The Home Depot

The Home Depot's founding story is like an Avengers movie… if the Avengers got fired, went broke, and stacked empty paint cans ten feet high to look legitimate. After being unceremoniously fired from their previous hardware chain at ages 48 and 35, Bernie Marcus and Arthur Blank took the words of their New York banker Ken Langone (who had also just accidentally caused their firings) to heart: they'd just been "kicked in the ass with a golden horseshoe.” They proceeded to author the greatest compounding story in American retail history, helped by some legendary cameos along the way from Sol Price, Jamie Dimon, and Ross Perot (to name a few). And the ending is as good as any superhero film: from its 1981 IPO to today, The Home Depot has been the single highest-returning equity in the entire US stock market — higher than Apple, Microsoft, Berkshire Hathaway, and everything else! Sponsors: Many thanks to our fantastic Fall '26 Season partners: Sierra https://link.acquired.fm/sierraWorkOS https://link.acquired.fm/workosAnthropic https://link.acquired.fm/claudeSentry https://link.acquired.fm/sentryLinks: Sign up for email updates https://www.acquired.fm/email, get our takeaways and research photos from each episode, and vote on future topics! The Official Acquired Meetup on Sept 17th with our friends at Sentry. Join us! https://acquired.fm/meetupThe Acquired Home Depot Companion PDF https://library.acquired.fm/episodes/home-depot.pdfOur Visual Artifacts page for Home Depot https://www.acquired.fm/artifacts/home-depotBuilt from Scratch by Bernie Marcus and Arthur Blank https://www.amazon.com/dp/0812933788?ref_=cm_sw_r_ffobk_cp_ud_dp_NBZN6M70HC84VZ67G3W3&bestFormat=trueKick Up Some Dust by Bernie Marcus https://www.amazon.com/Kick-Up-Some-Dust-Thinking/dp/0063259923/ref=sr_1_1?dib=eyJ2IjoiMSJ9.9Rt8DTUF_4o54vie5beepIMt57cHNIbON0wyqqv6VpxbVsKNe2TiKkpaKy-B726lLa17aeIB2XXYe6ntRGTM2Sx0HqQLV0oUKn8jSmtrm1LA3pJSF_7x-_GcE26P_NUG_s7yXKY2cJWrjB6t-_GY4pvsaHF7OnlWMIPg_XbwwyYAMCrX1_8LSC2ebcDXsFbDuu7gvE12XorB8ovGaLtmb2Ls5avW5kASdcsMr5Gqqkc.o7ORxDVEdw9TBRt6JJ2RjhoOCpTumMV0kkTtSDj-pRQ&dib_tag=se&keywords=kick+up+some+dust&qid=1788538639&sr=8-1The Board Wore Chicken Suits by Joe Nocera, The New York Times https://www.nytimes.com/2006/05/27/business/27nocera.htmlFrank Blake on Invest Like the Best https://colossus.com/episode/blake-investing-in-your-people/Ken Langone's interview with Arvind Navaratnam https://worldlypartners.com/in-conversation/ken-langone/Worldly Partners' Multi-Decade Home Depot Study https://worldlypartners.com/businesshistoryAll episode sources https://www.acquired.fm/episodes/home-depot#sourcesCarve Outs: Silo Season 3 https://tv.apple.com/us/show/silo/umc.cmc.3yksgc857px0k0rqe5zd4jiceTires Season 3 https://www.imdb.com/title/tt31491435/Ratio 8 Coffee Maker https://link.acquired.fm/4iNsnAoTrade Coffee https://link.acquired.fm/4gDhPCJQuarterback https://www.imdb.com/title/tt26777035/Comedian https://www.imdb.com/title/tt0328962/?ref_=nv_sr_srsg_4_tt_4_nm_4_in_0_q_comedianMore Acquired: Get email updates https://www.acquired.fm/email and vote on future episodes! Join the Slack http://acquired.fm/slackCheck out the latest swag in the ACQ Merch Store https://www.acquired.fm/store!00:00:00 Start 00:00:43 Intro 00:05:32 Bernie Marcus's Early Career and meeting Arthur Blank (1972) 00:15:58 Ken Langone & Handy Dan (1970s) 00:33:08 Ken Buys Handy Dan, Bernie & Arthur Fired 00:43:55 Ross Perot Almost Buys Home Depot 00:51:20 Pat Farrah & The HomeCo Interlude 01:05:03 First Stores & Early Model (1979) 01:14:16 Home Depot Goes Public & Expands (1981) 01:24:35 Home Depot's Unique Operating System 01:46:01 Arthur Blank Takes CEO & Early Cracks (1997) 01:56:07 The Bob Nardelli Era (2000-2007) 02:12:09 Nardelli's Public Downfall & Firing (2006-2007) 02:24:24 Frank Blake's Turnaround: Crisis & Culture (2007) 02:42:30 E-commerce & Distribution Revolution 02:59:57 Home Depot Today: Pro & DIY (2024) 03:12:04 Analysis: The Paradox of Specialness 03:16:18 7 Powers: Home Depot's Competitive Advantages 03:19:17 Quintessence: Why It Got So Big 03:26:27 Carve-Outs + Outro ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  I'm sorry, I got tripped up. You used power tools, David Rosenthal?

• 0:05David Rosenthal?

  I built this whole door. I got the blank door from Home Depot. I had to cut it down to size to fit a non-standard sized door opening in my studio. I drilled the door handle. I put the doorknob on myself. It all worked great.

• 0:18Ben Gilbert?

  We got to get you to the pro desk.

• 0:20David Rosenthal?

  Yeah.

• 0:22David Rosenthal?

  And it's been part of every acquired episode since.

• 0:24Ben Gilbert?

  All right, let's do this.

• 0:42Ben Gilbert?

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

• 0:51David Rosenthal?

  I'm David Rosenthal.

• 0:52Ben Gilbert?

  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, David.

• 1:13David Rosenthal?

  Large.

• 1:15Ben Gilbert?

  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.

• 1:47David Rosenthal?

  Or Disney that we just covered?

• 1:49Ben Gilbert?

  Yes.

• 1:50David Rosenthal?

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

• 1:56Ben Gilbert?

  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.

• 2:33David Rosenthal?

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

• 2:37Ben Gilbert?

  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.

• 2:54David Rosenthal?

  Not bad, not bad. Well, we're going to get into as we go, who holds that equity? Because it's actually a critical part of the company's strategy, or at least it was.

• 3:04Ben Gilbert?

  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.

• 3:24David Rosenthal?

  Wow.

• 3:24Ben Gilbert?

  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.

• 4:02Ben Gilbert?

  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.

• 4:26David Rosenthal?

  Woo, let's go.

• 4:27Ben Gilbert?

  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.acquired.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 acquired.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 want to thank our brand new presenting partner, Sierra.

• 5:07David Rosenthal?

  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.

• 5:17Ben Gilbert?

  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.

• 5:32David Rosenthal?

  So the story of Home Depot is kind of like the acquired version of like Avengers movie. They're 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.

• 5:45Ben Gilbert?

  They provide extreme value propositions to the American consumer.

• 5:49David Rosenthal?

  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, the foreword of which was written by his good friend, the rapper Pitbull. Like amazingly, the two of them like bonded and became good friends later in Bernie's life.

• 6:24Ben Gilbert?

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

• 6:29David Rosenthal?

  So Bernie, despite his, 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 store within a store. This begins Bernie's retail education. And from there, he would go on to join the New York area discount

• 7:13David Rosenthal?

  chain, Two Guys. Ultimately, this leads him a couple of years later in his 30s to an executive role at the Dalen Corporation, 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. 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

• 7:58David Rosenthal?

  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. And Dalen 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.

• 8:34Ben Gilbert?

  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.

• 8:47David Rosenthal?

  Yep, yep. So Bernie's now a corporate executive at Dalen. He has no equity in the company. He's just an 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, Dalen 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 again, he has no equity. He's the CEO, but he's just an employee.

• 9:20Ben Gilbert?

  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, none of them are like general contractors, or grew up in the hammer manufacturing business. It's people who just knew retail.

• 9:38David Rosenthal?

  These are retail guys, exactly.

• 9:41David Rosenthal?

  Well, retail and finance guys, as we'll see.

• 9:43Ben Gilbert?

  Yes.

• 9:43David Rosenthal?

  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 knows himself, 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?

• 10:22David Rosenthal?

  Because Handy Dan was also a standalone publicly traded company.

• 10:29Ben Gilbert?

  And Daylin didn't own all of it, right? It just owned the majority of the shares?

• 10:33David Rosenthal?

  Yeah, so Daylin had bought all of it, but then there was this kind of crazy fad going on on Wall Street in the 70s here, which we're into now, where conglomerates would spin off these little 19% equity stubs of their various divisions and then float them publicly on the stock market, 19% being below 20% so that the parent company could still consolidate the division's financials on their books.

• 11:04Ben Gilbert?

  I see. So it actually looks like, oh, no, this is a division of ours. 19% of it just happens to be owned by someone else.

• 11:10David Rosenthal?

  Yep, yep. And the idea was that this would unlock value since these conglomerates traded at a discount to the value that they'd otherwise have if all the businesses were independent. Actually, in reality, it didn't work at all. In practice, most of these publicly traded little divisional stubs traded at a further discount to the parent company's already discounted holding company valuation. So, why is Daylin doing all this financial engineering? You know, I thought we just said that times are great for retail. The American suburbs are booming, et cetera, et cetera. Well, they were in the 60s, but now here in the 70s, retail is struggling. So, we've talked about this period

• 11:55David Rosenthal?

  on a whole bunch of other episodes, on acquired, Vanguard most recently, but the 70s were brutal in America. There's the oil crises that hit, there's stagflation. Federal interest rates go up into the teens, like the teens. Can you imagine?

• 12:08Ben Gilbert?

  Yeah, they briefly even hit like 18, 19%.

• 12:12David Rosenthal?

  And, well, we'll get to the high point in 1980 in a minute because it's right after Home Depot gets founded. But this is bad for America, the economy, et cetera. This is really bad for suburban retail. Shopping just dries up. And Daylin starts totally sucking wind, except for Handy Dan.

• 12:33Ben Gilbert?

  Right, it's like this crown jewel within an otherwise withering empire, right?

• 12:38David Rosenthal?

  Right, and it's all thanks to Bernie and Arthur. Because when they take over, as you said, they're not coming from the hardware business. These guys are seasoned retailers from other parts of, you know, the retail sector. Hardware, home improvement as a concept wasn't really a term yet. The hardware store landscape at the time was this hatchwork of clubby, regional, not very sophisticated and not very good businesses.

• 13:07Ben Gilbert?

  And they've got limited assortment. They don't stock that many things. The market's super fragmented. And importantly, you couldn't actually go to one place to get everything. You'd go to some store for lumber, then a different store to get tools, and then another store for plumbing supplies, electrical products. Lawn and garden was sort of its own entire thing. These are all little specialty stores.

• 13:29David Rosenthal?

  Yeah, and so like if you're a consumer, if you're a suburban homeowner and you've got a project that you want to work on yourself over the weekends.

• 13:38Ben Gilbert?

  Which actually wasn't very many people. That, that sort of do it yourselfer wasn't really a thing yet.

• 13:44David Rosenthal?

  Totally, I mean, it's Home Depot that unlocks that category because before Home Depot, you couldn't trust that you could get all the stuff you needed to accomplish your project, to build a deck or retail your bathroom or whatever you wanted to do around your house. You would walk into these little hardware stores and, good luck, you know? So, the biggest operator in the industry at the time was a company out of North Carolina called Lowe's. You might have heard of it.

• 14:12Ben Gilbert?

  Yes.

• 14:12David Rosenthal?

  Lowe's back then, despite being the biggest player in the hardware sector, was not the Lowe's that you think of today. It had evolved out of the general store concept. It was all these small store footprints that we're talking about, like a fifth or less of the size of what you know as Lowe's today. They're mostly in strip malls. And the whole company, Lowe's, is only doing about 150 million in annual revenue total.

• 14:38Ben Gilbert?

  And my understanding of the store concept then is it's basically a hardware store, sort of a small showroom, not, you know, concrete floors and giant ceilings, attached to a lumberyard. So you get a lumberyard, a nice little showroom, that's kind of it. The craziest thing about Lowe's is it was founded in 1921.

• 14:57David Rosenthal?

  Yeah, as a general store, yeah.

• 14:58Ben Gilbert?

  Right, by this point in history, it's already 50 years old before the Home Depot's even been founded.

• 15:03David Rosenthal?

  Yep, so Bernie and Arthur, when they come into Handy Dan and this whole hardware sector, this is like bringing a bazooka to a knife fight. These guys are much more competitive, much more sophisticated than the whole rest of the industry. These guys are sharp operators. They've done concessions, they've done discounting, they've done pharmacy.

• 15:26Ben Gilbert?

  Yeah, they're students of retail.

• 15:27David Rosenthal?

  Yep, so despite this like super tough overall retail macro, Bernie and Arthur turn around Handy Dan and make it the best operator in the industry. But, that still doesn't save Daylin, the parent company, because they're so weighed down by their other divisions that they file for bankruptcy in 1975. And they bring in a noted turnaround artist as the CEO to turn it around. We'll come back to that in a minute. For the moment, though, let's flash back over to the East Coast, to a completely different character, the New York investment banker, Ken Langone.

• 16:08Ben Gilbert?

  This is your, your third superhero. 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.

• 16:18David Rosenthal?

  Yep, and 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. People today remember Ross Perot as like, oh, yeah, that guy who ran for president in the 90s. But he was kind of like Larry Ellison of his time. EDS was this giant company.

• 16:52Ben Gilbert?

  Yeah, and I was trying to 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 got to do a whole Ross Perot episode at some point, but from his time at IBM, he kind of saw people are buying all of these mainframes, but they have no idea how to use them. I actually have to start like a-

• 17:11David Rosenthal?

  He was a top salesman at IBM before starting the company.

• 17:14Ben Gilbert?

  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.

• 17:33David Rosenthal?

  Totally, and based in Plano, Texas. EDS has this long history. They ultimately get acquired by Hewlett Packard and become HP Enterprise Services. So you have been to 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. And we're going to talk about the almost in just a minute. So, all right, back here, we're in the mid 1970s, after the EDS IPO.

• 18:16David Rosenthal?

  Ken has just taken public a Philadelphia-based hardware chain, one of these other regional players, a company called Panelrama. And like everyone else, they've fallen on hard times. So Ken goes down to Philadelphia to see the CEO. And 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?

• 18:39Ben Gilbert?

  Because it should be a good business. I mean, we, 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. 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 recurring revenue, if you're in this business, to keep working on a home as the weather and time acts on it.

• 19:09David Rosenthal?

  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.

• 19:23Ben Gilbert?

  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 should have been, anyway.

• 19:32David Rosenthal?

  Should have been, should have been. So, Ken says to the CEO of this company, a guy named Gary, says, all right, Gary, who's the best operator here in the business? And Gary says, 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. Gary says, no, no, no, no, no. Their parent, Daylin, is going bankrupt, but Handy Dan is doing great. So Ken says, okay, wait, wait, hang on. Let me go get my Moody's manual, because this is how you checked company financials back in the day. 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.

• 20:13David Rosenthal?

  But yeah, it's trading for $3 a share. And if Moody's is right, this company is going to 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-

• 20:34Ben Gilbert?

  Something has to be wrong. Is there like an accounting problem? Is there some trick in the reporting or gimmick here that I don't understand? I got to dig into this.

• 20:42David Rosenthal?

  So, so he says, Gary, let's get, let's get Handy Dan on the phone like right now. I got to 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?

• 20:57David Rosenthal?

  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.

• 21:16Ben Gilbert?

  This is classic Ken Langone.

• 21:17David Rosenthal?

  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.

• 21:27Ben Gilbert?

  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 in them to fly across the country right away. It's like, okay, I really got to watch what I say to this guy.

• 21:41David Rosenthal?

  Yeah. Yeah. So they have lunch and quickly becomes apparent that Bernie is a 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? Bernie says, no, just an employee. You know, this is a Dalen subsidiary, even though we're publicly traded. Ken says, okay, I'm going to go back to New York tonight. And tomorrow I'm going to 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

• 22:25David Rosenthal?

  your stock is about to go way, way up. Now Bernie, this is exposing his weakness here with finance. While he's brilliant and street smart, he's also kind of like innocent about Wall Street and finance and investing and all this stuff.

• 22:43Ben Gilbert?

  Negotiating.

• 22:44David Rosenthal?

  Yeah.

• 22:45Ben Gilbert?

  In some ways he overtrusts people to.

• 22:47David Rosenthal?

  He's weirdly risk averse in this area. So he says, oh, oh, I can't do that. That's, that's, that's too risky. You know, I've got a family. And Ken's like, Bernie, Mr. Marcus, the stock market is based on supply and demand. I have enough money. I'm going to buy every single share that exists of your company. The price will go up. There's no risk. Bernie says, nope, nope, I can't do it.

• 23:09Ben Gilbert?

  And interestingly, when I read this, I was thinking, is this insider trading? I don't think it would have been at the time since Ken is an outsider just telling Bernie that he's going to buy the stock. So the information is actually market information, not inside information originating from the company itself. And Bernie's lawyer is of course, sitting there listening to make sure.

• 23:28David Rosenthal?

  Yep. So Ken says, all right, all right. I told you. He flies back to New York. He does exactly what he said he was going to do. He buys every single publicly traded share of Handy Dan, except for one block.

• 23:47Ben Gilbert?

  All right. So I, I looked this up, David, in the book Built From Scratch, which is the awesome book that is kind of the canonical Home Depot story written by Bernie and Arthur. And so here's how it goes. There was this little block of 50,000 shares, which was about 2% of the company owned by the Brooklyn-based congregation of the Most Holy Redeemer. So Ken calls the priests like he called up every other shareholder. And when Ken asks the church's financial officer, who is also a priest, hey, will you sell your shares to me? The priest pauses and he says, Langone, is that an Italian name? And he goes, yes. And he goes, and are you Catholic? And Ken goes, yes, I am.

• 24:32Ben Gilbert?

  And the priest says, then under the pain of hell, tell me what I should do. And Ken, you know, smiles and laughs and says, well, on, on these terms, you should keep it. Don't sell.

• 24:47David Rosenthal?

  You should hang on to your shares.

• 24:48Ben Gilbert?

  So Ken started buying at $3 a share. And by the time he was done, he got almost 20% of the company. The last few shares that he bought were at around $9 with no float and no trading left. So it's essentially locked at that price. There's two plus a church shareholders of this business.

• 25:06David Rosenthal?

  And improbably, Ken going out and buying these shares leads to Bernie and Arthur getting fired and then founding the Home Depot.

• 25:19Ben Gilbert?

  Which is in no way Ken's fault, but it is crazy that this is the first domino to tick over in that series of events.

• 25:25David Rosenthal?

  This is how Ken Langone becomes a co-founder of the Home Depot is he gets his buddies, Bernie and Arthur fired accidentally.

• 25:32Ben Gilbert?

  Accidentally.

• 25:33David Rosenthal?

  But before we tell that story, now is a great time to thank our presenting partner, a company that we are big fans of, Sierra.

• 25:41Ben Gilbert?

  Yes. So on Acquired, we study the leaders of the greatest companies in history. And today, all of those folks are wrestling with basically the same question. What is my competitive advantage when everyone has access to the same intelligence? And what is the right way to turn AI into revenue for our company?

• 26:01David Rosenthal?

  Yep. And that's where Sierra comes in. First, your customer relationships are your competitive advantage. When you deploy Sierra's AI agents, those relationships get deeper with every customer interaction, generating insights that compound over time. Second, you should pay for outcomes, not tokens, like an insurance claim paid or a sale closed or a customer retained.

• 26:25Ben Gilbert?

  Sierra is already the leading platform for customer service agents. Everything from account signup to troubleshooting and subscription management. They work with 40% of the Fortune 50, one in three of the world's leading banks, five out of the 10 largest healthcare companies. And now their agents can handle complex workflows that generate revenue as well. These are things that can take weeks or months and they span across voice, chat, email, WhatsApp. I mean, really complex things like appointment booking or prior authorizations in healthcare or refinancing a loan in financial services.

• 27:00David Rosenthal?

  Yep. And they just launched a super cool new product, personas. So instead of every AI agent sounding the same, polite, but kind of robotic, you can give your agent a distinct voice and personality, tailoring its tone, humor, even the rhythm of how it speaks to your brand.

• 27:15Ben Gilbert?

  Great brands have a recognizable character to them. Acquired, for example, has a, a very different communication tone than say a hospital.

• 27:24David Rosenthal?

  Yep.

• 27:25Ben Gilbert?

  And, you know, a luxury brand would have yet a completely different one. And the agents at your company should too.

• 27:31David Rosenthal?

  How an agent speaks impacts customer trust. Sierra told us that a customer there is one of the largest telecommunications companies in the world, just introduced a new voice and persona for their agent. And, and this is wild. The rate it solved customers' problems increased by almost 50%.

• 27:49Ben Gilbert?

  Because it had a persona.

• 27:51David Rosenthal?

  Yes.

• 27:51Ben Gilbert?

  Wild. So to find out how you can build standout customer experiences that grow your business with AI, visit sierra.ai/acquired and just tell them that Ben and David sent you. Okay, David, so how does Ken hoovering up all the shares, even though he's sort of become buddies with Bernie and Arthur, how does that lead to their ousting from Handy Dan?

• 28:14David Rosenthal?

  Yes. So Ken is essentially like de facto board member now of Handy Dan. And he just loves everything that the guys are doing. He's super encouraging. He starts flying out to the West Coast and then around the country as Bernie and Arthur open new Handy Dan stores. Ken basically becomes part of the crew, which is a very different than the new Dalen CEO's approach to managing Bernie and Handy Dan.

• 28:45Ben Gilbert?

  And quite bothersome. This guy who's the minority shareholder is sort of like closer with your management team than you are.

• 28:52David Rosenthal?

  Right. That you consider one of your divisions in your company.

• 28:55Ben Gilbert?

  Right.

• 28:55David Rosenthal?

  So on one of Ken's trips out to LA, Bernie says, hey, you should probably go see our actual CEO at Dalen, a guy named Sandy Sigaloff. And, you know, build a relationship with him. Now Sigaloff, as we said, was brought in to turn around the company out of bankruptcy. And he's a bad dude. He's exactly who you would imagine is the bankruptcy value recovery artist here, shall we say.

• 29:25Ben Gilbert?

  Yeah. Didn't he give himself a nickname? Was it Ming the merciless?

• 29:30David Rosenthal?

  Yes. After the villain in the Flash Gordon comic series. And he called himself that because of how merciless he was to all the employees of these companies that he would slash and burn and get rid of. So Ken realizes right away that this Sigaloff guy is bad news, but he's got this close to 19% equity position in Handy Dan. It's like, this guy can't walk all over me. All this leads to Ben, as you predicted, quite a lot of conflict between the two of these characters. And finally Sigaloff says, all right, Ken, I want you out of here. I want you gone. What do I have to do to just buy back this 19% stake that you have?

• 30:14David Rosenthal?

  And Ken loves a good game here.

• 30:19Ben Gilbert?

  Okay. So Ken has no intention of selling here. Let's first say that. He, he is now in it with Bernie and Arthur. He thinks it's a great business.

• 30:28David Rosenthal?

  And loyalty is his whole MO. He never sells.

• 30:30Ben Gilbert?

  Yes. So Sigaloff sends his lieutenant, Jeffrey Chanin, to try to negotiate something. So this is from the book Built From Scratch. Chanin says, the stock is selling for about $8 a share. How about if we pay you 10? No way, Langone says. The price is 12. Chanin was shocked. Forget it. Langone left and went to the men's room. Barely two minutes later, Chanin followed him in. Okay, he said, 12.

• 30:59Ben Gilbert?

  Jeff, you don't understand. You offered to buy it for 10. I said no. I offered to sell it to you for 12. You said no. Now you are back wanting to buy it for 12? That offer's off the table. That is gone. We had an offer and a denial. No deal. Chanan goes, what? Ken goes, I suggested a price of $12 in my office, right? Chanan nodded, and you declined. Well, that's it. I don't want to sell now.

• 31:24David Rosenthal?

  We're in the bedroom now. Price is different.

• 31:26Ben Gilbert?

  Chanan says, you must have some price. Okay, Ken says, $14. Chanan left in such a blind rage that he almost banged his head on the door. About a week later, Sigaloff called Langone. Let's not mess around, he said. We will pay you 14. Ken goes, Sandy, you guys don't get it. I offered it to you for $14. Chanan said, no, that offer's off the table. I don't understand, Sigaloff said. Ken goes, it's this simple. You had a chance, you turned it down. I've reconsidered my position. I don't want to sell. Sigaloff hung up the phone, madder than hell.

• 31:58David Rosenthal?

  It's like, is it in Empire Strikes Back of the?

• 32:02Ben Gilbert?

  I am altering the deal. Pray I don't alter it any further, is the Darth Vader line.

• 32:07David Rosenthal?

  So this continues for a while, and then one day Bernie calls Ken, or Kenny, as he's taken to calling him.

• 32:14Ben Gilbert?

  Yes.

• 32:15David Rosenthal?

  He says, Kenny, just do me a favor. Just sell. Just sell to Sigaloff. He's breathing down my neck. This situation's getting bad. It's making my life difficult. Just sell. It's fine.

• 32:27Ben Gilbert?

  The business is doing great, so this is actually like my biggest headache.

• 32:31David Rosenthal?

  Yep. And Ken says, Bernie, what are you talking about? Don't you understand? Like, I am the only thing that is protecting you from Sigaloff. If I sell, he's gonna turn around and fire your ass. He can't stand to see you being successful and getting credit for any success at Dalen, you know, that's not him. Bernie, though, again, he's like surprisingly trusting about this stuff. He says, no, no, no, no. Sandy needs me. I'm the only thing propping up the company. I'm a big boy. I can handle him. Please just sell. Make my life easier. And it's funny. I think it's actually this trusting nature of Bernie, even though he's got sort of a rough exterior

• 33:11David Rosenthal?

  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.

• 33:24Ben Gilbert?

  Yep.

• 33:24David Rosenthal?

  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 that he's invested in.

• 33:41Ben Gilbert?

  But David, how much does he sell for?

• 33:43David Rosenthal?

  Well, even though he's gonna sell, Ken is no pushover here. He sells for $25.50 a share, but he started buying at 3.

• 33:53Ben Gilbert?

  Do you know over what period of time?

• 33:55David Rosenthal?

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

• 33:57Ben Gilbert?

  From $3? His average entry price is probably, I don't know, $5, $6.

• 34:02David Rosenthal?

  Yeah, $5, $6, whatever.

• 34:03Ben Gilbert?

  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, well, it has to look like we had some real hard bargaining here.

• 34:19David Rosenthal?

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

• 34:33Ben Gilbert?

  Yep. And then, just as predicted.

• 34:36David Rosenthal?

  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 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.

• 35:16Ben Gilbert?

  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 want to consolidate power.

• 35:30David Rosenthal?

  You guys are out of here.

• 35:30Ben Gilbert?

  I need to be the guy here.

• 35:32David Rosenthal?

  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.

• 35:48Ben Gilbert?

  This is April 1978.

• 35:50David Rosenthal?

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

• 36:25Ben Gilbert?

  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 all these store openings, when Bernie is opening a Handy Dan in, I think it was Houston, Texas?

• 36:40David Rosenthal?

  Yep, Houston, Texas.

• 36:42Ben Gilbert?

  And Bernie should have been all, you know, excited about this. This is 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, because 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 Bernie has started to learn a little bit. He's like, well, if I tell you, then you know. And right now,

• 37:24Ben Gilbert?

  only I know. So I'm actually, I'm gonna, I'm gonna hold on to it. And Ken's like, no, come on, dude, tell me. And so now Ken knows the idea too.

• 37:33David Rosenthal?

  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 Saul Price. That Saul Price.

• 37:50Ben Gilbert?

  Of Price Club, and then what would eventually become Costco.

• 37:54David Rosenthal?

  Yep, yep, yep. And Bernie spills the beans to Ken, and he says, oh, I went to see Saul. And he's got this new store concept that he's launching down there in San Diego. And I'm telling you, man, it's gonna revolutionize the whole retail industry. It's just a matter of time before somebody brings Saul's concept to hardware, puts us out of business, to all sorts of other categories. We're all going the way of the dinosaur. He's calling this thing Price Club. And the idea is warehouses. The warehouse is the store. Customers come

• 38:37David Rosenthal?

  in and shop the warehouse. So there's no backroom.

• 38:43Ben Gilbert?

  All the square footage that we're paying money on, on our lease, is shoppable square footage.

• 38:49David Rosenthal?

  Yep. And even more than that, there's no distributors, or wholesalers, or anything. Price Club is the wholesaler. They're buying the goods directly from the manufacturers at wholesale pricing, and then marketing it up just a little bit, selling it to consumers. This is blowing everybody else in San Diego out of the water.

• 39:10Ben Gilbert?

  They're not even paying people to walk around and put the labels out. I mean, it's literally just people coming in to the warehouse and buying stuff right off the pallet. There's like, no cost in this business.

• 39:24David Rosenthal?

  Yep. And there's no reason why it shouldn't work just as well in hardware. And someday soon, somebody's gonna see Price Club. They're gonna do this for hardware, and we're gonna be out of business. So. Cut back a couple of months later here to breakfast at the Waldorf Astoria in New York. Ken's like, Bernie, you getting fired is the opportunity of a lifetime for both of us. You, me, Arthur, let's bring Ron along too. We're gonna go start that company. We got the golden horseshoe here.

• 39:53Ben Gilbert?

  Yep.

• 39:53David Rosenthal?

  So Bernie's excited, but he says, well, there's one problem. What about the money? Arthur and I don't have any. And this isn't a Handy Dan concept here. We're talking about a warehouse, but also a lot of stuff that we gotta put in it. And yeah, this isn't Price Club. We're not selling toilet paper and water bottles. We're selling expensive stuff like power tools and lumber. We need a lot of capital to put into this thing.

• 40:20Ben Gilbert?

  Yeah, Bernie and Arthur had gone away, done a little work, sketched out what the economics could be. And they realized even the best Handy Dan did about $3 million in annual revenue. I think these stores can do seven, eight, $9 million in revenue. And we're not just gonna stock like 8,000 items. We're gonna stock 25,000 items. It's not a 10,000 foot store like Lowe's or Handy Dan. This is gonna be like a 60,000 foot store. I mean, we need capital to make this happen.

• 40:48David Rosenthal?

  Yep. So Ken says, don't worry about the money. That's my job. I got it covered. More on that in a sec. So Bernie's, he's in, he says, oh, okay. But I have someone I need to go talk to first. I need to go back down to San Diego and see Saul.

• 41:04Ben Gilbert?

  Yep.

• 41:05David Rosenthal?

  Bernie goes back down to San Diego. He sits down, he has dinner with Saul. He explains the whole situation, the firing from Handy Dan, the labor relations suit from Sigaloff, et cetera, et cetera. Saul listens to all of it and he says, Bernie, do you think you're talented? Bernie says, yes, I think I'm talented. I did a great job at Handy Dan. Saul says, do you think you have the ability to build something, to create something, to do this on your own? Bernie says, yeah, yeah, I think this could be really successful. Saul says, then tell Sigaloff to go F himself and just do this thing. And so with Saul's blessing, Bernie's in.

• 41:45Ben Gilbert?

  And it is kind of important to keep Saul Price in the loop because Bernie is trying to ascertain, are you also going to meaningfully add home improvement to your concept here?

• 41:56David Rosenthal?

  Yes.

• 41:56Ben Gilbert?

  I mean, it's, it's an eerily similar thing. They would diverge over time and we'll talk about all the differences, but the pitch is customers are gonna love it because we're gonna have the lowest prices. We're only gonna make a 30% gross margin instead of what's industry standard in hardware retail at that time, 45%. It's gonna be a little bit different than Price Club in that they actually think they're gonna have the best selection. We have tons and tons of SKUs.

• 42:20David Rosenthal?

  We're gonna have tons of SKUs versus Price Club and Costco's famous low SKU count.

• 42:23Ben Gilbert?

  We're gonna have the, the best selection. I mean, Bernie thinks that is essential to making this model work because it has to be a one stop shop for any job that you wanna get done. You don't wanna go to the outdoor lawn and garden store and over to the lumberyard and the tool store.

• 42:39David Rosenthal?

  Plumbing store, et cetera, et cetera. Yeah, being a warehouse unlocks putting all this stuff together under one roof for the first time.

• 42:46Ben Gilbert?

  But it is different than the Price Club model of only having 4,000 items. They're gonna have to have 25,000 SKUs in these warehouses and work with tons and tons of suppliers to make good on the promise that if you're doing something, it is the all in one place to shop for the job that you're getting done. And there is one other big difference too. People know how to buy toilet paper and how to use toilet paper. They know how to buy a big jar of nuts and eat a big jar of nuts. They don't know how to build a deck.

• 43:19David Rosenthal?

  Yep.

• 43:20Ben Gilbert?

  They don't know how to install blinds. They don't know how to put in a floor. You need real expertise on the floor to make that happen.

• 43:30David Rosenthal?

  Yep.

• 43:30Ben Gilbert?

  So we already can kinda see there's two giant differences that I think Bernie is just trying to check on and say, you're not doing this, right? Because Price Club actually isn't set up to have an army of people with expertise and carry tons and tons of SKUs.

• 43:45David Rosenthal?

  Yeah, I think Bernie both really did need the pep talk from Saul. And he also wanted to make sure Saul wasn't gonna do this too.

• 43:54Ben Gilbert?

  Yeah.

• 43:55David Rosenthal?

  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 seventies with all this inflation and interest rates at 20%?

• 44:12Ben Gilbert?

  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.

• 44:19David Rosenthal?

  Yeah, 70% of Home Depot. 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.

• 44:32Ben Gilbert?

  $2 million.

• 44:33David Rosenthal?

  $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 ultimately the sticking point, you can't make this up, it's all inbuilt from scratch, is the car that Bernie drives. He drives an old Cadillac.

• 44:59Ben Gilbert?

  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 expensive car.

• 45:10David Rosenthal?

  You know, fancy Cadillac, 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. Bernie's like, costs, what are you talking about? This is an old Cadillac.

• 45:27Ben Gilbert?

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

• 45:32David Rosenthal?

  Yep, and Ross is like, no, no, it's the principle of the thing.

• 45:35Ben Gilbert?

  And it's a sticking point of two things. One, Bernie's like, no, we should be pragmatists. We shouldn't follow some dumb virtue signaling thing. But two, you're treating this like this is a division of your company, isn't it?

• 45:48David Rosenthal?

  Exactly, you're treating me like an employee again.

• 45:50Ben Gilbert?

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

• 45:55David Rosenthal?

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

• 46:08Ben Gilbert?

  Let's see, I'll do the math here live on air. So 70% of a market cap of $350 billion. 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 have had about 91% of their original percentage of the company.

• 46:33David Rosenthal?

  Yep.

• 46:33Ben Gilbert?

  So Ross Perot insisting on a Cadillac cost him $223 billion. Assuming he held, assuming he would have held.

• 46:44David Rosenthal?

  Right, which Ken did, by the way, still holds all of his shares. Yeah, you didn't miss here, Ben, their 230 billion, that's with a B, dollars. Oh, man.

• 46:58Ben Gilbert?

  So they're screwed, right? I mean, there's not a lot of places to find the capital. This thing requires a ton of money to get off the ground.

• 47:05David Rosenthal?

  Yeah, for ordinary people, but they got Ken Langone here, the greatest investment banker of all time. So he says, no, no big deal, you know, I get it, you know, that was pretty heavy handed to Ross. I'll just go round up a bunch of other investors instead and we'll put a syndicate together. And, um, all right, let's rewrite the deal for this. Rather than the investors getting 70%, let's give them 50% this time. And Arthur looks at him and he's like, wait, you mean we're gonna get a better deal by walking away from Ross Perot? To which Ken replies, Arthur, in the retail business, when you can't sell something, you mark it down. In my business, when we can't sell something, we mark it up.

• 47:52David Rosenthal?

  So great.

• 47:54Ben Gilbert?

  Which is a little facetious. In my mind, what happened here is when you're negotiating with one counterparty that's coming in for all the capital.

• 48:03David Rosenthal?

  They have leverage, yeah.

• 48:03Ben Gilbert?

  They have leverage. But Ken goes out and he finds 40 individual people.

• 48:08David Rosenthal?

  Yep, to put in $50,000 chunks.

• 48:11Ben Gilbert?

  Yeah, and so Ken basically writes the term sheet and then just, just going around all these people and saying, or do you wanna be in on these terms? It's kind of the, if you're a venture investor or you're a startup, it's the difference between you writing your own terms for the safe and writing in the number of the valuation and then just having people pile in on that number versus the lead investor coming in with a price round. They get to dictate the number and that number is usually

• 48:34David Rosenthal?

  Lower.

• 48:35Ben Gilbert?

  Not as friendly to you, yeah, as, as the number that you write on your own safe.

• 48:39David Rosenthal?

  Yep, it's still a great line though.

• 48:40Ben Gilbert?

  It's a great line.

• 48:41David Rosenthal?

  Totally sums up Kenny. All right, so Ken gets the money and they all get back together in LA and they get to work.

• 48:48Ben Gilbert?

  And the way the cap table breaks down now is the investors own 50%. Ken gets 5% in exchange for, you know, putting this deal together, finding the capital. And I think he put in something like 100K of his own.

• 49:00David Rosenthal?

  Yep, he put in 100K.

• 49:02Ben Gilbert?

  And then Arthur, Bernie, the rest of the management team would get 45%. And at this point, the, the founders of the Home Depot are set. It's Bernie, Arthur and Ken.

• 49:14David Rosenthal?

  For the moment.

• 49:15Ben Gilbert?

  Yes, they are missing one superpower that you need in a Avengers of retail team.

• 49:23David Rosenthal?

  Yes, yes, well, let's get to that. So Bernie and Arthur go back to LA and they get to work. And the first question is, all right, where are we gonna put the first store, the first warehouse? And as we talked about warehouses are expensive. LA isn't great because real estate is super expensive. There are not a lot of empty warehouses lying around. And also Handy Dan is still there. Handy Dan is still the best operator in the industry. Maybe not great if we start in our previous backyard here. We should go somewhere else in the country. So they start scouting around, looking for other cities to go to. Before they can decide on a location though, while they're still in LA, they get wind

• 50:08David Rosenthal?

  that someone else has beat them to the punch, has been down to San Diego, seen Price Club and has gone out and started Price Club for hardware, for home improvement. And it's right there in LA. It's a store called Homeco. And it's run by this wild man named Pat Farah. So Bernie and Arthur, they go to see the store. They walk in and

• 50:33Ben Gilbert?

  It's the exact vision that Bernie had.

• 50:36David Rosenthal?

  Yep, it's 130,000 square foot warehouse.

• 50:40Ben Gilbert?

  Which is way bigger.

• 50:42David Rosenthal?

  It's not even Home Depot then, it's Home Depot today.

• 50:44Ben Gilbert?

  Right, it's way bigger than those early Home Depots that would open that were like 60, 65,000 feet.

• 50:48David Rosenthal?

  Yep, it's got every hardware and home improvement item that you can imagine piled up high to the ceilings and priced cheaper than consumers had ever seen it before. In retail parlance, the strategy here is known as stack them high, watch them fly.

• 51:07Ben Gilbert?

  I mean, it's a bonanza. The consumers walk in and they're like, oh, what? This is crazy.

• 51:12David Rosenthal?

  Yep.

• 51:12Ben Gilbert?

  This is fun. It's like our Walmart episode where they were doing crazy stunts in the parking lot to attract people.

• 51:17David Rosenthal?

  It's a party, yes. Yes. It's a feeding frenzy.

• 51:19Ben Gilbert?

  Yes.

• 51:20David Rosenthal?

  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 going to read Bernie's description of what happens next here. Pat, the HomeCo 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.

• 52:02David Rosenthal?

  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 Farah is one of the most creative people any of us had ever met. Pat is to retailing what Michelangelo was to art. At least that's what Ken said by the time the meeting ended. Or the way I've heard Ken describe this is Pat was crazier than a bedbug, but he was a genius.

• 52:33Ben Gilbert?

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

• 52:37David Rosenthal?

  Yes.

• 52:38Ben Gilbert?

  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.

• 52:50David Rosenthal?

  Yep.

• 52:51Ben Gilbert?

  Who is going 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.

• 53:08David Rosenthal?

  Yes.

• 53:08Ben Gilbert?

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

• 53:14David Rosenthal?

  You gotta create heat in the store.

• 53:16Ben Gilbert?

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

• 53:19David Rosenthal?

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

• 53:27Ben Gilbert?

  Yeah, wasn't that like they wanted to tear down a wall, but they couldn't get a permit? And so Pat just drove a forklift into it. And when the inspector came out, he said, I don't know, someone just is an accident. But we definitely got to take out this wall now.

• 53:40David Rosenthal?

  Yep. So despite the 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 are in.

• 53:55Ben Gilbert?

  Well-funded, they got $2 million. That's not nearly enough to do anything that they need. They're operating on a shoestring budget here, but I'll come back to that.

• 54:02David Rosenthal?

  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 because Pat has not been paying any of his suppliers.

• 54:25Ben Gilbert?

  Pat needs an Arthur.

• 54:26David Rosenthal?

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

• 54:35Ben Gilbert?

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

• 54:40David Rosenthal?

  Yes.

• 54:40Ben Gilbert?

  Not

• 54:41David Rosenthal?

  No, 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 get the stuff and then I sell it.

• 54:51Ben Gilbert?

  And they bring in as a part of the due diligence on this auditors to look at, hey, 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 like distraught. He's like, what do you, what do you mean? I, this thing's going to run out of cash in the next few months. I'm doing great. And they're like, you're, you're not doing great, man.

• 55:17David Rosenthal?

  Yep, but God bless them. And this is Bernie's trusting nature and optimism. They say, okay, we're not going to buy HomeCo. You're going to go bankrupt, but we gotta get you on the team. You are special. After you file for bankruptcy, we want you to come in and join us as our fourth full co-founder here. And you're going to handle merchandising. We're going to take care of finances and operations. You're not going to go anywhere near that. But you are going to come in, you're going to stack them high and we're all going to watch them fly.

• 55:51Ben Gilbert?

  Yep. So I mentioned 2 million is not that much capital. They have to start getting really creative as they're thinking about the first store to make the business work on that. So it kind of has two things it forces. One, they gotta get the longest possible financing terms from suppliers.

• 56:10David Rosenthal?

  Yep.

• 56:10Ben Gilbert?

  So, you know, once the goods arrive at the store, it's like a ticking clock to make sure that they can move these goods. So they don't want them arriving anywhere, you know, other than the day before opening day. Two, they have to try to turn their inventory as fast as possible so they can get as much cash in the door from customers to pay the suppliers when the bills came due. This is what Pat was not doing. So this resulted in about half of the Home Depot's inventory at any given time actually being financed by the suppliers, which is still true today.

• 56:43David Rosenthal?

  Yep.

• 56:43Ben Gilbert?

  Just based on payment terms, because they can sell about half the items before they have to owe those dollars to the manufacturers. Two, they realized they couldn't afford to extend payment terms to their customers. Now, they were already thinking this way, but what it did mean is they had to focus on retail customers, like consumers, who would just pay cash or, you know, credit cards when they're buying an item so that the Home Depot could get money right away versus businesses.

• 57:11David Rosenthal?

  That are going to want credit.

• 57:12Ben Gilbert?

  Because the expectation with a business is I get credit at your store. They don't have the ability to offer credit at the store. So it's like, sure, if you're like a little pro contractor and you're expecting to pay in cash, we can deal with you, but we can't really deal with big businesses. So they just have to be generally very scrappy in every area of their business to get kind of the most bang for their limited bucks, especially in the early days.

• 57:35David Rosenthal?

  Yep, yep. And thus, the founding team, the Avengers of retail is complete. They're all assembled. Bernie, Arthur, Ken, Pat. There's just a couple more things they need, you know, like a actual location and a name. But before we tell those stories, now is a great time to thank one of our favorite company's WorkOS.

• 58:02Ben Gilbert?

  Yes. So listeners, there's this decision that every company faces. Once you find product market fit and you start scaling, what do you do next? Well, one big answer is move up market and find your first enterprise customers. Actually, it's funny, the way this fits into Home Depot is going after the first pros, not just these consumer customers.

• 58:22David Rosenthal?

  Yep. And today, the way you do that is WorkOS. They make it easy to add all the things that enterprise customers require. Single sign-on, skim, permissions, audit logs, all with simple drop-in APIs. And this matters even more in the AI era where products need deep access to sensitive data to be impactful. But there's a new twist. It's not just your customers' employees who need to get into your app anymore. It's their agents.

• 58:49Ben Gilbert?

  Ba-da-da.

• 58:50David Rosenthal?

  Da-da-da.

• 58:51Ben Gilbert?

  Which actually is a very Home Depot problem. About half of what Home Depot sells goes to a pro contractor who is buying on behalf of a homeowner.

• 59:01David Rosenthal?

  That's right.

• 59:01Ben Gilbert?

  It's someone else's money for someone else's kitchen that you're building and the scope of work that the pro and their end customer agree to.

• 59:09David Rosenthal?

  Yep. Agents are like the pros of software. They log in and take actions on behalf of the people who deploy them. Except the way most teams wire them up today is a shared API key or a borrowed human session, even worse. This is like handing your contractor a credit card and your house keys and just hoping a house comes out the other side.

• 59:30Ben Gilbert?

  Or my new bathroom or, yeah. Authentication used to just mean proving that you are you. Now it means proving that your agent is allowed to do this specific thing as you right now with limits. And that is what WorkOS has built the whole stack for. So their new system, WorkOS Airlock, doesn't just check which tools an agent can call. It checks the user's original intent so that the agent that you sent in to redo the kitchen doesn't decide to take out a load-bearing wall in the dining room.

• 1:00:00David Rosenthal?

  Which, you know, permissions tell you what an agent can do. WorkOS Airlock checks it was actually asked to do it. Turns out those are very different questions.

• 1:00:10Ben Gilbert?

  Getting agent identity right is how you get in the door with enterprises now. It is why OpenAI, Cursor Proplexity and friends of the show at Sierra and Anthropic, along with hundreds of other AI startups, build on WorkOS. You can learn more at workos.com and just tell them that Ben and David sent you. All right. So how is this company born in Atlanta? So far, we've been talking about California.

• 1:00:33David Rosenthal?

  So after the HomeCo interlude and bringing Pat on the team.

• 1:00:38Ben Gilbert?

  Who, by the way, we should say, all those investors who lost money, Pat felt so bad that later on, he would give them shares of his Home Depot stock equivalent to the value that they had lost in his first venture to make them whole. And if they held, that would be giant amounts of wealth for them in the long run.

• 1:00:57David Rosenthal?

  Very wealthy if they held, yes. So, pretty quickly, they all decide on Atlanta, as you said, Ben, for two reasons. So, one, the demographics of the southeast are good, promising. It's poised for lots of suburban expansion, even despite the tough climate of the 70s. But unlike California and the northeast, which are already built up, good real estate locations are still pretty cheap and available there. Which leads us into the second reason they choose Atlanta. Speaking of good real estate locations, they end up getting a sweetheart deal from JCPenney.

• 1:01:40David Rosenthal?

  You know, like the big national department store chain.

• 1:01:43Ben Gilbert?

  Yep.

• 1:01:43David Rosenthal?

  To sublease a couple of their locations in Atlanta. JCPenney had started a Kmart copycat subsidiary.

• 1:01:55Ben Gilbert?

  Is that what Treasure Island was?

• 1:01:57David Rosenthal?

  Yeah, I think it was a Kmart copycat. Yep.

• 1:01:59Ben Gilbert?

  Ah.

• 1:02:00David Rosenthal?

  Yep. And it was in the southeast, and it was called Treasure Island. And they had great locations. I mean, JCPenney was like a big company, big national retailer, had a great real estate team. But the Treasure Island subsidiary wasn't working, and it was failing. So they offer these crazy hardware startup guys four of the Treasure Island locations in the Atlanta suburbs.

• 1:02:24Ben Gilbert?

  As a sublease, right?

• 1:02:26David Rosenthal?

  Yep, as a sublease. Yep, at least a start. So Bernie, Arthur, and Pat, they all pack up their families, they move to Atlanta. But now they really need a name. They've got the locations, they can open these stores. So they hire a marketing consultant who comes up with a great idea. Can't wait to present it to the team. Bad Bernie's Build All. It's alliterative, get it? Like, it's awesome. You're Bernie, you're Bad Bernie. And we're gonna have all this, you know, advertising that's gonna be you behind bars in jail. Like, they put me in jail for these prices, they're too good.

• 1:03:00Ben Gilbert?

  Is that what the shtick was?

• 1:03:02David Rosenthal?

  That was what the shtick was gonna be.

• 1:03:03Ben Gilbert?

  I could not figure out why they would want to call it Bad Bernie.

• 1:03:07David Rosenthal?

  Yeah.

• 1:03:08Ben Gilbert?

  Oh, that is awful.

• 1:03:09David Rosenthal?

  It's like, he must be a crook because these prices are too low.

• 1:03:13Ben Gilbert?

  Which, of course, is exactly what the loan officer wants to hear at the bank when you're... I mean, speaking of being scrappy, they're just constantly going to lenders and trying to get capital so that they can buy inventory. But they're just trying to get loans so they can run the business.

• 1:03:32David Rosenthal?

  Yep. So, obviously, Bad Bernie's Build All is not gonna cut it. So Ken goes to the investor group that he put together to solicit ideas. And the wife of one of the investors suggests the Home Depot. And it sticks. Now, none of the guys ever wrote about this, so I don't know if this was part of the process or not. I don't know if it was intentional or not, but what are the initials of Home Depot?

• 1:04:08Ben Gilbert?

  And the stock ticker today.

• 1:04:09David Rosenthal?

  And the stock ticker, yeah. HD. Where did they get fired from by Sandy Stigaloff? Handy Dan, HD. Nice little, uh...

• 1:04:19Ben Gilbert?

  Homage.

• 1:04:20David Rosenthal?

  Tweak, shall you say? A little nod. Yeah, let's put it in a positive spin, a little nod.

• 1:04:24Ben Gilbert?

  Yes.

• 1:04:26David Rosenthal?

  Turns out, though, the consultant who came up with Bad Bernie's Build All wasn't a total waste because he's the one who suggests that they adopt the color orange as their company color, because it would stand out. And because, Ben, like you're saying, they're trying to be so cheap, they could buy circus tent material, like canvas for orange circus tents, and use it as their signage and save money on that. And that's how orange became the Home Depot color. Perfect. Which is totally brilliant. I mean...

• 1:04:58Ben Gilbert?

  It's distinctive.

• 1:04:59David Rosenthal?

  The orange apron stands out, it's distinctive, it's great.

• 1:05:02Ben Gilbert?

  Yep.

• 1:05:02David Rosenthal?

  So, that leads right into the opening of the first two Home Depots in Atlanta on June 22, 1979. They opened 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.

• 1:05:26Ben Gilbert?

  And it is obvious that it happened fast. When you look at some of these pictures, listeners will put some in the email. It's very clearly a big hardware store operating inside of a Kmart. I mean, it looks like that. They describe the concept in all the books they've written and all these accounts of early Home Depot as this vast warehouse with tall ceilings and merchandise piled to the ceiling. But the early pictures are, I swear, Kmart's, or even kind of JCPenney's. Like, it's pretty low ceilings, the racks that things are on are like standard Kmart-style racks. It's nothing like the Home Depot that you know of today.

• 1:06:12Ben Gilbert?

  The floors are this sort of like linoleum-type floors. And so, yeah, they're selling table saws and hammers and lumber out of, uh, discount...

• 1:06:24David Rosenthal?

  Kmart knockoff.

• 1:06:25Ben Gilbert?

  Kmart knockoff, right. Second-use real estate.

• 1:06:27David Rosenthal?

  Yep, yep, yep. There are 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 want to drive homeowners to your store. Well, weekend newspaper delivery highly correlated with homeownership.

• 1:06:56Ben Gilbert?

  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.

• 1:07:08David Rosenthal?

  Exactly.

• 1:07:08Ben Gilbert?

  If you blitz one local geography's radio, TV, newspapers, then you can kind of 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.

• 1:07:40David Rosenthal?

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

• 1:07:49Ben Gilbert?

  Whoops.

• 1:07:49David Rosenthal?

  Nobody knows about these stores opening. Instead, Bernie and the store associates, like the retail workers on the floor 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 into the store.

• 1:08:13David Rosenthal?

  Inauspicious beginning to 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. 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 Farah comes in at like 4:00 in the morning, the day of the opening. He sees the polished floors and he goes nuts.

• 1:08:46Ben Gilbert?

  Oh yeah, that was like a thing with this entire company for decades, is that they all worked from like the wee hours of the morning, 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 party, and we just work all the time, and all of us do it.

• 1:09:03David Rosenthal?

  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.

• 1:09:24Ben Gilbert?

  And it sends the wrong message. I think 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.

• 1:09:43David Rosenthal?

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

• 1:09:48Ben Gilbert?

  Yeah. And also, 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.

• 1:10:02David Rosenthal?

  Yep.

• 1:10:03Ben Gilbert?

  So sometimes that means if you are swinging by every morning on the way to your job site, sometimes it means that...

• 1:10:09David Rosenthal?

  If you're a pro, yep.

• 1:10:10Ben Gilbert?

  If you're trying to fix a deck and you realize, oh crap, I've got the wrong nails, then you can go get the nails mid-project. But they wanted it to be a place where they could treat it like the outsourced back-office store room inventory that was reliable and you could count on, and you could get in a just-in-time way whenever you were working on a project.

• 1:10:32David Rosenthal?

  Yep, whether you're a pro or a homeowner.

• 1:10:34Ben Gilbert?

  Yes, and it sure better feel like that.

• 1:10:36David Rosenthal?

  Yep.

• 1:10:37Ben Gilbert?

  Another classic story is, uh, their capital constraint. They don't have enough to actually buy all this merchandise and store a huge amount of inventory and stack it all the way to the ceilings, but they want to create the illusion that they do for customers. And so, a week before opening, they didn't have enough merch to fill the whole store. So Pat Farah calls the Delmar Cabinet Company and asks if they can borrow, not even buy, borrow 500 boxes of all different sizes. So the team stays up all night, folding them and putting them on the racks around the stores. And apparently, I haven't seen this video, but they filmed themselves walking around the store because it looked so, in their words, fabulously legitimate, that they had this...

• 1:11:22Ben Gilbert?

  Big expansive inventory. And they did the same thing with paint stacks. Pat found 2,000 empty paint cans for each store and they put special little labels. So they would know not to investigate too significantly, but stacked them 10 feet high.

• 1:11:39David Rosenthal?

  Whenever I go to Home Depot now, I'm going to have to start like knocking on cans and boxes and make sure that they're actually full.

• 1:11:45Ben Gilbert?

  Capital constraint is no longer their issue.

• 1:11:46David Rosenthal?

  Yeah. So despite the rocky launch of the first few stores, within a couple of months, they do get all these kinks ironed out and the first stores start humming. By the end of the year, that first year there in 1979, they opened the third store in Atlanta and they do $7 million in total sales for just that like six month operating period of the first year. So like startup retailer, $7 million in sales across two, and then at the very end of the year, bringing online a third store. This is right on with their aggressive financial projections that Ben, you were talking about

• 1:12:31David Rosenthal?

  that they needed to make this work.

• 1:12:33Ben Gilbert?

  And part of the appeal is they're blowing stuff out. I mean, friend of the show, Arvind Navaratnam, who I'll bring up several times on this episode for his extensive research on the retail sector and especially Home Depot. He found that they were in the early days, 10 to 25% below the prices of their competitors. And they did this through all the ways that you would expect. And we've talked about on the Costco episode, they're getting deliveries directly from the manufacturers on a pallet into the store. So they can take relatively low margins, not Costco low, but 30% gross margins on these products, and they can offer these screaming deals. I mean, 10 to 25% below that of competing retailers.

• 1:13:16Ben Gilbert?

  This should create crazy word of mouth. You gotta see the store. I just went. They have everything. I'm like discovering new projects to do and it's all cheap. It's amazing.

• 1:13:27David Rosenthal?

  Yep. I mean, just like Costco, no brainer proposition to the buying public.

• 1:13:33Ben Gilbert?

  And it's a different take on the classic retail triangle of price, selection and convenience. You usually have low prices, large selection and high convenience. And they definitely have low prices and large selection. It's in some ways not high convenience because what's high convenience to me is I can walk literally two blocks from here to a hardware store. Granted, it's low SKU count, but it's close. This element, this twist on convenience is yeah, you're going to have to drive kind of out into the sticks or here in Seattle, you know, down south of downtown, you know, in the neighborhood of Soto, but you can get everything. You only need to go to one store.

• 1:14:13David Rosenthal?

  It's one trip, like we've been talking about.

• 1:14:15Ben Gilbert?

  Yes.

• 1:14:15David Rosenthal?

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

• 1:14:44Ben Gilbert?

  Right, right.

• 1:14:44David Rosenthal?

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

• 1:14:50Ben Gilbert?

  Yep.

• 1:14:50David Rosenthal?

  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.

• 1:15:16Ben Gilbert?

  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.

• 1:15:28David Rosenthal?

  Yep. 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.

• 1:15:47David Rosenthal?

  Now, 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?

• 1:16:13Ben Gilbert?

  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.

• 1:16:34David Rosenthal?

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

• 1:16:38Ben Gilbert?

  Call me Warren Buffett over here, David.

• 1:16:42David Rosenthal?

  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.

• 1:17:09Ben Gilbert?

  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.

• 1:17:15David Rosenthal?

  Yeah.

• 1:17:15Ben Gilbert?

  As it always works.

• 1:17:16David Rosenthal?

  Ken knows how to get deals done.

• 1:17:17Ben Gilbert?

  Yes.

• 1:17:18David Rosenthal?

  So of the $6 million target, the plan is that half of that is going to be for expansion capital to go down into Florida and take over these leases. And half of that money is going to 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.

• 1:17:41Ben Gilbert?

  Great deal.

• 1:17:42David Rosenthal?

  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 going to 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 going to let our investment ride rather than cashing out at a slightly less than a 2X.

• 1:18:18Ben Gilbert?

  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.

• 1:18:26David Rosenthal?

  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 return on their capital.

• 1:18:55Ben Gilbert?

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

• 1:18:57David Rosenthal?

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

• 1:19:12Ben Gilbert?

  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.

• 1:19:20David Rosenthal?

  Nvidia, et cetera.

• 1:19:21Ben Gilbert?

  It went public at a tiny, tiny market cap. I mean, you could get in as a public shareholder at a $32 million valuation. I mean, even if you inflation adjust that, that's 122 million today. Just think about that. A company went public at a total market cap of 122 million dollars. It had so much running room ahead of it. That is how you get that giant multiple since IPO that the public had access to.

• 1:19:52David Rosenthal?

  Yep. But you needed to be, well, I was going to say crazy, but you needed to have vision to do this. I mean, it's IPO-ing as a four store hardware chain in Atlanta.

• 1:20:07David Rosenthal?

  This is not anthropic here where everybody knows them and they're giant.

• 1:20:10Ben Gilbert?

  A household name, right? This is a four store chain in Atlanta.

• 1:20:14David Rosenthal?

  Yep. So after the IPO, they go to Florida, goes great. Next they go to Texas by actually acquiring a copycat chain that had sprung up called Bow Water. That was a bad idea and cost the company a lot of time remaking those stores, but they turn it around. They're successful in Texas. Then they go to the West Coast. They go back to California. They beat Handy Dan. They go to the Northeast, then national rest of the country. The company is just like on a tear.

• 1:20:46Ben Gilbert?

  Yep. As of the IPO, they were tripling year over year in revenue. In 1984, they hit 31 stores. So that's Georgia plus Florida plus Texas. They're solidly a multi-regional chain here.

• 1:20:59David Rosenthal?

  Yep. And then quickly after that, in 1986, they hit a billion dollars in sales.

• 1:21:05Ben Gilbert?

  With 60 stores.

• 1:21:07David Rosenthal?

  They don't stop there. In 1989, they pass lows to become the largest home improvement retailer in America. Also in 1989, Handy Dan goes out of business. Finally get their clock cleaned by the new HD.

• 1:21:22Ben Gilbert?

  Meanwhile, Home Depot is now up to 118 stores nationally.

• 1:21:26David Rosenthal?

  Yep.

• 1:21:26Ben Gilbert?

  So it's this interesting question here. We've talked about how they speed ran to a billion dollars in revenue and 100 plus stores.

• 1:21:33David Rosenthal?

  National market leader in less than 10 years.

• 1:21:36Ben Gilbert?

  Right. Kind of ridiculous. The model, at least as we've explained it so far, clearly works at scale, but you should sort of have this question in your head of, well, how did they do all that when they had $2 million and just a scrappy team? I mean, this was a shoot the moon strategy. It needed to grow fast in order to make it work. They needed to have a flood of customers on day one at the store in order to justify all the different inventory that they had. And they needed to have suppliers give them great deals, even though they actually didn't have any proof points that they could sell in volume.

• 1:22:18Ben Gilbert?

  So I, I don't know, how do you think about why they were able to sort of? Act like a scale company even when they weren't at scale yet.

• 1:22:28David Rosenthal?

  I think it was that they combined Pat Farah's aggressiveness that he put together at Homeco with Bernie and Arthur's operations and finance genius to just barely make it all work.

• 1:22:43Ben Gilbert?

  And a lot of illusion along the way where they could sell the dream and selling the dream is fine if the dream comes true. It's only bad if you promise people all this volume and then you can't get any volume.

• 1:22:56David Rosenthal?

  But you know, specifically selling the dream to their suppliers, to the manufacturers.

• 1:23:00Ben Gilbert?

  Suppliers and to financiers to like max out the amount of debt that they would extend this company.

• 1:23:07David Rosenthal?

  All the debt capital they were raising.

• 1:23:09Ben Gilbert?

  So there's a great quote in Built From Scratch that I think kind of addresses this point because this was a disconnect I had the whole time of, in theory, you shouldn't be able to start like this. And I think it addresses the uniqueness of the people. "We had to be psychologists, lovers, romancers, and con artists to get our suppliers aboard. Our ability to paint a picture of how that would take place, the lowest prices, the widest selection, and great customer service was what convinced skeptical manufacturers to sell merchandise to us in those early years. We didn't have the buying power of our established competitors. On paper, we couldn't compete with Handy City or Handy Dan, but we were good at selling futures. You need to do this for us now, we'd tell vendors, because down the road, we will have 50 stores. Eventually, we will be the biggest in the industry. So

• 1:23:53Ben Gilbert?

  now is the time to get on board. And as in any long-term relationship, the key was getting to know the vendors and at the same time, understanding what motivated them. Then we motivated them. We appealed to their greed. We appealed to their enthusiasm for new concepts. We appealed to their need to get their products exposed." It's like sheer force of will, keeping all these plates spinning and convincing everyone in your ecosystem that you're legit.

• 1:24:19David Rosenthal?

  It's why you needed the Avengers to do this.

• 1:24:21Ben Gilbert?

  Right. And it's fine to sell the future as long as you make the future come true.

• 1:24:26David Rosenthal?

  American enterprise system here. The worst thing that happens if it doesn't work is you declare bankruptcy and like Pat Farah, you go join the next thing.

• 1:24:34Ben Gilbert?

  Yes.

• 1:24:35David Rosenthal?

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

• 1:24:43Ben Gilbert?

  Yes.

• 1:24:44David Rosenthal?

  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?

• 1:24:59Ben Gilbert?

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

• 1:25:09David Rosenthal?

  Yeah, yeah, yeah. So yes, exactly. This did happen. A lot of capital rushed into the space trying to do this. Yeah, Builder Square, Home Club, Homequarters Warehouse, Mr. Howe Warehouse. These are all copycats spun up in the 1980s. None of them are around today.

• 1:25:28Ben Gilbert?

  Okay, so why?

• 1:25:29David Rosenthal?

  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 kind of 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

• 1:26:11David Rosenthal?

  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.

• 1:26:46Ben Gilbert?

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

• 1:26:49David Rosenthal?

  Right, right.

• 1:26:50Ben Gilbert?

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

• 1:26:54David Rosenthal?

  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.

• 1:27:14Ben Gilbert?

  And we're generalizing here. I'm sure there were amazing associates at amazing hardware stores all over the place, but there wasn't this idea that, 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.

• 1:27:56David Rosenthal?

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

• 1:28:00Ben Gilbert?

  That is correct. They have a store support center because headquarters merely exist to support the stores.

• 1:28:06David Rosenthal?

  Yes, yes. Atlanta for Home Depot, the corporate address is the store support center, not the headquarters of the company.

• 1:28:14Ben Gilbert?

  But that's powerful to name it that and sort of instill that in the culture.

• 1:28:17David Rosenthal?

  Totally, totally.

• 1:28:18Ben Gilbert?

  So 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 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.

• 1:28:49David Rosenthal?

  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.

• 1:29:26Ben Gilbert?

  No, you're hiring a contractor. Who knows how?

• 1:29:28David Rosenthal?

  Right, exactly. But people want to 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 going to 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

• 1:30:13David Rosenthal?

  what they want to build.

• 1:30:14Ben Gilbert?

  Which is crazy, right? If you have a reasonably high-paying job as a contractor, switching gears and taking a retail job is typically not on people's bingo card.

• 1:30:25David Rosenthal?

  Good point. You would think on the surface that this is crazy. And this is what all the copycats miss. They just hire regular retail employees like Walmart does, or Costco does, or Target does, or what have you. Actually, though, if you're a tradesperson, there's a pretty good chance that a Home Depot job might be appealing to you. So back here in, I don't know, call it 1985, 1990, imagine you're a plumber, you're an electrician, maybe you're a carpenter. Sure, you can make more money in your trade than you can working at Home Depot. But being a contractor is not easy. Like even if you're successful, one,

• 1:31:09David Rosenthal?

  it's not steady. Cash flow is lumpy and unpredictable. Two, it requires a lot of driving. And then, three, it's manual labor. Like, what are you going to do if you get old? What are you going to do if you get hurt? What are you going to do if you can't work? Do you have a retirement plan? Well, if you're in a union job at like a big, you know, commercial constructor, sure. But if you're working residential, you're probably not in a union. You probably don't have a retirement plan. You probably don't have a fallback of savings. Okay, now Home Depot comes to town and they're recruiting. It's a stable job with regular hours with other people like you. You don't need to drive

• 1:31:53David Rosenthal?

  around. You don't need to manage clients.

• 1:31:57Ben Gilbert?

  Yep.

• 1:31:57David Rosenthal?

  You need to stock the shelves, but it's not hard labor. It's pretty attractive.

• 1:32:01Ben Gilbert?

  And there's all sorts of benefits to the Home Depot long-term of doing this, the most obvious of which is if a former tradesperson works in your store and they meet with a customer trying to do a pretty simple project, hey, I need to paint the walls of my living room. You do that and you have a pro help you pick out all the right stuff you need and get the right amount of paint. You suddenly feel empowered and you're like, you know what? I'm going to try drywall next time. And your basket size at Home Depot over the years and the scale of your projects goes up and up and up if you have good education and good service.

• 1:32:32David Rosenthal?

  So today, all this that we're talking about sounds like, sure, nice. I can go talk to the associates at Home Depot and they used to work in the trades and they can help me with my projects. You got to imagine back in the 80s and 90s before the internet and before YouTube.

• 1:32:50David Rosenthal?

  This was the only way that you were going to be able to even attempt to learn how to do this as a homeowner.

• 1:32:57Ben Gilbert?

  Yep.

• 1:32:57David Rosenthal?

  And so unless you copied Home Depot's labor employment model, you weren't actually going to be able to make the model work like they did.

• 1:33:06Ben Gilbert?

  And it's not just the employment model. There's a lot of other elements that kind of have an escape velocity component.

• 1:33:11David Rosenthal?

  Yep.

• 1:33:11Ben Gilbert?

  So we talked about who's in the stores, then there's what's in the store. At its core, it's the warehouse concept. You're eliminating middlemen, you're not paying distributors, you're shipping directly to the stores, you're passing savings on to customers, lower margins than elsewhere in the industry. This leads to you having the lowest prices. This is a well-understood warehouse model at this point, but they have something working against them, which is super high SKU count and lots of associates doing all this service. So they sort of have to figure out how to succeed despite sort of two big strikes short-term against the business model. Those are great.

• 1:33:49David Rosenthal?

  Against the economics of the model.

• 1:33:50Ben Gilbert?

  Long-term, right, but it is horrible operationally having lots of SKUs. It's hard to turn them over quickly. You have a bigger payroll at each store than you would in a Price Club-like model. So what are all the elements that make up for it and make it worth those investments? You have to encourage a buying frenzy. That is a huge part of making this work. When you have so many SKUs, you have to have reasons for people to buy all of them. And if you have low gross margin percentages, that can be okay as long as people are buying lots of items and coming back and buying them often because it's not the gross margins

• 1:34:32Ben Gilbert?

  percentages that put food on the table. It's the gross margin dollars that put food on the table. So you're just trying to sell enough volume and turn everything over fast enough that those gross margin dollars add up and justify holding all of that inventory in a Home Depot. So it's the crazy stunts, it's the heat in the store, it's the one-stop shop-ness. So you buy a bunch of things. It's starting to work with pro contractors as customers because they're going to buy huge amounts of things every week. They're going to be repeat buyers. Again, the whole goal here is we actually don't generate that much margin percentage. We have lots of SKUs and we have lots of inventory of each of those SKUs. So how do we get as much volume as possible?

• 1:35:16Ben Gilbert?

  So if you succeed in that and you're doing your job and you have stuff flying off the shelves, that means you can place ever larger orders with suppliers and that means you can ask for ever lower prices on your bulk orders. So you either can harvest that extra margin for yourself or what the Home Depot did, at least for a very long time, is pass that along to the customer, make the whole thing spin faster of, oh my God, they have even lower prices. So to summarize all this, friend of the show, Arvind Navaratnam at Worldly Partners, has studied this company at length and I'm just going to quote from his 100-page study that we'll link to in the show notes. "The big box warehouse format itself was the most visible innovation at the time in

• 1:36:00Ben Gilbert?

  '79, but the more enduring advantage was the operating system beneath it. Home Depot built a high-volume model and shared the benefits of scale with customers, generated greater traffic, strengthened supplier relationships, supported a broader assortment, and reinvested the resulting productivity into stores, associates, logistics, technology, and price, creating a self-reinforcing flywheel that became increasingly difficult to replicate as the company scaled."

• 1:36:25David Rosenthal?

  And there's one more element too, that turbocharges the whole thing, which is the company's stock price and the fact that employees, all the way down to and including the retail associates on the floors, the good jobs for the former tradespeople are getting equity in the company. So you're probably listening like, wait, what? How does the company's stock price make this model work better? A big portion of the associate onboarding and training was about the stock and the stock price and what equity is and building the connection between the stock price and

• 1:37:07David Rosenthal?

  your work on the floor. And it's all possible because the company went public so early.

• 1:37:13Ben Gilbert?

  Right. There was so much upside remaining.

• 1:37:15David Rosenthal?

  Yes. So for these early associate employees of the company, they build this real link and culture among the labor force of, hey, I serve my customers well on the floor of the store. I help them complete their projects. They come back, they buy more, my store's sales grow, the company's revenue goes up. And the company was small enough back in the early days that this made an impact on the company's revenue. The stock then goes up and then I get rich, like really rich. There are thousands and thousands of early Home Depot associates who became multimillionaires because of this.

• 1:37:57Ben Gilbert?

  Yeah.

• 1:37:58David Rosenthal?

  When we were talking to Ken in research for this, he put it this way to us. When you tap into people's basic instincts, good things happen.

• 1:38:05Ben Gilbert?

  Yeah. I mean, if you come from a Silicon Valley tech startup, this is second nature to you.

• 1:38:10David Rosenthal?

  Yep.

• 1:38:10Ben Gilbert?

  But this really wasn't done in retail. This is really the first time that a scaled company, sort of at mass employment, has retail employees who are participating in this like giant wealth generation machine. And because it was compounding at 25% per year, I mean, it's the best thing they could have put their money in.

• 1:38:31David Rosenthal?

  The way it worked was if you were a salaried employee, which started at assistant store manager, you got stock options. If you were an hourly employee, you couldn't be granted stock options, but you got this stock purchasing program, which in the early days they set up as you can buy stock at a 15% discount to the current trading price and we'll give you a no-risk guarantee. So if the price ever goes down below what you bought it for, we will fill the gap for you. And then they did all this education to the associates and say, hey, you really need to do this.

• 1:39:06Ben Gilbert?

  And the whole thing works because they were able to position it to Wall Street as a growth stock. If you don't have a financier who's doing that, or you don't have the business results to justify it, then this cool party trick doesn't do anything for you because the people aren't in the break room getting rich.

• 1:39:21David Rosenthal?

  Yes. And it all comes back to the specialty retailer model versus general merchandise. Let's say you're Costco or Walmart. You set up the same thing. No associate on the floor is going to be that good at customer service that a customer is going to come in and buy $10,000 worth of toilet paper.

• 1:39:45David Rosenthal?

  Hardware and home improvement is different. So there are these legends within the company. The one that gets told often is the faucet washer that leads to a kitchen remodel. So legend is, customer comes into the store with a faucet that he's brought in from his kitchen sink. He says, hey, my faucet is leaking. I think I need a new faucet. I know it's probably going to be a couple hundred dollars. And the store associate who has plumbing experience looks at the faucet and says, oh, no, no, you don't need a new faucet. Like, we can fix this. Let's go get a new washer. That's all you need. We'll get a new washer. It's 25 cents. Install it and you're going to be good to go. They do. The customer's

• 1:40:27David Rosenthal?

  so happy. He goes home. He tells his wife and family. Next thing you know, a couple of weeks later, he's back and he says, you know, we've been thinking about a kitchen remodel. We're going to do it with you guys here at Home Depot and it's $100,000 sale. Because of hardware and home improvement in this category, this stuff happens and customer service directly drives it.

• 1:40:50Ben Gilbert?

  Yep. Yep. That's a great point. The continuation of that story is that someone makes a comment like, boy, your, your boss is going to probably fire you. You could have sold a $200 faucet and you only made 25 cents on the washer. You're probably going to get fired for losing that sale. Bernie Marcus hears about this and he's like, calls the guy and says, I think we should promote you.

• 1:41:08David Rosenthal?

  Yeah.

• 1:41:09Ben Gilbert?

  Thank you. That's the exact right customer service mentality.

• 1:41:12David Rosenthal?

  We're going to give you another equity grant right now.

• 1:41:14Ben Gilbert?

  Right. So listeners, a fun aside, one fellow listener and friend of the show is Frank Blake, who famously was the Home Depot CEO going into and navigating the company through the Great Recession, 2007 through 2014.

• 1:41:29David Rosenthal?

  Yep.

• 1:41:29Ben Gilbert?

  And he gave us this great quote when we were talking to him for research. He said, "The best sign of cultural health is walking into the break room and seeing the associates watching the stock price."

• 1:41:41David Rosenthal?

  Yeah.

• 1:41:42Ben Gilbert?

  We want that. We encourage that here.

• 1:41:44David Rosenthal?

  Yeah. It's like the opposite of prevailing Silicon Valley wisdom where like, oh, you know what? Your employees checking the stock price. At Home Depot, at least for many decades, it was, no, we, we very much want our employees checking the stock price and thinking about how their day is going to impact that.

• 1:41:59Ben Gilbert?

  So the last thing that I think is fascinating about this model is the original hunch of why the business would work despite all the trade-offs was correct. In 1980, Home Depots were twice as large as Lowe's and they carried three times as many products, which if you know us and our Costco zealotry, that sounds like a lot of danger. These are all downsides, right? But what ended up happening is they had four times as many transactions as those smaller Lowe's stores. So there really was this benefit where when you made those investments in more square footage, more inventory, more SKUs, the return on that investment actually

• 1:42:42Ben Gilbert?

  increased at scale as you added more things. The word of mouth, the one-stop shopping, the feeling of the buying frenzy, it more than paid for all that additional allocation that you were making in inventory and square footage. And you know, that was a, that was a Bernie hunch before they actually opened the first store, but he was right. That, that is the kind of key insight behind the whole thing is that actually there are returns to your investment that increase once you get out beyond a certain SKU count and out beyond a certain square footage.

• 1:43:16David Rosenthal?

  Yep. And again, was super unique to home improvement. Because there's no cap on the amount that a customer can spend, you will get super whale transactions happening of $100,000 kitchens, home remodels, et cetera, et cetera.

• 1:43:33Ben Gilbert?

  Yep. So this is basically the core model that takes Home Depot to the $350 billion market cap company today.

• 1:43:43Ben Gilbert?

  Except.

• 1:43:43David Rosenthal?

  Except it's not exactly a straight line.

• 1:43:48Ben Gilbert?

  Yes, there is a fall from grace coming listeners before we get to the Home Depot of today. But first, now is a great time to thank our friends at Anthropic, the makers of Claude. So David, Anthropic published a number over the summer that I have not been able to stop thinking about since I saw it for the first time. They looked at 1.2 million Claude cowork sessions over the course of three weeks across a ton of companies, like 600,000 organizations. Software development, which I thought would be a huge part of it, was less than 9% of those sessions. I assumed it'd be way higher.

• 1:44:26David Rosenthal?

  I know. The biggest category by a mile was business process and operations, which was about a third of all cowork usage. Then content and writing was the next highest. So if your mental model is still AI writes code, like this is very different in the data.

• 1:44:45Ben Gilbert?

  Yeah, and it's a perfect lens for the company that we're covering today with Home Depot. Home Depot has thousands of employees and very few of them are ever going to open a command line interface. Their job might be merchandising or supply chain or figuring out what their stores should be putting on the shelves. And so there's a lot of use cases there for AI, even though almost none of them are writing code.

• 1:45:06David Rosenthal?

  Yep, these are all types of cases that require analysis in documents and spreadsheets all day long. And that is exactly what Claude cowork is built for. On your desktop, working in your actual folders, not just a chat window.

• 1:45:20Ben Gilbert?

  And that's the important part for you listeners. As is so often the case, you are waiting on engineering resources to free up in your company to build some tool. No longer with cowork, Claude can build you the tools that you need to do your job better. And in fact, that is even the case for us here at Acquired HQ.

• 1:45:38David Rosenthal?

  Absolutely.

• 1:45:39Ben Gilbert?

  We have a bunch of proprietary tools that live in web dashboards that Claude has just built for us that handle tons of our process and automation. So if you want to be like us and build tools using Claude cowork to make your organization work better, you can go to claude.ai/acquired and just tell them that Ben and David sent you.

• 1:46:01David Rosenthal?

  So back to Home Depot not exactly being a straight line from here. So at first, things are going great, as we talked about. What's the models 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.

• 1:46:27Ben Gilbert?

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

• 1:46:32David Rosenthal?

  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.

• 1:46:53Ben Gilbert?

  Now JP Morgan.

• 1:46:54David Rosenthal?

  Yep, that's right. And 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 because it turns out there's some segment of consumer homeowners who also want pro level tools and hardware and supplies.

• 1:47:31Ben Gilbert?

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

• 1:47:38David Rosenthal?

  Absolutely.

• 1:47:38Ben Gilbert?

  They also hire dedicated salespeople to handle pros. They stand up a pro desk in a lot of their stores. They offer, this is a big change for them, pro pricing.

• 1:47:50David Rosenthal?

  Yep.

• 1:47:50Ben Gilbert?

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

• 1:47:54David Rosenthal?

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

• 1:48:03Ben Gilbert?

  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. You know, you don't want to 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.

• 1:48:22David Rosenthal?

  Yep.

• 1:48:22Ben Gilbert?

  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 relevant data point.

• 1:48:35Ben Gilbert?

  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.

• 1:48:50David Rosenthal?

  Yep.

• 1:48:50Ben Gilbert?

  With an annual spend of $6,500.

• 1:48:54David Rosenthal?

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

• 1:48:59Ben Gilbert?

  Yep.

• 1:49:00David Rosenthal?

  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.

• 1:49:19Ben Gilbert?

  So almost 20 years.

• 1:49:20David Rosenthal?

  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 corporate management wasn't exactly tip top, shall we say, in this era.

• 1:50:06David Rosenthal?

  And the lawsuit also kind of reflects the stores. I mean, Home Depot is up to this point were like a man's place, you know? It was guys buying hardware from other guys and.

• 1:50:19Ben Gilbert?

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

• 1:50:22David Rosenthal?

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

• 1:50:30Ben Gilbert?

  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.

• 1:50:41David Rosenthal?

  Yeah, it was there for sure.

• 1:50:42Ben Gilbert?

  Yep.

• 1:50:43David Rosenthal?

  Yep. So, okay, that's problem number one. Problem number two, we didn't talk about this as much in the model because it didn't survive the early days. But part of the philosophy of Home Depot as it was getting built was radical decentralization.

• 1:51:01Ben Gilbert?

  And it's awesome because the stores get to use their local knowledge of the market to make sure that they're buying all the right stuff, the right quantities, that they're super in touch with the customer. And that leads to, I think Bernie estimated 15% to 20% higher sales per store because the regions were making their own decisions.

• 1:51:20David Rosenthal?

  Yep, yep. But as Home Depot scales, the benefits of doing that really start to get outweighed by what you're leaving on the table in terms of.

• 1:51:30Ben Gilbert?

  Absolute chaos.

• 1:51:31David Rosenthal?

  Scale economies with purchasing power if you were to centralize your merchandising organization.

• 1:51:37Ben Gilbert?

  Right, so there's chaotic operations. There's lack of being able to use technology and systems because it's so fragmented everywhere. There's a zillion decision makers and a zillion negotiators with all these different vendors. And the thing you're talking about, David, you can't get the best prices from your suppliers.

• 1:51:54David Rosenthal?

  From your suppliers if you've got 57 different regional or even store level buyers negotiating with them.

• 1:52:00Ben Gilbert?

  Which wasn't an issue at any other store because Home Depot invented the concept of the national hardware store chain.

• 1:52:07David Rosenthal?

  Right, there wasn't even an opportunity to do national buying for hardware before Home Depot because nobody was buying nationally. Like, sure, absolutely, there were still regional differences in what like Arizona needed versus what Alaska needed. But like a table saw is a table saw. You don't need different table saws for different parts of the country.

• 1:52:27Ben Gilbert?

  Yep.

• 1:52:27David Rosenthal?

  So that's two. And then three, the market is changing. As we get into the end of the 1990s and into the early 2000s, the US housing market is rapidly inflating. This is everything that would lead to the financial crisis and the subprime crisis.

• 1:52:45Ben Gilbert?

  Yeah, you're putting down no cash and managing to get a house because they're willing to lend against invisible earnings.

• 1:52:52David Rosenthal?

  Yes, yes. So obviously, that contained a lot of bad things for the American economy and for home improvement retailers to come. But during the run up.

• 1:53:03Ben Gilbert?

  Right, they're building houses at an unmatched clip.

• 1:53:05David Rosenthal?

  Yep. And it reopens the market for Lowe's to come back as a real competitor. So while the housing market is inflating here in the late 90s and early 2000s, Lowe's completely changes their strategy.

• 1:53:19Ben Gilbert?

  Yeah, in 1990, they got wise to what was happening to all of their regional competitors and the smaller format stores. And they basically studied Home Depot and said, that is the correct way to do this. So I think it was 1990, they opened their first warehouse store and they did a complete about face. Obviously, when you go to a Lowe's today, it's a very, very similar concept. But this is like a real innovator's dilemma, impressive thing that they did to shed their old operations and formats and close those and open only Home Depot style stores, starting in the early 90s.

• 1:53:52David Rosenthal?

  Yep. And here is the market is changing. You're getting younger buyers of homes, you're getting more women buyers of homes. What they want and need from home improvement is actually starting to shift a little bit from what Home Depot is offering.

• 1:54:08Ben Gilbert?

  Didn't Lowe's come in with a slogan, "Improving Home Improvement"?

• 1:54:12David Rosenthal?

  Exactly, exactly. Tracking the slogans in this industry will tell you everything that is going on strategically. Yeah, "Improving Home Improvement" is aimed directly at Home Depot and directly at appealing to younger, more casual, often more women buyers. These are buyers that aren't necessarily doing home remodels. They're doing home makeovers or home refinishing. They're like weekend sprucers versus weekend warriors. So they're buying more kitchen and bath products, furnishings. They're not buying lumber and plumbing pipes and stuff like that.

• 1:54:49Ben Gilbert?

  So Lowe's starts to shift. They actually used to appeal more to pros and then in this era, they really start shifting more to the end consumer, the DIY casual consumer and having a more pleasant shopping experience than Home Depot's sort of rugged, appealing to pros environment.

• 1:55:07David Rosenthal?

  Yep. And what does it also coincide with? The internet. So all of a sudden, for the first time, there's a way to get educated as a consumer, as a DIYer about how to complete these projects without needing to go to these tough, burly, former pros that are staffing the Home Depot.

• 1:55:29Ben Gilbert?

  Now, it'd be a while still before YouTube was founded. This is, you know, the late 90s, not the 20 teens. But you start to get people sharing information on forums and things like that.

• 1:55:39David Rosenthal?

  Yep. All of this in aggregate, though, opens up the market for a real competitor for the first time.

• 1:55:45Ben Gilbert?

  Yep.

• 1:55:46David Rosenthal?

  So, once Arthur takes over Home Depot, he runs the company for a couple of years, but these issues start piling up and he's also getting tired, just like Bernie, when Bernie retired. And the company is just getting bigger and bigger. By 2000, it's over $40 billion in revenue. They have over 1,000 stores and over 200,000 employees. And so one day, at a board meeting, Ken asks Arthur about succession, like, hey, man, you seem like you're kind of getting tired too. If you need to step down tomorrow, is there anybody here at the company that could take your place?

• 1:56:21Ben Gilbert?

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

• 1:56:25David Rosenthal?

  And so Arthur goes away, thinks about it, 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 can, 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.

• 1:56:48Ben Gilbert?

  It is worth saying, they 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. And that works super well. But what they didn't cultivate, at least in this era, was who's going to succeed these founders?

• 1:57:15David Rosenthal?

  So the board and Arthur together decide, hey, we got to bring in a external search firm and bring some more management talent into the company. And the plan is that they're going to 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.

• 1:57:49Ben Gilbert?

  It's amazing.

• 1:57:49David Rosenthal?

  Who has just gotten fired by Sandy Weil at Citigroup.

• 1:57:53Ben Gilbert?

  Yes. And Jamie loved the 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, you know, I've never actually been to a Home Depot before considering this opportunity. And 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? I'm like pretending to be a home improvement.

• 1:58:18David Rosenthal?

  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.

• 1:58:34Ben Gilbert?

  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 cultural indicator.

• 1:58:46David Rosenthal?

  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 going to succeed Jack Welch.

• 1:59:22Ben Gilbert?

  The most storied CEO in America at the time.

• 1:59:24David Rosenthal?

  Yeah, history has kind of forgotten this now because GE frankly has fallen apart. But.

• 1:59:32Ben Gilbert?

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

• 1:59:35David Rosenthal?

  Yes, yes, it actually.

• 1:59:36Ben Gilbert?

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

• 1:59:43David Rosenthal?

  Or at least until some of the Nvidia drawdowns.

• 1:59:45Ben Gilbert?

  Oh, but yeah, these days, like these, these drops that happen at big tech companies is, you know, dwarfs everything in comparison. But at the time, that was the story is post-Jack Welch, GE just completely destroying shareholder value.

• 2:00:01David Rosenthal?

  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.

• 2:00:19Ben Gilbert?

  Yep.

• 2:00:20David Rosenthal?

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

• 2:00:33Ben Gilbert?

  Sounds great.

• 2:00:34David Rosenthal?

  Yes, sounds great, right? Well, we'll see. So back to Home Depot. So here's Ken and the Home Depot board thinking, man, we sure could use some of that operational excellence stuff around here. I think that would really be good for the company.

• 2:00:51Ben Gilbert?

  And if you're going to go cherry pick the best corporate leadership that you could possibly get, the GE bench is probably the place to go hunting. You couldn't get Jamie Dimon, we don't have it here. Let's start at the top.

• 2:01:02David Rosenthal?

  GE is the consensus best place to look in America for management.

• 2:01:06Ben Gilbert?

  Which is crazy, looking at the three choices to succeed Jack Welch and how disastrous it was for all three of them and the three places they went.

• 2:01:17David Rosenthal?

  Yes. So in November of 2000, Jack Welch announces that Jeffrey Immelt will be his successor to take over as GE's next CEO. And Ben, as you were alluding to, the other two candidates for the GE job were James McNerney, who quickly leaves to become the CEO of 3M.

• 2:01:38Ben Gilbert?

  You may know his name because he would then leave 3M to go and become the CEO of Boeing.

• 2:01:45David Rosenthal?

  Yeah. We all know how that turned out. And then the other candidate, Bob Nardelli, who Ken Langone, again, being on the GE board here, knows well and loves, loves Bob. So immediately after the succession news comes out at GE, Ken calls up Nardelli and pulls out the same line that he used on Bernie 20 years earlier. You've just been hit in the ass with a golden horseshoe.

• 2:02:17Ben Gilbert?

  Guess where you get to go work now?

• 2:02:18David Rosenthal?

  Guess what we are going to do together now that you didn't get the GE CEO job? I'm going to bring you into Home Depot. So the board immediately pivots and offers Nardelli the president and COO job and says, you'll come in, you'll be here for a little while, Arthur's going to retire, you will be his appointed successor. And so to incentivize Nardelli to take this job, they say, we'll make you whole on your GE stock options. We're going to give you $150 million equity package to come join Home Depot.

• 2:02:58David Rosenthal?

  Bob says, okay, great. I clearly can't stay here at GE. I'm in. And then at the last minute, after they've already agreed on a deal for Nardelli to come in and be president and COO under Arthur, Nardelli calls the recruiter and has the recruiter tell the Home Depot board that he's changed his mind. He's only going to come on board if he becomes CEO right away. He's not going to wait. This leads to a awkward, shall we say, Home Depot board meeting where the board presents this new development to Arthur. He says, okay, I'm okay with it. Bob can have the CEO job.

• 2:03:42David Rosenthal?

  But deep down, he's not really okay with it. And part of it, I think, was Arthur not being ready to let go. The other part of it, I think, was a genuine spidey sense that, hey, what is this last minute bait and switch from Nardelli? Is this a red flag here?

• 2:04:02Ben Gilbert?

  Well, Arthur would later say, A, this is faster timing than I was thinking for me to leave. But B, Arthur would later say in an interview, I thought he was the wrong choice by a lot, even though I'm the one who initiated an external search.

• 2:04:16David Rosenthal?

  Yep.

• 2:04:16Ben Gilbert?

  To your point, though, I think the, yeah, yeah, I'm okay with it, is a little bit of like a test to the board of what I would like is you to come back to me and say, actually, we love you so much. Who is this guy? No, get him out of here. We think you should stay CEO.

• 2:04:31David Rosenthal?

  Yep. Well, that's not what the board says.

• 2:04:35Ben Gilbert?

  They take him at his word.

• 2:04:36David Rosenthal?

  They take him at his word. This leads to a big fight, like a big fight between Arthur and Bernie and Ken, as chronicled in Ken's book, I Love Capitalism, because Bernie's still on the board at this point, and I think pretty severely damages their relationships going forward. Regardless, the board does bring Bob in as CEO. Arthur resigns as CEO, but stays on the board for just a couple of months. And within six months, he fully steps away and is gone from the company. We'll come back to Arthur all the way at the end, but.

• 2:05:16Ben Gilbert?

  He's got his own golden horseshoe.

• 2:05:18David Rosenthal?

  Golden horseshoe, yeah.

• 2:05:19Ben Gilbert?

  Spoiler alert, he would, I think, become the highest net worth of any of these folks.

• 2:05:26David Rosenthal?

  So Nardelli comes in as the new Home Depot CEO. And to the outside world, this looks like a huge win. I mean, they got essentially the most eligible corporate bachelor in America, one of the two runners up to the GE job. And as you're imagining, that's probably not a great dynamic you want to enter into for a new relationship, be it romantic or in a boardroom.

• 2:05:53Ben Gilbert?

  I wanted that job, but I got this one. So I'm going to try to make this job like the one that I wanted.

• 2:05:58David Rosenthal?

  Yeah, yeah. Now, to be fair, the first couple of years of Nardelli's tenure are great.

• 2:06:05Ben Gilbert?

  Maybe even the first three or four.

• 2:06:07David Rosenthal?

  Yeah, yeah, yeah. Ken Langone still says to this day that for the first four years, everything Nardelli touched turned to gold. Turns out that a lot of the issues that had been popping up in the company that we talked about a minute ago could be fixed with great operational excellence. And there was a lot of low hanging fruit around.

• 2:06:29Ben Gilbert?

  Yeah, when he came in in 2000, there had been four consecutive quarters of slowing comparable store sales growth. There's clearly some serious underlying issue there. The older stores, they were getting really run down.

• 2:06:42David Rosenthal?

  And yeah, this is where Lowe's was coming back and beating Home Depot.

• 2:06:46Ben Gilbert?

  The extreme decentralization made things very chaotic. Nardelli referred to the company in an interview as having been in startup mode for 20 years. Clearly, what Nardelli missed is how important being entrepreneurial was to the company's success. He was about to embark on a mission of operational excellence, but you can operationally excellence yourself out of being entrepreneurial. If you take away all of people's ability to take ideas and act on them and have fun and all that stuff like you, that could kill the company.

• 2:07:19David Rosenthal?

  Yep, yep.

• 2:07:19Ben Gilbert?

  The other things he did was just this, if you look across every system, purchasing, replenishment, merchandising, all operating functions, he would centralize. He took nine separate buying offices and folded them into one. So they were suddenly getting better prices from their suppliers. He invested in a bunch of new technology systems. I mean, the, the answer here isn't decentralized or centralized. You have to have the balance where you centralize, where there's actually a benefit of getting all the data in one place, or doing a bulk negotiation, or doing analysis on one data set in a system of record. But you definitely don't want to centralize it when you can push decision making closest

• 2:07:59Ben Gilbert?

  to the customer, where people can see like all the idiosyncrasies of any given situation.

• 2:08:05David Rosenthal?

  Yep. Yeah, here's the way I would characterize it. There was a bunch of low hanging fruit. Operationally, Nardelli was excellent at implementing all the changes that needed to be made on that front at Home Depot. But he was all about Six Sigma, all about operational excellence. And he was the GE guy through and through. And operating the Home Depot was not the same thing as manufacturing turbines at GE.

• 2:08:38Ben Gilbert?

  Right.

• 2:08:38David Rosenthal?

  So if you go back to the whole thesis of Home Depot here, and this idea of being a specialty retailer.

• 2:08:46Ben Gilbert?

  With great service.

• 2:08:47David Rosenthal?

  Meaning you need to service your customers. It's not to say that GE doesn't service their customers, but it's a very different dynamic. At GE, line level employees are completely replaceable.

• 2:09:01Ben Gilbert?

  Right, by design.

• 2:09:01David Rosenthal?

  This is the whole point of Six Sigma Black Belt. We are going to drive out costs and inefficiencies ruthlessly within the organization. It's the system, it's not the people. That's the opposite of the 25 cent kitchen sink washer sale, leading to a $100,000 kitchen remodel on the sales floor at Home Depot. You just can't measure that in a Six Sigma spreadsheet management process kind of way.

• 2:09:31Ben Gilbert?

  It reminds me of why Jeff Bezos doesn't like to have his meetings have a hard end time, because he likes to be able to wander, to invent and wander. And if you're going to invent, you need to wander. It's like the, if the job of the Home Depot store is to have an associate wander with a customer who's trying to figure out how to solve some problem or dream up some project, that is really hard to optimize because it's kind of an unbounded problem.

• 2:09:58David Rosenthal?

  Yep. So what does Nardelli do? He replaces huge swaths of the associate on the floor retail workforce in Home Depot with part-time, general retail labor. So doing away with the whole philosophy that made Home Depot of we have knowledgeable people who are gonna make that 25 cent washer sale and fix a customer's kitchen sink and have that lead to something bigger down the line. All that's going to go, we're going to bring in 16 year olds on part-time jobs to just ring them up at the cash register.

• 2:10:40Ben Gilbert?

  And not only that, there's just going to be less of them, period. According to Arvin's research, associates per store dropped from 200 to 170 over the course of 2000 to 2006.

• 2:10:51David Rosenthal?

  Yep.

• 2:10:52Ben Gilbert?

  The 15% reduction in headcount, just like, all right, we've fewer people to help you solve your problems now.

• 2:10:57David Rosenthal?

  Yep. So those are the associates on the floor. Now the store managers. Before Nardelli, all the store managers were promoted up, Ben, as you said, from store associates. And they were focused on their stores, their customers, doing what was right, et cetera. Nardelli changes the criteria for store managers, now preferring candidates with college degrees.

• 2:11:20Ben Gilbert?

  So now there's no promotion path, because no one's starting on the floor with a college degree. Every single person that you're hiring into those associate jobs doesn't have one. So what you're just telling them is like, you're locked in this forever job with no path now.

• 2:11:33David Rosenthal?

  And think back to the old workforce, all these tradespeople who are highly educated, highly knowledgeable, they have trades degrees if they have degrees at all. They don't have college degrees. That has nothing to do with either knowing about hardware and home improvement or being a great retailer.

• 2:11:48Ben Gilbert?

  Yeah. I mean, it weakened the culture. Zooming out, there's a great case to be made that the only sustainable competitive advantage this company had were their scale economies and their culture. This entrepreneurial, we can figure it out thing. This is heavily destructive to that in a way that you may never be able to fully rescue and get back.

• 2:12:08David Rosenthal?

  So a couple of 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.

• 2:12:34David Rosenthal?

  Home Depot goes from near the top to dead last.

• 2:12:37Ben Gilbert?

  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? All the charts are up into the right.

• 2:12:50David Rosenthal?

  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

• 2:13:35David Rosenthal?

  to the company's stock price.

• 2:13:38Ben Gilbert?

  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, you're comped on what other people think of the company.

• 2:13:59David Rosenthal?

  Ben, it's like you're reading from Nardelli's script right here. So Business Week would report on this because 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 going to agree to my comp to be tied to it. The problem in Home Depot is that this is fundamentally going against a key part that we talked about a minute ago of the company's model.

• 2:14:29Ben Gilbert?

  No stock go up, no machine work.

• 2:14:31David Rosenthal?

  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 big week former GE guy coming in as CEO and saying, yeah, I'm going to get rich regardless of whether the stock price goes up. And the stock price stops going up.

• 2:15:00Ben Gilbert?

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

• 2:15:02David Rosenthal?

  Well, here's what's going on. Even though he doubles revenue and profits, he actually mostly does it by doubling store count. 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 and comparing Home Depot to Lowe's, which is growing same store comps 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.

• 2:15:47Ben Gilbert?

  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.

• 2:16:04David Rosenthal?

  Yeah. Well, they think it's shrinking because Home Depot is also in the market buying up stock and that's not moving the price up. So.

• 2:16:14Ben Gilbert?

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

• 2:16:26David Rosenthal?

  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.

• 2:16:40Ben Gilbert?

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

• 2:16:45David Rosenthal?

  Yep.

• 2:16:46Ben Gilbert?

  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.

• 2:16:57David Rosenthal?

  Yep. Yep.

• 2:16:58Ben Gilbert?

  Which like, when you come from a conglomerate like GE.

• 2:17:01David Rosenthal?

  That's what you do.

• 2:17:02Ben Gilbert?

  That's what you do. And on top of all of this, some of what made Home Depot unique starts to fade. They took gross margin up, which results of course in more profits, but prices that aren't blow away, they're closer to market competitive. And actually, if you look at their gross margin profile, it's remained elevated ever since. So it's not a huge difference. The gross margins are still lower than typical retail and certainly lower than that 45% that we talked about way back when. But they went from this like 28, 29, 30 range to like pretty squarely 33% gross margins, which is not

• 2:17:42Ben Gilbert?

  as low as Walmart, let alone Costco's razor thin margins. So they kind of moved away from that.

• 2:17:49David Rosenthal?

  Costco model, if you will.

• 2:17:50Ben Gilbert?

  The scale economies shared idea. They sort of realized, eh, you know, we can actually keep a little bit more of the profits.

• 2:17:57David Rosenthal?

  Yep. Which also coming back to Wall Street's disappointment with Nardelli and the company, despite the growth of revenue and profits, makes sense, right? Like he's trying to pull out all the tools in the tool bag to get Wall Street back on his side here.

• 2:18:13Ben Gilbert?

  You're right. It's just incentive misalignment. If you're comped on the stock price, you don't care about the business's current performance. You just want investors to believe the story that you are storing up long-term value inside the company. So you keep prices really low, you keep volume really high, you keep customers really obsessed. If your comp is tied to today's numbers, you, you don't store value inside the company.

• 2:18:37David Rosenthal?

  Yes.

• 2:18:37Ben Gilbert?

  You try to pump today's numbers.

• 2:18:39David Rosenthal?

  Exactly. It's a paradoxical misalignment of incentives.

• 2:18:44Ben Gilbert?

  Fascinating.

• 2:18:45David Rosenthal?

  Yep.

• 2:18:45Ben Gilbert?

  So you actually, coming all the way back around, you do want to incentivize management on stock price because that is the way that we are storing up value in this business for the far future.

• 2:18:57David Rosenthal?

  Yep. So all of this brewing negativity and certainly Wall Street dissatisfaction with Nardelli comes to a head at Home Depot's 2006 annual shareholder meeting. Jonas Sarah, great financial journalist, wrote for the New York Times. I'm just going to read here, quote, "Mr. Nardelli has become this year's version of Mr. Overpaid CEO. In the five years since he was recruited from General Electric, Home Depot's stock has fallen

• 2:19:37David Rosenthal?

  12%, while shares of its chief competitor Lowe's have risen 173%. You've heard of pay for performance? This is pay for pulse. But these facts barely begin to get at the richer story that is the Home Depot scandal. So I hopped on a train and headed to Wilmington, Delaware, where the Home Depot shareholder meeting was being held this year. I arrive, I can hear protesters chanting, hey, Bob, why are you chicken? While the stock price takes a licking. Mr. Nardelli finally takes the podium. He's accompanied by no one else.

• 2:20:16David Rosenthal?

  Suddenly, we all understand what's going on. The board isn't coming to the annual meeting. In all my years as a business reporter, I have never seen that before. As a corporate governance expert at the University of Delaware will tell me the next morning, quote, "Your one obligation as a director is to show up at the annual meeting. The fact that the directors didn't show up is disgusting." Nardelli begins the meeting. When the first person gets up to speak, the questioner gets mad. I think it is absolutely outrageous that the board is not here. The board is too chicken to face the shareholders. As he

• 2:20:59David Rosenthal?

  speaks, the timer hits zero and his microphone is cut off. After the meeting, the words on people's mouths are appalling, disgraceful, and arrogant. I would add one more, contemptuous. I'm sure there are plenty of boards and chief executives who have contempt for their shareholders, but most of them are at least smart enough to keep it to themselves.

• 2:21:21Ben Gilbert?

  So what happened? Did the board not want to show up and say they were aligned with Bob? Did Bob say, please don't come because I don't want you speaking against me?

• 2:21:32David Rosenthal?

  It has never come out. I think that Nardelli was just fed up with.

• 2:21:40David Rosenthal?

  The narrative around him and all the discussions of his pay and the flat stock price and he just wanted to say a giant F you to the shareholder community of Home Depot, many of which included current and former Home Depot employees.

• 2:22:01Ben Gilbert?

  Wow.

• 2:22:02David Rosenthal?

  It's, it's bad.

• 2:22:03Ben Gilbert?

  I mean, bad on the board, too, though.

• 2:22:05David Rosenthal?

  Yeah, bad on the board, bad on everybody. So the fallout from this event is extreme. Home Depot basically becomes the new symbol of everything that is wrong with corporate America.

• 2:22:18Ben Gilbert?

  And in particular, Nardelli's pay package is being held up as the number one example of corporate greed, corporate executives making too much.

• 2:22:28David Rosenthal?

  Yep. In the weeks and months after this meeting, the company and Nardelli and the board issue a series of explanations and apologies and escalating obsequiousness, doesn't do anything to change the narrative. Finally, on January 2, 2007, Ken Langone calls a special board meeting in Dallas and the board fires Nardelli at this meeting. He gets an $18 million cash severance payable immediately and gets a quote unquote, retirement package valued at $210 million.

• 2:23:09Ben Gilbert?

  This is on top of the initial make you whole grant plus the pay along the way?

• 2:23:16David Rosenthal?

  Yes, yes, it is. Ultimately, in Ken Langone's book, he does say that Nardelli only ended up getting a fraction of that amount, but it doesn't matter. The headlines are brutal. When the news gets announced, the associates on the store floors in Home Depot, there's reports and videos of them celebrating and high fiving and basically, you know, having a party.

• 2:23:43Ben Gilbert?

  Was not exactly a man of the people.

• 2:23:44David Rosenthal?

  No, no, not exactly a man of the people. After this, Nardelli quickly gets another job. He becomes the CEO of Chrysler to guide that great American car company through the financial crisis.

• 2:24:01Ben Gilbert?

  And continue its path as an independent American automaker succeeding and coming through it, much like Ford did as an independent company and GM did as an independent company. Oh, wait.

• 2:24:14David Rosenthal?

  Ends up getting known by the Italians.

• 2:24:16Ben Gilbert?

  Yes.

• 2:24:17David Rosenthal?

  Yeah, you can go listen to our Ferrari episode to learn how that all turned out.

• 2:24:22Ben Gilbert?

  How Fiat Chrysler was born.

• 2:24:24David Rosenthal?

  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, anywhere from here would be up from here. They decide that they're going to pin their hopes on another GE guy, one of Nardelli's lieutenants that he'd brought over from GE to run M and A and corporate development for Home Depot, a new role, as you were saying, Ben, as they added all this stuff to the company.

• 2:24:59Ben Gilbert?

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

• 2:25:05David Rosenthal?

  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 going to 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.

• 2:25:45Ben Gilbert?

  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.

• 2:25:56David Rosenthal?

  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.

• 2:26:11Ben Gilbert?

  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.

• 2:26:30David Rosenthal?

  Ah, I see what you're doing here.

• 2:26:32Ben Gilbert?

  Yes.

• 2:26:32David Rosenthal?

  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.

• 2:26:45Ben Gilbert?

  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.

• 2:27:04David Rosenthal?

  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, Versal, Cursor, Linear and GitHub.

• 2:27:23Ben Gilbert?

  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.

• 2:27:54David Rosenthal?

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

• 2:27:57Ben Gilbert?

  Yes.

• 2:27:58David Rosenthal?

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

• 2:28:00Ben Gilbert?

  So the thing that is the context of all of this, we're going to talk about all the personnel stuff and the culture change.

• 2:28:07Ben Gilbert?

  In 2006, the housing bubble burst.

• 2:28:10David Rosenthal?

  Yep.

• 2:28:11Ben Gilbert?

  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 and to blow everything up. But for Home Depot, their revenue would fall starting in 2007.

• 2:28:51Ben Gilbert?

  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 watermark on revenue and profits.

• 2:29:07David Rosenthal?

  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.

• 2:29:27Ben Gilbert?

  Yeah.

• 2:29:28David Rosenthal?

  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.

• 2:29:42Ben Gilbert?

  Or so they thought.

• 2:29:43David Rosenthal?

  Or so they thought.

• 2:29:44Ben Gilbert?

  To give some credit to Bob, 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.

• 2:29:57David Rosenthal?

  Yep.

• 2:29:57Ben Gilbert?

  You know, 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.

• 2:30:07David Rosenthal?

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

• 2:30:22Ben Gilbert?

  So 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 and A, came over with Bob Nardelli and held a senior role at Home Depot, but he didn't own a P and L. Like he, his job didn't look anything like what a CEO's job would look like.

• 2:30:48David Rosenthal?

  Right. He didn't have an operational role at the company. He wasn't in touch with the store associates. He wasn't on the store floors.

• 2:30:54Ben Gilbert?

  But the answer to why he's the right choice is he was in touch with the culture, with what made Home Depot special, with its original founding principles, all that. One of the ways in which he was, he talked about this on Invest Like the Best in Patrick's podcast interview with him. His son worked at Home Depot.

• 2:31:13David Rosenthal?

  Yeah, that's right.

• 2:31:14Ben Gilbert?

  And so he got the unvarnished take, not the corporate ivory tower sort of filtering of information. He got the dinner table conversation of what's it like in the stores?

• 2:31:25David Rosenthal?

  Yep.

• 2:31:25Ben Gilbert?

  And obviously it wasn't just that one thing, but that's the mentality that he brought to this job of how do we exist as a store support center, not as a headquarters?

• 2:31:35David Rosenthal?

  Yep. So when Frank takes over as CEO, at that same board meeting on January 2, like the, the first thing that he says to the board, the first ask that he makes is I want to place a call to Bernie. By this point in time, Bernie had retired fully from the board and certainly was just disgusted with the whole state of the company, as evidenced by his, another goddamn GE guy quote. So Frank gets him on the phone, even knowing that Bernie is hostile to him.

• 2:32:08David Rosenthal?

  And convinces Bernie that he wants to come meet him and spend some time with him. That leads to Frank and Ken going to Florida to meet with Bernie, where he now lives, getting breakfast with him the next weekend. And then Bernie and Frank go out and they do a store walk together. But it's not a store walk of Home Depot. The first place they visit together is Costco. Because to Bernie, Home Depot stores no longer embody the values and qualities of a great retailer that he wants to teach the young Jedi here. So that's the first thing that Frank does is mend the Bernie relationship.

• 2:32:51Ben Gilbert?

  And really learn directly from him, what do you think the culture is? Because the whole time he's been here, he's been under Bob. Frank wasn't here under Bernie. And so it's like, hey, I'm going to try to reinvent, reinvigorate whatever was special about the culture, help me understand what that is.

• 2:33:08David Rosenthal?

  Yep.

• 2:33:08Ben Gilbert?

  And one of the things that he brings up is this sort of fabled inverted pyramid at Home Depot where you've got, imagine a pyramid, except it's upside down. And at the bottom is the CEO and that the CEO is just this tiny little triangle. And at the top, the big thick level is customers. And then underneath customers is associates. And the belief is like, look, the people who can actually affect the experience of the customers on their projects is the associates and everyone under them just exists to serve them. And Frank sort of grabs this and brings this to the company as kind of a management tool of, hey, we need to start paying attention to this again.

• 2:33:45David Rosenthal?

  Yep. So after calling Bernie, the second thing that Frank says to the board upon becoming CEO is, hey, we gotta get this whole issue of the Home Depot CEOs compensation out of the newspapers. We gotta make it not a thing anymore. So obviously my compensation needs to be much lower than what Bob's was. And I want to align myself with you guys, the company and the shareholders. So I want 90% of whatever number we collectively decide is my compensation, the right number for the CEO of Home Depot.

• 2:34:28David Rosenthal?

  I want 90% of that to be in stock options. So that I'm aligned with the company, the shareholders, the employees. I'm going to bring it all back to the equity strategy that the company had forever.

• 2:34:42Ben Gilbert?

  Okay, that's a way to make a statement.

• 2:34:44David Rosenthal?

  Yep.

• 2:34:44Ben Gilbert?

  And if the company does well, you do really well.

• 2:34:47David Rosenthal?

  Yep. And the company would do well under Frank. So the next thing is he completely stops new store expansion for Home Depot. Says, all right, if we're going to return this company to growth, we gotta do it with same store sales.

• 2:35:04Ben Gilbert?

  So this is crazy. In 2008, they had grown to 2,300 stores. And today, 18 years later, they are at just 2,400 stores.

• 2:35:17David Rosenthal?

  Yep.

• 2:35:18Ben Gilbert?

  Here's how it went from 2008. Right away, they closed about 30 of them. They took a billion dollar write off on all of the pipeline that they had been developing. So all this new store development, they said, nope, we're not going to open any of those. We're just going to focus on store productivity. Then for the next 11 years, other than like four or five stores a year here and there, they did not open any new stores. They were flat for over a decade.

• 2:35:44David Rosenthal?

  As they are simultaneously returning to growth.

• 2:35:48Ben Gilbert?

  So remarkably, while they weren't opening new stores, they grew revenue from 70 billion to 130 billion and net income from 4 billion to 11 billion, all by focusing on the return they could get from their existing stores. So sales per store go from around 30 million to about 65 million over that 11 years.

• 2:36:11David Rosenthal?

  Yeah.

• 2:36:11Ben Gilbert?

  Per store.

• 2:36:11David Rosenthal?

  Yeah, crazy.

• 2:36:12Ben Gilbert?

  I mean, they just cranked on store productivity.

• 2:36:16David Rosenthal?

  Yep. And we're going to get to e-commerce in a minute, which was a big part of that.

• 2:36:20Ben Gilbert?

  That is, of course, it's funny, that was my next thing too. I was like, that is the missing piece of this puzzle. But I think there's a interesting like cultural thing here. They'd always grown ever since founding by growing stores. It was this like safety net that we can, we will always show growth because we are always growing stores, which means A, you don't really optimize the stores you have. You don't try to wring the very most you can out of them because you have a different way to provide growth. And B, if you believe opening stores is intrinsically virtuous, then you just open more stores, whether it was a good idea or not. So there's lots of stores they opened that like probably shouldn't have been open and they either needed to close or focus on getting their productivity up to where it should be.

• 2:37:03David Rosenthal?

  Right. Like Starbucks has run into this several times in their life as a company.

• 2:37:07Ben Gilbert?

  Yes. Opening more stores is not inherently virtuous unto itself.

• 2:37:12David Rosenthal?

  Yep. So the other big thing that Frank does right away is spin off and sell some of the other businesses that Nardelli had been acquiring.

• 2:37:24Ben Gilbert?

  Yeah, they built this business called Home Depot Supply, which is sort of an amalgamation of several things they bought 2000 to 2006. This is mainly a distributor, this business they built, Home Depot Supply, that served home builders, infrastructure contractors, municipalities, maintenance professionals, like big commercial customers. And the goal was this broader ambition than just their existing pro desk. They wanted to serve properties across their whole life cycle and whatever needs pop up across the life cycle, not just this like single job, single contractor, order stuff, we'll give it to you. It's a super different business model than their traditionally very focused model where

• 2:38:09Ben Gilbert?

  everything kind of runs through the store. And they had to develop all these new competencies, which are good, but also detract from your focus. So wholesale distribution, offering commercial credit, specialized sales forces, large scale delivery to job sites for these giant commercial projects. It did grow to 13% of Home Depot's revenue by 2006. So it was starting to become a big, big business for them. But when Frank came in, his assessment was, this is such a different thing and we're such a mess right now. And the macro is starting to look a little shady.

• 2:38:46David Rosenthal?

  Rocky.

• 2:38:46Ben Gilbert?

  Yeah, I don't think Frank would take credit that he knew that it would affect the whole financial system, but at least it was impacting home building and home supplies. So in 2007, they sold HD Supply to a private equity consortium for about $8.3 billion and kind of focused attention back on its core retail business. But it wasn't just the attention that they focused back on the core retail business. Frank, under the extreme nudging from Ken.

• 2:39:15David Rosenthal?

  Yep.

• 2:39:16Ben Gilbert?

  Realized the core of this business is awesome.

• 2:39:19David Rosenthal?

  Yeah.

• 2:39:20Ben Gilbert?

  The adjacencies around this business might be great, but I don't know. The core is great.

• 2:39:25David Rosenthal?

  We're starting to do some of the right things. We're starting to turn this around.

• 2:39:29Ben Gilbert?

  Wouldn't it be great if we owned more of the core business? So what they do with the $8.3 billion, and this is ballsy, they put it all into buybacks.

• 2:39:43David Rosenthal?

  Yep.

• 2:39:43Ben Gilbert?

  They just bet on themselves. They said, I think the best ROI thing we can do is buy Home Depot stock with this $8 billion. So right away, they bought back 14% of the total outstanding shares in the first year. And Frank would go on to buy back 30% of all outstanding shares over the course of his tenure. He dramatically shrunk the size of the shareholder base. Those buybacks were done mostly at $30 to $50 a share. I mean, today, Home Depot is $340 a share.

• 2:40:17David Rosenthal?

  Yeah, this is, ballsy is putting it mildly. Buying back 30% of your company's share base, starting in the summer of 2007.

• 2:40:31Ben Gilbert?

  While you're in the housing industry.

• 2:40:33David Rosenthal?

  While you're in the housing industry, as the housing bubble is popping real time, continuing this buyback program through the financial crisis, this is all Ken Langone right here. To the extent that Ken sinned at Home Depot during the Nardelli era, he is atoning for his sins here.

• 2:40:55Ben Gilbert?

  And we'll, we'll put this chart in the email. The graph of the total number of outstanding shares is almost this like perfect uphill, downhill that's centered right around the year 2001, where when the company was in its growth phase, it was doing all these new equity offerings, creating more and more and more shares all the way up through about 2001. And then they'd slowly started buying them back during the Nardelli era. And then Frank and again, Ken just go nuts and say, no, no, no, this company at the core is awesome. We want to own as much of it as we possibly can. It's flattened out in recent years because they've done some more recent giant acquisitions and they had COVID and good reasons to flatten them out.

• 2:41:37Ben Gilbert?

  But the number of outstanding shares today is almost all the way back down to where it was at IPO.

• 2:41:42David Rosenthal?

  I know. This is just incredible. And in big part, thanks to this, through the financial crisis, Home Depot stock performs great. This is like so counterintuitive. You would think that the financial crisis would be terrible for Home Depot stock. But from 2008 to 2012, Home Depot stock is up 132%. And then it continues after that, 2013, it's up 33%, including dividends, 27%, 2014, 26% in 2015. Compounding is back, baby.

• 2:42:20Ben Gilbert?

  Why? Is it just Wall Street suddenly believing a narrative that Frank walks on water? Or what's, what intrinsically is happening that is driving the value of this company?

• 2:42:30David Rosenthal?

  Well, this gets into the next, 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.

• 2:42:54David Rosenthal?

  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 the knowledge in the stores. Has gone, you know, first to the internet in 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 get your knowledge for free on YouTube.

• 2:43:32Ben Gilbert?

  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.

• 2:43:51David Rosenthal?

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

• 2:44:00Ben Gilbert?

  High quality, yeah.

• 2:44:00David Rosenthal?

  For home projects, DIY.

• 2:44:03Ben Gilbert?

  I think that's probably right.

• 2:44:04David Rosenthal?

  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 because they're not growing stores.

• 2:44:28Ben Gilbert?

  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.

• 2:44:43David Rosenthal?

  Yes.

• 2:44:43Ben Gilbert?

  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.

• 2:44:59David Rosenthal?

  Out of the stores.

• 2:45:00Ben Gilbert?

  Out of the stores.

• 2:45:01David Rosenthal?

  Yeah, you can't really do that.

• 2:45:02Ben Gilbert?

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

• 2:45:24David Rosenthal?

  In-store pickup.

• 2:45:25Ben Gilbert?

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

• 2:45:30David Rosenthal?

  Oh, that's awesome.

• 2:45:31Ben Gilbert?

  From the Soto store in Seattle, it's about 20 minutes away from my house. But within a couple of 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.

• 2:45:43David Rosenthal?

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

• 2:46:22Ben Gilbert?

  They need to build a whole specialized system for it.

• 2:46:24David Rosenthal?

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

• 2:46:34Ben Gilbert?

  One of those little Rivians.

• 2:46:35David Rosenthal?

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

• 2:46:39Ben Gilbert?

  Yeah.

• 2:46:40David Rosenthal?

  So Home Depot is actually pretty uniquely positioned to build this out and own e-commerce for home improvement and hardware.

• 2:46:51Ben Gilbert?

  At the very least, just because it's wholly different, that an Amazon or a Walmart actually doesn't bring that much to bear to compete in delivery-based e-commerce for goods like this.

• 2:47:01David Rosenthal?

  And it gets even better. It turns out that in e-commerce for hardware, there's actually a whole separate servicing the customer element that Home Depot can lean into, which is when you're working on a project, it's really, really important that you get all the stuff you need all at once. And when you run out of something, you get a refill of it as soon as possible. Because if you run out of nails, the whole job stops.

• 2:47:32Ben Gilbert?

  Yeah.

• 2:47:33David Rosenthal?

  You know, and so if you're a pro, obviously this is an issue. But especially if you're a consumer, this is an issue because you only have a limited amount of time on the weekends to, you know, build your deck or re-tile your bathroom, et cetera. And so if it's Sunday morning and all of a sudden you're out of grout for your tiling job, are you really gonna wanna wait until two days later to get grout delivered? By which point in time, it's the week you're at work, you can't finish your bathroom, you gotta wait till the next weekend, like hell no. You're gonna do anything you can to get that grout as soon as possible.

• 2:48:09Ben Gilbert?

  So this gets to the thing that I really didn't think about until diving into this research. Most of the time when you say e-commerce, people equate it with delivery. These are bundled thing in the world. I wanna order from my phone or my computer and I wanna have it delivered to my house in a short period of time. At Home Depot, a giant chunk of the e-commerce is actually store pickup.

• 2:48:35David Rosenthal?

  Yep.

• 2:48:35Ben Gilbert?

  Because if I'm.

• 2:48:37David Rosenthal?

  Because of this dynamic, I need it right now.

• 2:48:39Ben Gilbert?

  I don't wanna wait, like I can get in my car right now. I just wanna know that it's gonna be ready when I get there and I wanna have the easiest possible checkout experience. So, oh my God, I'm out of grout. Uh, crap, I'm ordering on my phone and then I'm pulling out of the driveway and going down to Home Depot. Even if they were gonna do their fastest delivery to me, it's probably gonna take at least half hour, an hour, two hours longer than me just saying, you know what, this is the time I have, I'm driving right to the store right now.

• 2:49:05David Rosenthal?

  Yep, exactly. So in March of 2009, the company changes its slogan from its longtime slogan that many Americans probably remember of, "You can do it, we can help", which we didn't talk about earlier, by the way, but it's so perfect to encapsulate the value proposition of the original Home Depot model. You can do it, we can help.

• 2:49:27Ben Gilbert?

  Their marketing consultants got much better over time.

• 2:49:29David Rosenthal?

  Yeah, much, much better. So they scrapped that and they change it to more saving, more doing.

• 2:49:36Ben Gilbert?

  Hmm, how many entendres is that?

• 2:49:39David Rosenthal?

  And it reflects this change in strategy, right? Like it's more saving, so like, hey, we get it. You know, we're not differentiated anymore by the education that we bundle, that we can help. We're gonna re-dedicate ourselves to the saving value proposition, you know, the Costco elements of our strategy. But then also the more doing, this is what we're talking about. Shoot, I ran out of grout. It's Sunday afternoon, I need to get this bathroom done before the end of the night. More doing.

• 2:50:13Ben Gilbert?

  Yep.

• 2:50:14David Rosenthal?

  Pop online, go on your phone, we're gonna get it to you.

• 2:50:17Ben Gilbert?

  Yep.

• 2:50:17David Rosenthal?

  So the net of all that is building towards what Home Depot's strategy is today, which is 90% of all homes in America can get anything they need for any project. So over a million SKUs delivered to their home or job site or a nearby store within two to 24 hours.

• 2:50:40Ben Gilbert?

  And what they need to pull that off is just an incredible amount of density. So David, I texted you this, I said, I can't believe it. California alone has 250 Home Depots.

• 2:50:53David Rosenthal?

  Yep.

• 2:50:53Ben Gilbert?

  Washington State has 48.

• 2:50:56David Rosenthal?

  And when you say there are, by comparison, there are two IKEAs in Washington State?

• 2:51:00Ben Gilbert?

  There's two IKEAs. But you know, if you wanna have that value proposition, 90% of homes can get anything they need for a project, a million SKUs with two to 24 hours, that requires two things. One, being really close to lots and lots of stores, which was their initial market strategy to kind of go really dense before going to the next city. And two, to have a just ridiculous distribution center footprint to facilitate the e-commerce component. So I did as much research as I could to figure out, what does their distribution center network look like today? Cause it's evolved a lot since that 2009 and they've really figured out how to have all these different specialty ones. They have seven import distribution centers to bring things in from outside the country.

• 2:51:44Ben Gilbert?

  And this is all just within the US. They have 18 rapid deployment centers, which take goods from manufacturers, cut them up, get the merchandise into stores. Then there's special stocking and bulking distribution centers, which are meant to store inventory rather than cut it up and get it into stores. There's 17 flatbed distribution centers, which are all about fulfilling those massive orders to pros. So if you need huge quantities of things onto flatbed trucks. They also have 160 market delivery operations centers, which are cross-dock facilities for other large items like patio furniture that they don't wanna route through stores. David, to your point of really benefiting from a specialized supply chain,

• 2:52:29Ben Gilbert?

  this is an insane footprint to have. For e-commerce, they have 20 dedicated direct fulfillment centers that are just for that, that they started in 2014. Those stock way more SKUs than you would ever see in a store. That's where all their online only stuff comes from. And that explains why one of my goods that I ordered last week took, it was a battery for a camping lantern that I bought, took like two and a half days to get to me. Whereas the other thing that's shipped right from the store got to me in just a few hours because the lantern battery was an online only SKU. And then not to mention, we'll, we'll talk about this later, but they do re-acquire HD Supply and they make some other acquisitions.

• 2:53:09Ben Gilbert?

  HD Supply on its own has 130 dedicated distribution facilities. So it's just this. Crazy footprint to accomplish that mission you talked about.

• 2:53:20David Rosenthal?

  Crazy footprint and specialized footprint that looks super different than Amazon's. So this kind of becomes the story of the stock and the company after the financial crisis of, oh, hey, it's retail apocalypse out there and Amazon's eating everybody's lunch, except Home Depots, because this is a highly specialized, again, specialty retail, logistics and fulfillment chain, and Home Depot's built it out.

• 2:53:51Ben Gilbert?

  With very, very high dollar items that you buy through it. And actually, they make a decent margin. I mean, it's 33% gross margins. This is not Costco. So you multiply decent margins by large dollar items, buy lots of them, buy every house in America. The number gets really large.

• 2:54:09David Rosenthal?

  Yep. So Frank Blake retires in 2014. And unlike any of the previous chapters of the company, he's actually built a management bench.

• 2:54:21Ben Gilbert?

  And the people who would stay in the company and succeed him are matched in their impressiveness only by the people who were in that same group who are leading other companies now.

• 2:54:30David Rosenthal?

  Right.

• 2:54:31Ben Gilbert?

  So the CEO of UPS.

• 2:54:34David Rosenthal?

  Yep. Carol Tomei. She was the CFO of Home Depot for a long time.

• 2:54:37Ben Gilbert?

  And the CEO of Floor and Decor.

• 2:54:39David Rosenthal?

  Yep. Tom Taylor, legend. So when Frank retires, he hands the reins over to Craig Minier. He runs the company for another eight years and then he retires in 2022 and hands the reins over to Ted Decker. Both of them come up through the company, practically lifers at Home Depot. And yeah, speaking of 2022, all of this strategy and all of these people look like absolute geniuses when COVID hits.

• 2:55:09Ben Gilbert?

  Isn't it insane? They just, they stopped building the physical stores a decade before. They invested billions and billions of dollars building out many dozens of fulfillment centers. It's where all of their effort went.

• 2:55:23David Rosenthal?

  Yep.

• 2:55:24Ben Gilbert?

  In the category of improving your home.

• 2:55:27David Rosenthal?

  Yep.

• 2:55:27Ben Gilbert?

  And then suddenly we're all stuck at home, wanting to order things to improve our home and embark on home projects without necessarily going into stores in 2020. And they've got all this capacity built out and invested in.

• 2:55:39David Rosenthal?

  Or be able to go into stores to get what we need, but do it in a way that you minimize human interactions there. And guess what? Home Depot has already built out all that infrastructure to order online or on your phone and pick up in stores.

• 2:55:55Ben Gilbert?

  Yep.

• 2:55:55David Rosenthal?

  It was like the most incredible unintended preparation of all time.

• 2:56:03Ben Gilbert?

  Yeah.

• 2:56:04David Rosenthal?

  So during COVID, Home Depot's revenue growth goes nuts. It goes from 110 billion in revenue to about 160 billion of revenue.

• 2:56:13Ben Gilbert?

  In just three years.

• 2:56:14David Rosenthal?

  Yeah.

• 2:56:15Ben Gilbert?

  They had a little, obviously some hangover after that. So it would decline and then take a couple of years to come back. But still, America wanted to shop there and boy, did they have the capacity built out for it. And then in 2024, we all wanted to spend money on something besides our homes.

• 2:56:27David Rosenthal?

  Yes.

• 2:56:30David Rosenthal?

  Exactly, exactly. Yeah, Ben, you mentioned the HD Supply round trip in there. They spun off the company, sold it to private equity as the housing bubble is bursting right before the financial crisis.

• 2:56:47Ben Gilbert?

  And it was mostly the distribution company that they sold off, which is a fine business, but not a great business.

• 2:56:53David Rosenthal?

  Yep. Used all that capital to buy back the stock. And then 13 years later, bought the company back for the same price that it sold it for, right?

• 2:57:04Ben Gilbert?

  They actually just bought part of it back, the most valuable piece of it, for $8 billion. But there's been lots of inflation since then. It's not really fair to call it the same price. They definitely bought the best part of it for less than they sold it for. But yeah, the, the purpose of doing this, like leave capital allocation aside for a second. They wanted to better serve that maintenance, repair and operation customer. And you kind of need to do it with specialized distribution outside of the retail stores for larger and more complex planned purchases, rather than what the Home Depot retail store really is, which is filling in the gaps real time or one-off for a project.

• 2:57:40David Rosenthal?

  Yep.

• 2:57:41Ben Gilbert?

  The next thing they do is they buy SRS in 2024. This is a giant deal, an 18 and a quarter billion dollar acquisition, the largest deal in the company's history. They actually pause stock buybacks here.

• 2:57:55David Rosenthal?

  In order to do this.

• 2:57:56Ben Gilbert?

  They're like, we really gotta use the capital to swallow that. SRS is a specialty trade distributor that serves professional roofers, landscapers, pool contractors and other trades. You can kind of think of it as expanding into an adjacency, growing its total addressable market. The thesis is similar to HD Supply, but it's less focused on maintenance and more focused on net new exterior building projects. So these are bulk orders planned ahead of time, delivered to job sites with a dedicated delivery fleet of vehicles. Again, a whole nother set of distribution centers and vehicles that they now own, that are specialized for their business, mostly facilitated outside the walls of their traditional stores.

• 2:58:41Ben Gilbert?

  This continues to grow and they've already made another multi-billion dollar acquisition within SRS to do interiors. So drywall, ceilings, things like that, in addition to SRS's traditional focus on exteriors. So it's like a parallel business that serves even bigger pros doing different types of jobs where they can fulfill the whole thing outside of stores. And then those same pros probably come into Home Depot retail to do the real time stuff while they are doing a job in progress.

• 2:59:12David Rosenthal?

  Yep.

• 2:59:12Ben Gilbert?

  So it's interesting, like that Bob Nardelli growing via expansion into adjacencies wasn't wrong. It was just the wrong time to do it and the wrong way to do it.

• 2:59:24David Rosenthal?

  Yep. Yep. Yep. And now that the company has shifted its strategy to e-commerce, which is so much more distribution and logistics and fulfillment heavy, it makes more sense to expand into these adjacencies as logistics become the core competency of the business.

• 2:59:41Ben Gilbert?

  Yeah. And now that the core business is healthy again. I mean, now that you have stores that are actually working at their highest level of productivity possible with some work done on the culture, yeah.

• 2:59:54David Rosenthal?

  Yeah. So all right, take us to today.

• 2:59:56Ben Gilbert?

  Yes. So the business today, it's $165 billion a year revenue business. Not a super fast growing company, grows at 2.5% to 4.5% per year. A little over half the revenue is pro contractors and half is that sort of consumer DIY retail customer. Moving on to profits, the gross margin is a little above 33%. Operating margin is 12.5%. Net income last year was 14 billion. So of the $165 billion they make, they get to keep about 14 billion of it, which if you do the math, is about an 8.5% net income margin. They have 2,400 stores today, opening about 15 new ones each year. They own 90% of their real estate.

• 3:00:42Ben Gilbert?

  They only lease about 10% of the stores since once capital stopped being an issue for them and they started being free cash flow generative, they realized that actually a competitive advantage for us is lock up the best real estate and hold it forever and don't get held hostage in a real estate negotiation when a lease comes up. Early on, they obviously couldn't do that. And they intentionally did stuff like the JCPenney deal to, to lease secondhand retail stores so that they could quickly stand up new stores. But over time, it just became better to, to own the real estate. This has actually been why international has been tough, or one of the reasons why. A lot of the best real estate in Europe is taken.

• 3:01:25Ben Gilbert?

  But like a lot of the best real estate in Georgia in the eighties was perfectly available. And they, they sort of grew up with the US. I mean, it's weird to say because the US is already 200 years old, but they grew up with the suburbs of the US becoming extremely populous.

• 3:01:44Ben Gilbert?

  They have moved to Canada, Mexico, you know, they're, they're branching out in North America, but completely failed in China. They totally miscalibrated. Home improvement is not really a thing. A DIYer is not virtuous in China. It's sort of like, why can't you have someone fix that for you? And the wealthy people live in cities.

• 3:02:04David Rosenthal?

  Right, right, right.

• 3:02:04Ben Gilbert?

  So 86% of stores are here domestically in the United States. If you go over to the classic retail metrics and look at inventory turnover, it is higher than Lowe's, but it's nothing crazy. They turn their inventory about four and a half times per year compared to Lowe's turning 3.3. Just for reference, Costco turns their inventory 13 times per year.

• 3:02:27David Rosenthal?

  Right.

• 3:02:28Ben Gilbert?

  So again, like very different category here. Costco sells the items on its shelf faster than it needs to pay suppliers for them.

• 3:02:36David Rosenthal?

  Yep.

• 3:02:37Ben Gilbert?

  Home Depot doesn't have that. They, they have what we mentioned earlier, where at any given time, about half of their inventory is financed by the suppliers who they haven't paid yet.

• 3:02:46David Rosenthal?

  Yep.

• 3:02:47Ben Gilbert?

  One big thing we should say here is totally unbelievable that the Home Depot can turn their inventory four and a half times per year, given that the goods that they carry are super high dollar specialty. And they have 35,000 SKUs against Costco's 4,000.

• 3:03:03David Rosenthal?

  Yep. In store and then a million SKUs online.

• 3:03:06Ben Gilbert?

  Right. The, the inventory turn, given the nature of their business is kind of unbelievable.

• 3:03:11David Rosenthal?

  Yep.

• 3:03:11Ben Gilbert?

  At any given time, Home Depot has about $11 million of inventory tied up in a store. And Lowe's is about the same. The funny thing about whenever you look at any chart of Home Depot and Lowe's is used to be super different, now about the same. And they've really converged toward each other over time.

• 3:03:28David Rosenthal?

  Yep.

• 3:03:28Ben Gilbert?

  One thing we didn't talk about is private label. They started this slowly back in 1985 and it grew to become a really big part of their strategy to have house brands and, and brands that are exclusive to Home Depot. But you may not realize this, but Behr Paint, B H R, only available at Home Depot. Hampton Bay Lighting and Ceiling Fans.

• 3:03:50David Rosenthal?

  That was a Pat Ferris special, I think.

• 3:03:52Ben Gilbert?

  Yep. Glacier Bay Fixtures, Ryobi, which is a very hot brand recently, especially lawn care and anything with lithium ion batteries. Rigid Power Tools, Anvil HDX Ever Built Eco Smart Lighting, Husky Tools. There's actually a lot of brands that I did not realize were exclusive to Home Depot. They don't actually disclose now, but industry estimates are 15 to 25% of their sales are.

• 3:04:23David Rosenthal?

  House brands?

• 3:04:24Ben Gilbert?

  House brands.

• 3:04:24David Rosenthal?

  Yeah.

• 3:04:26Ben Gilbert?

  Again, nothing compared to the one-third of Costco sales that are Kirkland Signature. But still, I mean, that's a, that's a giant amount. I think house brands are getting more interesting, too, especially with electric tools. If you look at Ryobi, batteries create brand loyalty.

• 3:04:46David Rosenthal?

  Right, right.

• 3:04:47Ben Gilbert?

  So I'm, I'm actually in the other camp. I don't have Ryobi stuff. I have Ego. But I bought an Ego lawnmower, which gave me an Ego battery. So over the years, I now have

• 3:04:59David Rosenthal?

  Right, you develop switching costs.

• 3:05:00Ben Gilbert?

  weed whacker. I have an Ego hedge trimmer. I have an Ego leaf blower, which kind of, I think, puts me out of the Home Depot ecosystem for all that stuff. So imagine the thousands and thousands of dollars Home Depot could have gotten on me if I had first bought a Ryobi lawnmower.

• 3:05:16David Rosenthal?

  Yep.

• 3:05:16Ben Gilbert?

  Talking about e-commerce, after all that discussion, it's still only about 15% of their sales are online.

• 3:05:23David Rosenthal?

  Yep.

• 3:05:24Ben Gilbert?

  There's so much running room that they have there.

• 3:05:27David Rosenthal?

  So much running room.

• 3:05:28Ben Gilbert?

  They have 472,000 employees and their market cap today is $350 billion.

• 3:05:34David Rosenthal?

  And my favorite fact to sum up the state of the company and the business today is the CEO of Lowe's is a former Home Depot executive groomed under Frank Blake.

• 3:05:51Ben Gilbert?

  Really?

• 3:05:51David Rosenthal?

  Yep. Today, the Home Depot executive CEO lineage tree runs across the street to Lowe's.

• 3:06:01Ben Gilbert?

  Wow.

• 3:06:01David Rosenthal?

  Marvin Ellison was head of stores under Frank Blake and then went to take over JCPenney as the CEO of JCPenney. And then in 2018, became the CEO of Lowe's.

• 3:06:13Ben Gilbert?

  Such a deep bench that you created your competitor's CEO.

• 3:06:17David Rosenthal?

  Yep. I think Frank would be proud.

• 3:06:20Ben Gilbert?

  Yes.

• 3:06:21David Rosenthal?

  So yeah, the Home Depot story to put a bow on at least the original Avengers plus Frank. So Bernie Marcus passed away in 2024 at age 95, after a long, incredible life, including becoming friends with Pitbull in his later years. Pat Farah is alive and retired in his 80s, keeps a low profile. Arthur Blank, who we said we would come back to, today is 83. And as some of you know, is the owner of the Atlanta Falcons NFL franchise and several other sports franchises.

• 3:07:03David Rosenthal?

  And Arthur has been one of the most influential NFL owners of the last 20 years. He serves on basically all the critical NFL league committees. He's been a big part of everything we talked about on the NFL episode and all the strategy decisions that have made the NFL the dominant force in American sports and really American media today.

• 3:07:27Ben Gilbert?

  For as much affiliation as he has with the Home Depot, I think he actually has more with the Falcons and the NFL now.

• 3:07:34David Rosenthal?

  No question, he is much better known for the NFL.

• 3:07:37Ben Gilbert?

  Whenever you see an interview with him, it's Falcons owner, not Home Depot co-founder.

• 3:07:42David Rosenthal?

  Yep, yep. And we said he got the third golden horseshoe. So when he bought the Falcons in 2002,

• 3:07:51Ben Gilbert?

  Just one year after fully leaving Home Depot.

• 3:07:54David Rosenthal?

  Yep. He paid the then crazy price of $545 million for the franchise. The Falcons today, by the latest, you know, public valuations that are bandied about out there, are worth $7 billion.

• 3:08:13Ben Gilbert?

  There's no way. They're worth way more than that.

• 3:08:15David Rosenthal?

  That vastly discounts the actual value of the Falcons.

• 3:08:19Ben Gilbert?

  The Seahawks just traded for nine and a half.

• 3:08:21David Rosenthal?

  Yep. Seahawks just agreed to a sale at $9.6 billion.

• 3:08:25Ben Gilbert?

  And since then, the Lakers at 12 and a half.

• 3:08:27David Rosenthal?

  12 and a half. Even just comparing the Falcons to the Seahawks, Atlanta is about a 30% bigger market than Seattle, the whole metro area. And much more importantly, Atlanta has a much better stadium deal with Mercedes-Benz Stadium than the Seahawks do with Lumen Field. So I think the Falcons are worth a minimum of $10 billion and arguably more than that, which I think, combined with his other assets and his remaining Home Depot stake, makes Arthur the wealthiest of all of the co-founders of the Home Depot. Listeners, one update here from the acquired editing bay after recording.

• 3:09:11David Rosenthal?

  The Falcons just agreed to sell a minority stake at a $10.6 billion valuation. So yes, we were on to something.

• 3:09:19Ben Gilbert?

  David, you nailed it. Now, back to the show.

• 3:09:22David Rosenthal?

  Continuing on Frank Blake, who of course Bernie Marcus so violently reacted to as another goddamn GE guy when he got the news that he was taking over the company. Today runs Bernie Marcus's foundation.

• 3:09:35Ben Gilbert?

  Amazing.

• 3:09:36David Rosenthal?

  Which is about a $4 billion spend down foundation. And Ken Langone, the GOAT, is about to turn 91 years old, has never sold a share of Home Depot. His stake in the company is worth about $6 billion today.

• 3:09:54Ben Gilbert?

  I went and looked back at this, that that little 5% he got at founding compounded 25% for nearly half a century. But you all know this, that the hard part is actually not about the stock picking. The hard part is in the holding.

• 3:10:11David Rosenthal?

  Yes.

• 3:10:11Ben Gilbert?

  So in 1985, and this is a great Arvind stat. I mean, longtime listeners know, worldly partners, their whole thing is figure out what it takes to build a business that can 100x as a public company and then figure out how to have the stomach to stay with those companies through the downturns. Because there are always massive drawdowns in these giant 100x companies. I mean, you look at Nvidia, like you, you just have to weather through them and know enough about the business to believe that it's going to make it through. So in 1985, the stock was down 66% and Ken didn't sell. Then in 2002, down 70% and he didn't sell a share.

• 3:10:55Ben Gilbert?

  Then 2008, the whole Nardelli situation, the housing bubble, and then again, down 70%, he didn't sell. In fact, if you bought the shares at their peak in 99, your investment would have been underwater for a full 12 years until the stock recovered in 2012. But Ken still never sold.

• 3:11:18David Rosenthal?

  Yep. Hey, he's a loyal guy.

• 3:11:20Ben Gilbert?

  The value is in the holding.

• 3:11:22David Rosenthal?

  Yep, yep. And amazingly, Home Depot may not be Ken's largest position.

• 3:11:33David Rosenthal?

  Because in 1977, before even getting involved with Home Depot, Ken sold a medical device company to Eli Lilly for stock and got at the time, 2.5% of Eli Lilly's equity. And of course, I believe Ken has also never sold a share of Eli Lilly. But that is a story for 2027 on Acquired.

• 3:12:02Ben Gilbert?

  Yes, it is.

• 3:12:03David Rosenthal?

  All right, analysis?

• 3:12:04Ben Gilbert?

  Let's do it. So we did a lot of analysis along the way. I have one major topic that I want to discuss with you. And I think it's the perfect episode to

• 3:12:14David Rosenthal?

  Yeah, you foreshadowed this with me, but you didn't tell me what it is, so.

• 3:12:17Ben Gilbert?

  To do it on.

• 3:12:17David Rosenthal?

  I'm itching here.

• 3:12:18Ben Gilbert?

  Okay, so we, we talk about this all the time. I can't actually remember if we've talked about it on Acquired, but I feel like we talk about it endlessly on our phone calls. The thing that made you special often holds you back at scale. And I'm going to throw out a few examples that I actually highlighted when I was first reading the Built from Scratch book. We wanted to see the big stuff loaded in the front of the parking lot so everyone could see it. No, they definitely have loading docks now in the back of the stores. They talk about how merchandise is not fronted. There's not someone walking around, turning things, making sure they're facing out. I walked around the store last week. Most items I saw definitely facing out to be the most presentable and appealing to the customer. There is no backdoor or discount for contractors.

• 3:13:01Ben Gilbert?

  We were priced right for everyone, not just a select group. They definitely have a pro pricing desk now. They even talk this big game about in the book how they, they did everyday low prices, just like Walmart did to not appear duplicitous to customers and not have people time their purchases. Well, I got an email three days ago. It said, "Daily deals" with a big dollar sign through the S. Free delivery, online only, while supplies last. 84 offers for you, up to 30% off. Select home essentials, shop now.

• 3:13:33David Rosenthal?

  I was going to say, I'm pretty sure I've been to some Home Depot Memorial Day sales.

• 3:13:39Ben Gilbert?

  Definitely. You won't see aisle numbers in our stores. Why? Because if we had aisle numbers, when a customer asked where they can find something, it would be very easy for our associates to say, aisle eight. If there's no numbers, the employee has to say, let's take a walk and we'll find it together. I was in Home Depot a week ago. There were definitely aisle numbers, for sure. Same with decentralized decision-making, or having manufacturers ship direct to stores. These all changed. So what is the lesson here? I think there's two ways to look at it, and I'm curious how you think about this. Way number one, companies in general just get less special over time as they scale. It's like entropy. The world wants you to look more like every other company when you get big.

• 3:14:24Ben Gilbert?

  And to stay special, like Costco, Rolex, Hermès, Vanguard, these are like companies that fight gravity. It's ridiculously hard to clutch to the thing that made you so special and not look like everyone else. But the other way to look at it is, it's actually completely the correct thing to do in most instances. All the special things that you did when you were little to get attention and be different, in most cases, that actually holds you back when you're big. And it's easy to think, well, we have to keep doing things that way because it's what let us succeed in the first place. But you probably have completely different reasons of why you succeed now than you did compared to when you were small.

• 3:15:04David Rosenthal?

  Yep. And also, usually the market changes, right? Like, case in point in this story, early Home Depot would never have fulfillment centers and distribution centers. Home Depot today would be toast without them.

• 3:15:17Ben Gilbert?

  Totally. I think the second bullet point is actually the correct one. That it is the rare case where clutching your pearls and holding on to this founding insight is the way to succeed at scale. I think a lot of the time, your scale is the reason you can be successful at scale. And you have to make decisions that make sense for a giant scaled company. And like Hermès hand-stitching their Birkin bags, even at the scale that they are today, is like a one in a million example where it was, it's actually the right thing to hold on to some founding tactic that still works today.

• 3:16:01David Rosenthal?

  Yep.

• 3:16:02Ben Gilbert?

  The founding values are important, but the founding tactics are probably not.

• 3:16:05David Rosenthal?

  Yep. I totally agree. Well, speaking of embracing your scale and your scale economies, I think this is the perfect transition to powers for Home Depot.

• 3:16:18Ben Gilbert?

  Yes. So listeners, this is the part where we do the seven powers framework from Hamilton Helmer's book of the same title, where we try to figure out, what does a company have that enables it to get persistent differential returns or to be more profitable than their nearest competitor on a sustainable basis? And those seven are scale economies, network economies, counter positioning, switching costs, branding, cornered resource, and process power. Well, the first thing you'd have to believe is that Home Depot is sustainably more profitable than Lowe's. They are, but it's not by as much as you would think.

• 3:16:53David Rosenthal?

  Yep. Home Depot is marginally more profitable than Lowe's.

• 3:16:57Ben Gilbert?

  There's been a very dramatic convergence over time.

• 3:17:00David Rosenthal?

  Yep.

• 3:17:01Ben Gilbert?

  The biggest one to me is scale economies. I suspect it is because they can just negotiate for the very lowest prices with their suppliers, get the best manufacturers to do their house brands, that sort of thing, given their, what are they, 3X the scale of Lowe's?

• 3:17:17David Rosenthal?

  Yep, about 3X.

• 3:17:18Ben Gilbert?

  So that's the biggest thing now. Early on, I think it was definitely counter positioning.

• 3:17:24David Rosenthal?

  Definitely.

• 3:17:25Ben Gilbert?

  Lowe's doesn't get enough credit for the pivot in 1990. Because think about all the things working against a traditional hardware store. You've got a smaller footprint, which is...

• 3:17:37David Rosenthal?

  You have to change your entire real estate strategy.

• 3:17:39Ben Gilbert?

  Basically, all your real estate is useless.

• 3:17:40David Rosenthal?

  Yep.

• 3:17:41Ben Gilbert?

  You probably have to lower your gross margins.

• 3:17:44David Rosenthal?

  Yep.

• 3:17:44Ben Gilbert?

  But you're not doing enough volume to justify the lower gross margins, so you really can't lower them. Unless you can like pull some of those magic beans that Home Depot had and go convince people that the ride is going to be so long and fruitful together that even though you're not large yet, they should give you great deals.

• 3:18:00David Rosenthal?

  Yep, yep.

• 3:18:01Ben Gilbert?

  It's unbelievable that any of those stores managed to adopt the Home Depot strategy.

• 3:18:06David Rosenthal?

  Yep.

• 3:18:07Ben Gilbert?

  Oh, and they probably use distributors. So you have to blow up all of your existing supplier relationships to go direct to manufacturers.

• 3:18:14David Rosenthal?

  Yep, yep, yep.

• 3:18:16Ben Gilbert?

  Today, there's some switching costs with the house brands, but I'd say the switching costs are probably more for pros who have just integrated Home Depot into their workflow.

• 3:18:25David Rosenthal?

  Yep. I think there's significant switching costs for pros.

• 3:18:28Ben Gilbert?

  Yeah.

• 3:18:29David Rosenthal?

  For that reason.

• 3:18:30Ben Gilbert?

  And probably branding for pros.

• 3:18:32David Rosenthal?

  And I think the hardcore Weekend Warrior segment also prefers Home Depot, but that's for the same reason that the pros do.

• 3:18:40Ben Gilbert?

  Yep, I think so too.

• 3:18:42David Rosenthal?

  I think there is still counter positioning today. It's just very different. It's counter positioning versus Amazon with their logistics and fulfillment.

• 3:18:52Ben Gilbert?

  Good point.

• 3:18:52David Rosenthal?

  Network.

• 3:18:53Ben Gilbert?

  Yep.

• 3:18:54David Rosenthal?

  Amazon is building out more specialty fulfillment and logistics, but it's going to be really hard for Amazon to build and match the scale of what Home Depot has in hardware.

• 3:19:08Ben Gilbert?

  Yep, I agree.

• 3:19:10David Rosenthal?

  But yeah, I think that's it.

• 3:19:11Ben Gilbert?

  I think that's it too.

• 3:19:11David Rosenthal?

  A lot of scale economies.

• 3:19:12Ben Gilbert?

  A lot of scale economies.

• 3:19:14David Rosenthal?

  Which makes sense for a retailer.

• 3:19:16Ben Gilbert?

  Yes.

• 3:19:16David Rosenthal?

  Yep.

• 3:19:17Ben Gilbert?

  Yes. All right. Quintessence on this one. Listeners, David and I chatted before, and we decided for this episode, the quintessence, the main takeaway, we want to try and answer the question, why did this work so uniquely well? Home Depot is the only specialty retailer in the world that is in the same universe as Costco and Walmart and Amazon Retail. So how did it get that way? David, it won't surprise you that I have a several-part answer slash equation to answer this question.

• 3:19:50David Rosenthal?

  Equation, all right. You've certainly piqued my interest.

• 3:19:53Ben Gilbert?

  Because it's basically several things multiplied together.

• 3:19:56David Rosenthal?

  Hmm, does include scale economies shared.

• 3:19:59Ben Gilbert?

  Well, see what you think. So the magical thing at the core of all of this is, forget home improvement. If you can get consumers excited about shopping in a warehouse with no frills, there is an insane number of downstream benefits that that comes from that. And we talked about them all episode, particularly as it relates to saving costs of not having to have a separate backroom and showroom. Normally, that is a huge if, but home improvement is the perfect category. I mean, you are delighted to go buy hammers and lumber in a warehouse, so not an issue. That's factor number one. Two, giant market. Today, the home improvement industry in the US is $300 billion.

• 3:20:41Ben Gilbert?

  For reference, like a comparable market, US furniture, $180 billion. So even other large retail categories aren't playing in this large market. Three, they captured a huge part of the market, used to be super fragmented, but today, Home Depot is 51% of the market. Lowe's is 29% of the market. The next highest is Menards with less than 5% of the market. By 2026, Home Depot and Lowe's together represent 80% of the market for home improvement stores.

• 3:21:14David Rosenthal?

  Yeah, that's wild.

• 3:21:15Ben Gilbert?

  The scale economies in this business, which were not apparent when it was a small fragmented thing, have actually led to winner take most.

• 3:21:23David Rosenthal?

  Yep. And in fact, the narrative around Home Depot and the market that I think management itself would tell for many years is, hey, we're still a small part of the market. That's, yeah, not true anymore.

• 3:21:35Ben Gilbert?

  Depends how you define the market. But yeah, if you define it as home improvement stores, they're 51%. And it makes sense that they should be able to command the cheapest prices from the manufacturers. And as long as they're good about passing that on to you, that should reflect in market share.

• 3:21:51David Rosenthal?

  Yep.

• 3:21:52Ben Gilbert?

  Okay, so that's three. Four, aging housing stock in the United States. I wanted to save this all the way for the end. Arvin did some amazing research on this one, that the stat is perfect. The median age of the housing stock remained broadly stable at about 23 years old from 1940 all the way to 1980. Post-war construction, you kept adding new homes to the overall stock.

• 3:22:22David Rosenthal?

  The American suburban build-out.

• 3:22:24Ben Gilbert?

  So the median age of a home stayed young since you were injecting so many new single-family homes. As of 1980, right when Home Depot was starting, that ended. The median age of a home by 1990 went up to a little bit higher, 25 years. Then by 2000, it was a 30-year-old home. Then by 2010, it was a 33-year-old home. Today, the age of the median home in the United States is 42 years old. This company was founded and IPO'd into a market of houses that were only getting older and needed ever more repairs.

• 3:23:02David Rosenthal?

  And as the very proud owner of a 115-year-old house here in San Francisco, let me tell you, we have been very busy for the last few years maintaining our house.

• 3:23:13Ben Gilbert?

  This is one of the largest tailwinds we've ever studied in a business, and a very predictable one, too. I mean, one thing I know for sure, if the age of the median home in the United States right now is old, in five years, it's also going to be old.

• 3:23:27David Rosenthal?

  Yep, it's going to be older.

• 3:23:28Ben Gilbert?

  So here's a market, so this is a different way to slice the market, but another crazy stat. In 1975, US consumers spent $28 billion on residential improvements and repairs. That was right before the company was founded, $28 billion. Five years later, that $28 billion grew to $47 billion. Today, that number is $600 billion that US consumers spend on home improvements and repairs.

• 3:23:55David Rosenthal?

  It's funny, we haven't really talked about this all episode, but like so many of the other great companies we cover on Acquired, Home Depot is also a story of impeccable market timing.

• 3:24:06Ben Gilbert?

  Five, they massively grew/invented the do-it-yourself concept. And six, the pro market ended up having way more running room ahead of it than anyone thought. And Home Depot smartly crafted these very flexible offerings and parallel ways that you could buy from them, have different business models, have different distribution models. So if I had to answer the question, why did it get so freaking big? It's the literal multiplied product of giant market, captured a huge part of that market with scale economies, aging housing stock, invented the DIY concept, at least at scale,

• 3:24:48Ben Gilbert?

  and then sort of also consumed the pro market along with the consumer market.

• 3:24:54David Rosenthal?

  Yep, yep. I love it. I think maybe the only thing I would add to that beautiful equation is it's also the product of the US's economic and property rights policy decisions over the last 100 or so years that have created this market for US housing, where a huge portion of the households in America own their own homes.

• 3:25:26Ben Gilbert?

  Single-family, freestanding structure homes.

• 3:25:29David Rosenthal?

  Yeah, and that was a necessary precondition for the home improvement industry to get so large. If you either had-

• 3:25:36Ben Gilbert?

  And the US finances it.

• 3:25:38David Rosenthal?

  And the US finances it, yeah, yeah.

• 3:25:39Ben Gilbert?

  These 30-year mortgages are the most insane financial instrument ever, so we let people own homes, even though no one has anywhere near the capital to own these homes.

• 3:25:48David Rosenthal?

  And the strong tax incentives to have mortgages to own homes, et cetera, et cetera. If you either had not as high ownership rates in the US, or like China, if you had a just fundamentally different kind of housing stock that people own, because actually, the Chinese housing market is larger than the US housing market, but it's a terrible market for home improvement and Home Depot.

• 3:26:16Ben Gilbert?

  Yep, good point.

• 3:26:17David Rosenthal?

  Yep, that's what I got.

• 3:26:18Ben Gilbert?

  It's a good ad. All right, that's our quintessence, ladies and gentlemen.

• 3:26:22David Rosenthal?

  This was a fun one. A lot of characters along the way.

• 3:26:24Ben Gilbert?

  Lot of characters.

• 3:26:27David Rosenthal?

  Carve-outs. What'd you get?

• 3:26:28Ben Gilbert?

  Carve-outs. All right, listeners, this is where we recommend things that have nothing to do with the episode that we've just been enjoying recently. One for me is Silo, season three. I think I've probably made a carve-out of Silo, season one and two in the past.

• 3:26:44David Rosenthal?

  I think so, and I might have done the books. The books are great.

• 3:26:47Ben Gilbert?

  I think you did the books. I've never read the books, and the books have dramatic spoilers for the show, so please don't tell me anything about the books. It's really good. The acting has always been great. The directing has always been great. The story has always been great.

• 3:27:01David Rosenthal?

  Apple TV makes good stuff.

• 3:27:02Ben Gilbert?

  Yeah, I just can never wait till Friday night, and not for all the normal reasons to wait for Friday night. It's because that's when the new Silo drops. So I can't recommend it enough. Great, great sci-fi.

• 3:27:12David Rosenthal?

  Throwback to appointment viewing.

• 3:27:14Ben Gilbert?

  Yes. My second one is also a season three of a TV show, Tires.

• 3:27:19David Rosenthal?

  Oh, yeah, this is with Shane Gillis, right?

• 3:27:22Ben Gilbert?

  Yes. Oh, my God, it's so funny. I try to watch it at night after we put my son to bed, and I'm just like laughing so hard. I'm always afraid I'm going to wake him. It's just so, so good. I'm so glad they did a season three, because Shane got very famous after they did season one and two, and I was like, oh, this is, this low-budget thing that he did with his friends is done. But it's back, the whole cast is back, and it's better than ever. So I highly recommend it.

• 3:27:49David Rosenthal?

  Nice, nice.

• 3:27:50Ben Gilbert?

  And my third one is the Ratio 8 coffee maker. It is a all-glass ceramic and metal coffee maker. And I just realized how dumb it was that, for most of my life, I've been pouring boiling hot water through some piece of plastic before drinking it in my coffee every morning. And so the Ratio 8 is a, first of all, it's aesthetically a very beautiful machine, but it's basically a high-end precision automated pour-over. We'll link to it in the show notes. Makes delicious coffee, especially when paired with, there's another service I've been trying called Trade Coffee, where on a schedule, they deliver a different coffee for you to try every two weeks, or one week, or whatever you want the frequency to be.

• 3:28:34Ben Gilbert?

  And I oscillate decaf and regular, so that I can mix them and make half-caf coffee in the mornings.

• 3:28:42David Rosenthal?

  Oh, nice, nice.

• 3:28:43Ben Gilbert?

  Yeah, that's all I got.

• 3:28:45David Rosenthal?

  Nice. Well, I am going to surprise you, I think. I have two carve-outs, one of which is a TV show, and one of which is a movie.

• 3:28:51Ben Gilbert?

  A movie, David Rosenthal.

• 3:28:53David Rosenthal?

  I know, watching movies and TV shows. This is not my normal outside of acquired behavior. The first one is the TV show Quarterback on Netflix. It's August here as we're recording this, and I am so starved for football. Man, Netflix does such a good job with Quarterback. It drops right at the right time, right at the start of training camp, when you're desperately in need of some football content. This season, Cam Ward of the Tennessee Titans. I didn't watch a lot of Titans games last season, and so I didn't know much about Cam Ward, former number-one pick last year in the draft. I'm excited about him. I think he can be a star in the league going forward.

• 3:29:35Ben Gilbert?

  Sweet. All right, Quarterback on Netflix.

• 3:29:37David Rosenthal?

  And then my second carve-out is the old Jerry Seinfeld movie Comedian, which I watched upon reading a tweet from a friend of the show, Jeremy Jafon. This movie is so fun. It follows Jerry right after Seinfeld the show ended, when he goes back to the clubs in New York, to the comedy clubs, and builds up a whole new stand-up routine completely from scratch. And it's like, he's Jerry Seinfeld, right after the show ends, so the most famous person, you know, maybe in all of New York. And he's just going to the clubs, trying out new material,

• 3:30:22David Rosenthal?

  and he's bombing, and it's great. It's so fun to watch.

• 3:30:26Ben Gilbert?

  Oh, sweet, I gotta check it out. Do you know my favorite game when I go stay at a hotel?

• 3:30:30David Rosenthal?

  Ooh, no.

• 3:30:30Ben Gilbert?

  I turn on the TV, and I try to see if there is an hour where a Seinfeld rerun is not on any channels.

• 3:30:40Ben Gilbert?

  The syndication rights are so distributed that I feel like Seinfeld the show is on 24/7 somewhere.

• 3:30:47David Rosenthal?

  It's gotta be. And on Netflix now.

• 3:30:49Ben Gilbert?

  Yep. All right, well, we have some thank yous for folks who helped us this episode. First, I've been talking about them all episode, but Arvind Navaratnam at Worldly Partners, he always does these great 100-page studies. And this episode is particularly in his wheelhouse, because in his quest to find the next 100X company to invest in and hold for decades, he does this on-the-ground research. He goes to stores, and he employs someone full-time at Worldly Partners who is traveling the country, walking through Home Depot, Lowe's, Costco, other stores, doing price comparisons, and actually generating real first-party data on how do these stores evolve and change over time? How do their prices change? How did the experience change?

• 3:31:33Ben Gilbert?

  And so his write-up on this one is particularly awesome. So you can check it out at worldlypartners.com. All of his other studies are there. And this time, Arvind teaches a class for HBS and Boston College students. Usually, they're private. He interviewed Ken Langone, and he has agreed to make that video public alongside the release of this episode. So he's also going to put that on worldlypartners.com. So thank you so much to Arvind for your research help. Thank you to Ken.

• 3:32:02David Rosenthal?

  Yeah, so fun to talk to him.

• 3:32:04Ben Gilbert?

  Great storyteller. And to friend of the show, Frank Blake. Frank is just the most ridiculously humble person you will ever meet. Ken would insist that he saved the company, and it would cease to exist if not for Frank coming in and saving it. Frank, of course, says that is absolutely not true, and turns out, it wasn't that dire of a situation.

• 3:32:23David Rosenthal?

  I think I'm with Ken in his opinion on this one. Yes, thanks, Frank. And thanks to Russ and Dylan Murphy, my contractors, for being my partner in building and restoring and maintaining my 115-year-old house here in San Francisco, and helping us with this episode.

• 3:32:42Ben Gilbert?

  Yes. A huge thank you to our partners this season. Sierra, our presenting partner. Sierra helps the great companies of the world build better, more human customer experiences. That's sierra.ai/acquired. To WorkOS, start selling to enterprise customers with just a few lines of code. Build authentication in minutes instead of months. WorkOS.com. To Anthropic, Claude is a truly incredible AI product that thinks with you, just like it thought with me in preparing for this episode. That's claude.ai/acquired. To Sentry, application monitoring software considered not bad by millions of developers. Sentry.io/acquired. And if you're in the Bay Area on September 17th, just a few days after this episode comes out,

• 3:33:26Ben Gilbert?

  you should join us for the official 2026 Acquired meetup with our friends at Sentry. That's acquired.fm/meetup. If you liked this episode, go check out our other episodes on great retailers: Costco, Walmart, Trader Joe's, IKEA, and Amazon. We're really creating kind of this retail-

• 3:33:46David Rosenthal?

  I know.

• 3:33:47Ben Gilbert?

  -through line here, the great American retailers.

• 3:33:49David Rosenthal?

  We might have to make some T-shirts with some "More Saving, More Doing" slogans on it, and-

• 3:33:55Ben Gilbert?

  That's right.

• 3:33:56David Rosenthal?

  "You can do it, we can help."

• 3:33:57Ben Gilbert?

  That's right. And for all of you who have been asking for visuals with our episodes, you can check out our companion PDF. It will come out the day that this episode drops, and it will improve over time. So if you checked out our Disney PDF from part one or part two, both of those have been dramatically improved since those first dropped. That's library.acquired.fm for all those tables, charts, and illustrations of key concepts. Join the email list, acquired.fm/email, where we send out behind-the-scenes photos from research, past episode corrections, and vote on future episode topics. And come talk about this with David, me, and the whole community in Slack at acquired.fm/slash/Slack. Listeners, with that, we will see you next time.

• 3:34:41David Rosenthal?

  We'll see you next time.