The Home Depot

Home Depot's stock has outperformed Apple since IPO in 1981. A $1,000 investment would be worth $17 million today, compared to $170,000 in the S&P 500. This represents the number one performing stock in the S&P 500 in total return from IPO to present.

Bernie Marcus came from a poor Jewish immigrant family in rough Newark neighborhoods, was in a gang as a kid, yet became the first in his family to attend college at Rutgers. He dreamed of being a psychiatrist but became a pharmacist, eventually rising to retail executive. His memoir's foreword was written by Pitbull.

Investment banker Ken Langone discovers Bernie Marcus' undervalued Handy Dan chain trading at $3/share despite earning $1.50 per share. He buys nearly 20% of the company by paying up to $9.50/share. This discovery leads directly to the Home Depot founding when he later encourages Bernie to start the company after Handy Dan's parent company fires him.

When Dalen's CEO tries to buy out Ken's Handy Dan stake, Ken uses escalating prices to make a point about negotiation leverage. He offers $12, then $14, raising the price each time the CEO comes back, finally refusing to sell at all. This demonstrates Ken's skill at deal-making and his unwillingness to be bullied.

After being fired by Sandy Sigaloff, Bernie meets Ken at Peacock Alley in the Waldorf Astoria. Ken tells him he's been 'kicked in the ass with a golden horseshoe' and proposes they start the company Bernie had discussed months earlier. Bernie is terrified about money; Ken says he'll handle capital-raising.

Ken negotiates for Perot to invest $2 million for 70% equity. At the last minute, Bernie and Perot clash over Bernie's old Cadillac—Perot insists EDS employees drive Chevrolets only. Bernie refuses, triggering the deal's collapse. Perot's 70% stake would have been worth $223 billion today, making the Cadillac arguably the most expensive car in business history.

Bernie and Arthur discover HomeCo, a 130,000-square-foot warehouse run by Pat Farrah, the exact concept they envisioned. Pat is a genius merchandiser but the store is insolvent because he hasn't paid suppliers. Instead of buying HomeCo, Bernie invites Pat to join as co-founder and handle merchandising. Pat becomes the fourth member of the founding team.

With limited capital, the first Atlanta stores opened in 1979 with 50,000 borrowed empty boxes stacked as fake inventory and 2,000 empty paint cans stacked 10 feet high. The night before opening, store managers polished floors; Pat Farrah made them scuff them up because the stores needed to look busy and lived-in.

In 1981, with only 4 stores, Home Depot goes public at a $32 million valuation (equivalent to $122 million inflation-adjusted). Interest rates are hitting 20%. The IPO raises $4 million, which becomes expansion capital. This tiny public valuation offers shareholders massive runway for appreciation.

In 2000, the board, led by Ken Langone, recruits Bob Nardelli from GE after failing to recruit Jamie Dimon. Nardelli arrives with a $150 million equity package and a mandate to implement GE's six-sigma culture. Arthur Blank initially tests the board by saying he's okay with it, secretly hoping they'll reverse course, but they don't.

By 2006, Home Depot stock is down 12% while Lowe's is up 173%. Nardelli has paid himself $200 million while refusing to tie compensation to stock price. At the shareholder meeting, the board doesn't show up. Protesters chant 'Bob, why are you chicken while the stock price takes a licking?' Shareholders are furious. By January 2007, Nardelli is fired with an $18 million severance plus a $210 million retirement package.

Frank Blake becomes CEO in 2007. His first call is to Bernie Marcus. He cuts CEO compensation to 90% stock-based and stops opening new stores. From 2008-2018, Home Depot grows revenue from $70B to $130B with almost zero new stores, instead focusing on store productivity and ecommerce. They buy back 30% of shares outstanding.

Home Depot invests billions in distribution centers instead of stores. They build 12 rapid-deployment centers in 2009, then later add 20 dedicated direct-fulfillment centers for online-only SKUs, 17 flatbed centers for pros, 160 market delivery centers, and 130 more from HD Supply acquisition. Today 90% of US homes can get any of a million SKUs within 2-24 hours.

Ken Langone's initial $100k investment and 5% stake today is worth $6 billion. He never sold through three separate 70% drawdowns (1985, 2002, 2008). If you bought Home Depot at the 1999 peak, it took 12 years to recover. Ken held through all of it because he believed in the business and the people.

Arthur Blank bought the Atlanta Falcons in 2002 for $545 million, one year after leaving Home Depot. The franchise is now valued at $10.6 billion (based on recent partial stake sale). This makes Arthur potentially the wealthiest co-founder, combining Falcons equity with his remaining Home Depot stake.

Home Depot works because it staffed stores with electricians, plumbers, and carpenters. A customer brings in a leaking faucet, an associate saves them $200 with a 25-cent washer, and later that customer does a $100k kitchen remodel. That's unmeasurable in six sigma but drives enormous lifetime value. Nardelli's mistake was optimizing this out.