Rosenthal1:48:54

        Yep. Sounds right. And of course, there are pros that spend hundreds of thousands of dollars a year.

    22. BGBen Gilbert1:48:59

        Yep.

    23. DRDavid Rosenthal1:49:00

        So on the back of all this train of success, great stuff, Bernie says, "All right. Time to declare victory." He retires as CEO, hands the title over to Arthur in 1997.

    24. BGBen Gilbert1:49:19

        So almost 20 years.

    25. DRDavid Rosenthal1:49:21

        Yep, almost 20 years in, and he goes out on top. And that's when some cracks start to emerge in the Home Depot foundation because there actually were a bunch of problems that this very rapid growth had masked. So first, that same year in 1997, the company agreed to one of the largest corporate gender discrimination lawsuit settlements in history up to that point. Bernie and Arthur dispute the claims in Built from Scratch, in the memoir that they wrote, but even just the fact that the company ended up in this position shows that, um, corporate management wasn't exactly tip-top, shall we say, in this era. And the lawsuit also kinda reflects the stores. I mean, Home Depots up to this point were like a, a man's place, you know? It was guys buying hardware from other guys, and-

    26. BGBen Gilbert1:50:19

        Which Lowe's would go on to exploit, cultivating women as customers.

    27. DRDavid Rosenthal1:50:23

        Absolutely, which we're gonna get to in just a second. And so yeah, this whole dynamic ends up coming back to bite Home Depot pretty quickly.

    28. BGBen Gilbert1:50:30

        There's also all of Bernie and Arthur's accounts in their book of the early days, of the like partying hard in stores and like drinking after hours, and obviously they cleaned all that up over time, but-

    29. DRDavid Rosenthal1:50:41

        Yeah, it was there, for sure.

    30. BGBen Gilbert1:50:42

        Yep.
12. 1:56:07 – 2:12:09

    The Bob Nardelli Era (2000-2007)

    1. DRDavid Rosenthal1:56:07

       And so one day, at a board meeting, Ken asks Arthur about succession. Like, "Hey, man, you seem like you're kinda getting tired, too. If you need to step down tomorrow, is there anybody here at the company that could take your place?"

    2. BGBen Gilbert1:56:22

       Right. When Bernie stepped down, we had you, but who's after you?

    3. DRDavid Rosenthal1:56:25

       And so Ar- Arthur goes away, he thinks about it, he comes back, and he's like, "Oh, man, Ken, you're right. Actually, the answer is no. Pat certainly can't take my place, and you, Ken, you know, we love you, but you're not an operator. You can't be CEO of this company. And yeah, I guess we haven't really cultivated an executive bench here in the company of someone who could take over as CEO."

    4. BGBen Gilbert1:56:48

       It is worth saying they, uh, very impressively figured out a management track for store managers. 75% of store managers at Home Depot don't have a college degree because they have figured out how to promote from within. And so you can, you know, come to Home Depot as an 18-year-old retail employee and become a store manager.

    5. DRDavid Rosenthal1:57:09

       Yep.

    6. BGBen Gilbert1:57:09

       And that works super well. But what they didn't cultivate, at least in this era, was who's gonna succeed these founders.

    7. DRDavid Rosenthal1:57:16

       So the board and Arthur together decide, hey, we gotta bring in a external search firm and bring some more management talent into the company. And the plan is that they're gonna go recruit a president and COO, basically somebody to replace Arthur's old job as number two now that Arthur is CEO. And this new person will be next in line to take the helm of the company when Arthur's ready to retire. And Arthur actually chairs the search committee himself. And the first target is Jamie Dimon-

    8. BGBen Gilbert1:57:49

       It's amazing

    9. DRDavid Rosenthal1:57:49

       ... who has just gotten fired by Sandy Weill at Citigroup.

    10. BGBen Gilbert1:57:53

        Yes. And Jamie loved the, uh, Home Depot founders, as he told us on stage at our Radio City show last year. But the other thing that he said right after that was, "Y- you know, I've never actually been to a Home Depot before considering this opportunity." And I, and h- I think he went in once because a friend told him, like, "Oh, you need to go upstate and go to that Home Depot." And it just didn't... He was like, "What am I doing here?"

    11. DRDavid Rosenthal1:58:15

        Yeah, he was like-

    12. BGBen Gilbert1:58:15

        "I'm, I'm, like, pretending to be a-

    13. DRDavid Rosenthal1:58:16

        Yeah

    14. BGBen Gilbert1:58:17

        ... home improvement d-

    15. DRDavid Rosenthal1:58:18

        Yeah. But this does burn a bunch of time, the whole process of meeting Jamie, wooing him, recruiting him. And they really do vibe. Jamie will say to this day that he loved everything about Home Depot, the culture, the philosophy as a company.

    16. BGBen Gilbert1:58:34

        He talks about the store support center thing all the time. When we were preparing for Radio City, I watched 50 Jamie Dimon interviews, and he references how awesome it is that their HQ is called store support center, and that's a, a cultural indicator.

    17. DRDavid Rosenthal1:58:46

        Yep. So the company burns about six months on the Jamie process. At the end of it, they've still got nobody, and the board is starting to get a little frustrated here. Now, it just so happened that Ken, in addition to now being the lead director of the Home Depot board, was also on the board of General Electric. And at the time, GE was going through its own very public succession drama of who was gonna succeed Jack Welch.

    18. BGBen Gilbert1:59:22

        The, the most storied CEO in America at the time.

    19. DRDavid Rosenthal1:59:25

        Yeah. History has kinda forgotten this now, 'cause GE frankly has fallen apart. But-

    20. BGBen Gilbert1:59:32

        Like, literally got broken into three pieces, so that's not a controversial statement.

    21. DRDavid Rosenthal1:59:35

        Yes, yes. It actually-

    22. BGBen Gilbert1:59:37

        And before that, incinerated more market cap than any other company before it in history.

    23. DRDavid Rosenthal1:59:43

        [laughs] Or at least until some of the Nvidia drawdowns, right? [laughs]

    24. BGBen Gilbert1:59:46

        Oh, but yeah, t- these days, like, these, these drops that happen at, at big tech companies is, uh, you know, dwarfs everything in comparison.

    25. DRDavid Rosenthal1:59:53

        Yeah, makes GE look quaint.

    26. BGBen Gilbert1:59:53

        But at the time, that, that was the story, is post-Jack Welch GE just completely destroying shareholder value.

    27. DRDavid Rosenthal2:00:01

        Yep. But here we are in 1998, 1999, 2000. I mean, Fortune magazine crowned Jack Welch the Manager of the Century in its millennium issue at the end of 1999. That's how vaunted GE was.

    28. BGBen Gilbert2:00:20

        Yep.

    29. DRDavid Rosenthal2:00:20

        And it was all driven by a culture of operational excellence, as embodied in GE's famous Six Sigma approach to defect-free output.

    30. BGBen Gilbert2:00:33

        Sounds great.
13. 2:12:09 – 2:24:24

    Nardelli's Public Downfall & Firing (2006-2007)

    1. DRDavid Rosenthal2:12:09

       So a couple years into Nardelli's tenure, customer satisfaction among Home Depot shoppers falls to the lowest level of any major US retailer. So all the major US retailers, you know, there's annual surveys of customer satisfaction at everything from Best Buy to Costco to Walmart to Home Depot to Lowe's. Home Depot goes from near the top to dead last.

    2. BGBen Gilbert2:12:37

       But David, they doubled their revenue and their profits, and they grew from 1,100 stores to 2,000 stores in five years. What do you mean there are problems?

    3. DRDavid Rosenthal2:12:49

       [laughs]

    4. BGBen Gilbert2:12:49

       All the charts are up and to the right.

    5. DRDavid Rosenthal2:12:51

       Yeah, yeah. So that then leads into the issue of Nardelli's compensation. So on top of the huge equity grant that he got when he joined Home Depot from GE, Nardelli also gets paid roughly $200 million by the board over the six years of his tenure running Home Depot, and the board would always give him bigger bonuses and pay him more than they were contractually obligated to, because Nardelli would always make the argument to them, "Hey, I'm crushing my numbers. Revenue's up. Profits are up. I'm beating plan. Everything is great." He would refuse, however, when the board would ask, to tie any of his compensation to the company's stock price.

    6. BGBen Gilbert2:13:38

       Which I will say is, is in some ways fair. I know it's misaligned with shareholders, but it is in some ways fair because it is incentivizing you on the things you can control, because a stock price is just what the outside world thinks of you, not actually what you are doing. It always has struck me a little bit weird that I, uh, you're comped on what other people think of the company.

    7. DRDavid Rosenthal2:14:00

       Ben, it's like you're reading from Nardelli's script right here.

    8. BGBen Gilbert2:14:04

       [laughs]

    9. DRDavid Rosenthal2:14:04

       So Businessweek would report on this, 'cause this was uncommon for major CEOs at the time and through to today. And Nardelli would always say, "Hey, this is the one measure of company performance that I can't control, so I'm not gonna agree to my comp to be tied to it." The problem in Home Depot is that this is fundamentally going against-

    10. BGBen Gilbert2:14:24

        Mm

    11. DRDavid Rosenthal2:14:25

        ... a key part that we talked about a minute ago of the company's model.

    12. BGBen Gilbert2:14:29

        No stock go up, no machine work.

    13. DRDavid Rosenthal2:14:31

        Exactly. And so for all the associates on the store floor now, those of them who are left with equity, their promise has always been, "I do good work. I see the results. The stock price goes up. I get rich." Now, here's this bigwig former GE guy coming in as CEO and saying, "Yeah, I'm gonna get rich regardless of whether the stock price goes up." And the stock price stops going up.

    14. BGBen Gilbert2:15:00

        Yeah. Why did the stock price stay flat during this time?

    15. DRDavid Rosenthal2:15:03

        Well, here's what's going on. Even though he doubles revenue and profits, he actually mostly does it by doubling store count.

    16. BGBen Gilbert2:15:13

        Mm.

    17. DRDavid Rosenthal2:15:13

        Ben, as you had said, same-store sales comps had already trended flat before Nardelli joins. They actually stay flat for his tenure. So Wall Street keeps bringing this up as a major red flag in comparing Home Depot to Lowe's, which is growing same-store comps-

    18. BGBen Gilbert2:15:32

        Mm

    19. DRDavid Rosenthal2:15:32

        ... as they're taking this new segment of the market, you know, the weekend sprucers here. And it gets even worse. During Nardelli's tenure, he authorizes $20 billion in share buybacks and dividends. That doesn't even move the stock price.

    20. BGBen Gilbert2:15:47

        Which you should read as all the institutional investors have all these discounted cash flow models, and they don't believe that the sum of all the future profits that this business will generate discounted to the present is growing. They think the value of this business is staying flat.

    21. DRDavid Rosenthal2:16:04

        Yeah. Well, they think it's shrinking because Home Depot is also in the market buying up stock.

    22. BGBen Gilbert2:16:10

        Mm.

    23. DRDavid Rosenthal2:16:11

        And that's not moving the price up, so...

    24. BGBen Gilbert2:16:14

        Right. But the, the high level point is despite revenue and profits and s- being up due to new store openings, we do not think the future-

    25. DRDavid Rosenthal2:16:24

        Yeah

    26. BGBen Gilbert2:16:24

        ... of this company is brighter.

    27. DRDavid Rosenthal2:16:26

        Yep, yep. And meanwhile, during this same period, again, this is as the US housing bubble is reaching, you know, its peak inflation, Lowe's stock price is up 200%. They're winning the housing bubble.

    28. BGBen Gilbert2:16:39

        Hmm. The other thing we haven't talked about is he tried to bolt a lot onto this company.

    29. DRDavid Rosenthal2:16:46

        Yep.

    30. BGBen Gilbert2:16:46

        He was growing by acquisition and expanding into adjacencies and launching new business lines to create these new adjacencies versus just kind of investing in the core business.
14. 2:24:24 – 2:42:30

    Frank Blake's Turnaround: Crisis & Culture (2007)

    1. DRDavid Rosenthal2:24:24

       Yep. So once again, Home Depot and the board are left without an obvious successor. Who do they turn to to go, well, I would say up from here. A- anywhere from here would be up from here. They decide that they're gonna pin their hopes on another GE guy, one of Nardelli's lieutenants that he'd brought over from GE to run M&A and corporate development for Home Depot. A new role, as you were saying, Ben, as they added all this stuff to the company.

    2. BGBen Gilbert2:24:59

       Someone who Ken loved, but Bernie was nowhere near convinced was the right choice.

    3. DRDavid Rosenthal2:25:06

       Yeah, yeah. A former lawyer by the name of Frank Blake. Bernie, and also, I would assume Arthur, although I don't think Arthur was on speaking terms with the board at this point in time, are pissed. Bernie's actual quote to Ken when Ken calls him and tells him who the next CEO of Home Depot is gonna be is, "I can't believe you brought in another goddamn GE guy to run my company." But it would turn out that not only was Frank Blake nothing like Bob Nardelli, he was exactly what Home Depot needed. But before we tell that story...

    4. BGBen Gilbert2:25:45

       Yes. Now is a great time, listeners, to thank one of our favorite partners, Sentry. That's S-E-N-T-R-Y, like someone standing guard.

    5. DRDavid Rosenthal2:25:56

       Which is what they do for developers. Sentry helps teams debug everything from errors to latency issues, basically any software problem, and fix them before users get mad. It's considered, quote-unquote, "not bad" by millions of software developers.

    6. BGBen Gilbert2:26:11

       And David, I have yet another interesting parallel for you to this episode on Home Depot. Home Depot is not just in the business of selling, you know, lumber. They wouldn't be a $350 billion company if that's all there was to it. They were in the business of turning regular people into builders.

    7. DRDavid Rosenthal2:26:30

       Aha. I see what you're doing here.

    8. BGBen Gilbert2:26:31

       [laughs]

    9. DRDavid Rosenthal2:26:32

       Yes. Bernie and Arthur staffed those first stores with actual plumbers and electricians and carpenters, people whose job was to stand in the aisle and teach you how to do the thing yourself. They didn't just sell you the tools, they gave you the confidence to pick them up.

    10. BGBen Gilbert2:26:46

        Which is exactly the moment that software is in right now. The number of people who can build something real has been completely blown open. I mean, engineers, sure, but also designers shipping their own products, founders who have never worked at a tech company before, people who describe what they want and watch it get built by AI.

    11. DRDavid Rosenthal2:27:04

        Yep. Everyone's a builder of software now, so the hard part isn't building anymore, it's the part afterwards. Something breaks in production, and you have to figure out what actually went wrong. That's what Sentry does for builders of every kind, from a solo founder's side project to the engineering teams at Anthropic, Vercel, Cursor, Linear, and GitHub.

    12. BGBen Gilbert2:27:23

        And when something does go wrong, Sentry shows you exactly what broke, which release it started in, and where it is in the code. Then it hands that whole picture to whatever you build with, Claude Code or Cursor or Sentry's own agent, Seer, which finds the root cause and opens a PR for humans to review. Sentry is where software gets fixed, with over 200,000 organizations running on it. So you can check out sentry.io/acquired to get started. All right, David. The saving of Home Depot.

    13. DRDavid Rosenthal2:27:53

        [laughs] Man, things got pretty low there, didn't they, for a little while?

    14. BGBen Gilbert2:27:57

        Yes.

    15. DRDavid Rosenthal2:27:58

        Fortunately, there's a comeback story here, too.

    16. BGBen Gilbert2:28:00

        So the thing that is the context of all of this, we're gonna talk about all the personnel stuff and the culture change. In 2006, the housing bubble burst.

    17. DRDavid Rosenthal2:28:10

        Yep.

    18. BGBen Gilbert2:28:11

        I mean, we know of the great financial crisis in 2008, which is after this leadership transition, which was January of 2007. But if you go back to 2006, that is where you can see it in Home Depot's financials. Spending on home improvement supplies fell off a cliff 2006 into 2007, and the actual ceasing of building new homes for all of these unqualified buyers took, like, 18, 24 months to wind its way all the way through the financial system-

    19. DRDavid Rosenthal2:28:44

        Mm-hmm

    20. BGBen Gilbert2:28:44

        ... and to blow everything up. But for Home Depot, their revenue would fall starting in 2007. It bottomed in 2010, and it actually did not get back to 2007 levels until 2014. So that's a seven-year span, and it's the same story with net income, where they were below their previous high water mark on revenue and profits.

    21. DRDavid Rosenthal2:29:07

        Yep. And I think this maybe explains a little bit of the board's behavior. Once again, we don't have a bench here that we know well and are confident in to come run the company. Shoot, I think we gotta stick with this guy as long as we can.

    22. BGBen Gilbert2:29:28

        Yeah.

    23. DRDavid Rosenthal2:29:28

        Most, if not all, of the other executive ranks at Home Depot were all Nardelli guys at this point in time. So if they were to get rid of Bob, the bench is only staffed with more Bobs.

    24. BGBen Gilbert2:29:42

        Or so they thought.

    25. DRDavid Rosenthal2:29:43

        Or so they thought.

    26. BGBen Gilbert2:29:44

        To give some credit to Bob, e- even though his tactics were not the right tactics on this company for their core competency, their culture, their mission, any of that stuff, the wind had, for decades, been at Home Depot's back.

    27. DRDavid Rosenthal2:29:57

        Yep.

    28. BGBen Gilbert2:29:57

        You know? Th- this, this amazing boom in housing, and suddenly you no longer have that. It's just hard to manage and create growth in an environment like that.

    29. DRDavid Rosenthal2:30:08

        Yep. So coming out of the board meeting on January 2nd, 2007, when Nardelli gets fired, Frank Blake, the dark horse candidate, becomes CEO. So yeah, Ben, who is Frank?

    30. BGBen Gilbert2:30:22

        So f- Frank was a lawyer by training who'd worked in DC in the federal government as a public servant, who'd been a Supreme Court clerk, had gone to GE and risen up to become the head of M&A, came over with Bob Nardelli and held a, a senior role at Home Depot, but he didn't own a P&L.
15. 2:42:30 – 2:59:57

    E-commerce & Distribution Revolution

    1. DRDavid Rosenthal2:42:30

       Well, this gets into the next, and, and frankly, probably the biggest thing that Frank Blake did for Home Depot, which is how they grew the company despite not growing store count, and that's e-commerce. And this is absolutely awesome because as we've alluded to throughout the episode, the internet actually represented a pretty big disruptive threat for Home Depot. Not from Amazon, we'll get to Amazon in a minute, but actually from YouTube. Like you're unbundling the core value prop of-

    2. BGBen Gilbert2:43:10

       Hmm

    3. DRDavid Rosenthal2:43:10

       ... the knowledge in the stores, has gone, you know, first to the internet and a little bit during the beginning of the Nardelli era. But once YouTube comes along in 2006, 2007, this is a big time threat to the company. Doesn't matter where you get your goods anymore if you can get your knowledge for free on YouTube.

    4. BGBen Gilbert2:43:32

       That's interesting. It sounds great in the abstract. I wonder if you're actually a, you know, Home Depot store manager, how much this actually impacts you. I'm sure people come in being like, "I learned this on YouTube." And then you gotta be like, "Okay, but You think you know everything right now, but let me save you some trouble. I suspect there's a lot of that going on.

    5. DRDavid Rosenthal2:43:51

       But I think over time, YouTube gets pretty good at surfacing the best videos-

    6. BGBen Gilbert2:44:00

       High quality, yeah

    7. DRDavid Rosenthal2:44:01

       ... for home project DIY.

    8. BGBen Gilbert2:44:03

       Yeah. I think that's probably right.

    9. DRDavid Rosenthal2:44:04

       Yep, yep. So a big part of the way that Home Depot reinvents itself here in this era to maintain its relevance for customers is e-commerce. So Frank invests a lot of capital into building distribution centers, which is interesting 'cause they're not growing stores.

    10. BGBen Gilbert2:44:28

        Right, right. In 2009, they opened 12 big distribution centers that they call Rapid Deployment Centers. This is a huge shift from the original model where manufacturers would ship directly to the store. This is centralizing the supply chain.

    11. DRDavid Rosenthal2:44:43

        Yes.

    12. BGBen Gilbert2:44:44

        This is saying, "Look, we want everything shipped to these 12 DCs, and we will quickly chop them up and get them to stores." But also it now enables us to have these centralized places to ship from, since it's kind of a mess if you're shipping your entire e-commerce storefront-

    13. DRDavid Rosenthal2:45:00

        Out of the stores

    14. BGBen Gilbert2:45:01

        ... out of the stores.

    15. DRDavid Rosenthal2:45:01

        Right. Yeah. You can't really do that.

    16. BGBen Gilbert2:45:02

        Except, one caveat to this, they do also do that. So I, I had two e-commerce Home Depot experiences in the last week.

    17. DRDavid Rosenthal2:45:10

        Hmm.

    18. BGBen Gilbert2:45:10

        One I bought on homedepot.com, and it arrived two days later the way you would expect, the same way you buy from Amazon. I'm sure that shipped from a distribution center. The other was something that I could get sooner, within two hours, because they had it-

    19. DRDavid Rosenthal2:45:24

        With in-store pickup

    20. BGBen Gilbert2:45:25

        ... at the store, and it wasn't pickup. They had someone drive it out to me later that night-

    21. DRDavid Rosenthal2:45:30

        Oh, that's awesome

    22. BGBen Gilbert2:45:31

        ... from the SoDo store in Seattle. It's about 20 minutes away from my house. But within a couple hours, it was delivered to my house since it was fulfilled from store. So they have the flexibility to do both ship from store and ship from distribution center.

    23. DRDavid Rosenthal2:45:43

        Yep. So yeah, e-commerce is actually this incredible opportunity for Home Depot right at the same time that Amazon is crushing the rest of the retail landscape and disrupting everything. When you think about it, though, if you think about Home Depot's core best-selling products, things like lumber or drywall or plumbing supplies, roofing, siding, insulation, just imagine that attempting to go through-

    24. BGBen Gilbert2:46:18

        [laughs]

    25. DRDavid Rosenthal2:46:18

        ... the Amazon logistics pipeline, right? Like, you probably have a-

    26. BGBen Gilbert2:46:22

        They need to build a whole specialized system for it.

    27. DRDavid Rosenthal2:46:24

        Totally. Amazon is not equipped to do this. I mean, could you imagine putting 200 cubic feet of lumber that weighs 6,000 pounds on an Amazon delivery van? [laughs]

    28. BGBen Gilbert2:46:34

        One of those little Rivians.

    29. DRDavid Rosenthal2:46:35

        No, uh, that, that is the amount of lumber you would need for a deck job.

    30. BGBen Gilbert2:46:39

        Yeah.

Episode duration: 3:35:03