CAN HOME DEPOT FIX ITS SAGGING STOCK? AFTER YEARS OF ASTONISHING GROWTH, SOME SAY AMERICA'S MOST ADMIRED RETAILER IS HITTING A WALL. THE ASSESSMENT INFURIATES CEO MARCUS, WHO SAYS, "THIS IS NOT A NUMBERS COMPANY. IT'S AN EMOTIONAL COMPANY."
(FORTUNE Magazine) – BERNIE MARCUS, co-founder and CEO of Home Depot, has a big pile of problems. One of his key executives and board members, Jim Inglis, has burned out on the job and is leaving for a while. Home Depot's president, co-founder Arthur Blank, has a combustible management style, and many people worry that the intense former accountant can never be the inspirational leader Home Depot needs after Marcus is gone. Marcus, who is 66, is concerned about this too. He's picked the brain of his friend Jack Welch for ideas on succession. He also just hired back Home Depot's all-but-forgotten third founder, Pat Farrah, to rekindle some of the old fire. Farrah, who quit Home Depot a decade ago, is a certified wild man, a self-proclaimed "radical" who has singed almost every business he's touched.
Talking for two hours about Home Depot's odd turnabouts and troubles, Marcus is calmly forthcoming. But he's not composed at all on one other subject: Home Depot's stock price. The shares have shot up 28,000%--yes, 28,000%--since the company went public in 1981, but the stock has been as flat as a two-by-four since the start of 1993. The view of many investors: Home Depot is hitting the wall on growth. On this point, Marcus turns apoplectic.
"If Las Vegas had odds on us 17 years ago when we were starting this company, they would have been 1,000 to 1 against us," he raves. He waves his arms, and his limber, 6-foot-2 frame nearly convulses in the high-backed leather chair. Doubters about Home Depot today, he says, are "just like those 1,000-to-1 bettors. They're all wet."
Home Depot, which is America's most admired retailer (and No. 18 on FORTUNE's overall list), is at a very difficult midlife juncture. The biggest concern is the stock price. This is any CEO's yardstick, sure, but at Home Depot, the price of the shares is really important. It literally drives the business. Home Depot is one of those model, progressive companies where every full-time employee is a shareholder. The guys who founded the company in 1979 decided to motivate employees not with sales commissions, as most retailers do, but with stock and options.
Marcus and Blank personally train every manager, eyeball to eyeball. The pitch is this: Do a few simple things, and the stock will take care of itself. "Serve the customer, serve the customer, serve the customer, serve the customer, serve the customer. And No. 6, kick ass," says Blank.
A VIRTUOUS circle built Home Depot into a company with $16 billion in annual sales. The firecracker stock sparked a fanatically dedicated, entrepreneurial devotion in the company's workers. They in turn powered the stock.
Now, with the stock stuck, morale is slipping away. "The people who have had a hard time are the new assistant managers," says Bruce Berg, a blunt, irreverent man who heads Home Depot's largest store division, which is in the Southeast. "These people thought they'd crossed over into the promised land. And now they're asking, 'Where is it?' "
So what do you say to them, Bruce? "I tell them, 'The movement of the stock is dependent on us.' "
This is a conundrum for Marcus, who is a visionary strategist/ stock promoter/inspirational cheerleader to more than 80,000 employees. He says, "Keeping the spirit alive is the most difficult task we have."
That's going to be an enormous challenge. While Home Depot pounded out 40%-plus earnings gains through 1992, profit growth got sawed to an estimated 15% last year. Wall Street predicts that profits will increase at least 20% during the next few years, but then expects a slowdown. First of all, Home Depot isn't such a nimble category killer anymore. A few years ago, rivals such as Lowe's in the Southeast and Eagle Hardware in the Northwest got smart and started building hangar-size warehouses just like Home Depot's. Industry experts say the service gap narrowed too. Says Blank: "The competition got better. They have their copy machines on clearer focus, running at higher speeds."
Even more significant, Home Depot seems to be running out of room to grow. This is essentially a national company now--a distinction the ad guys will hammer into consumers' brains this summer during the Olympics, which will be held in Home Depot's hometown. But cross-country presence is not entirely cause for cheering. Home Depot outlets already are in all 12 of the largest metro markets, and in 30 of the biggest 40. There are now 423 Home Depot stores; Marcus and Blank want to plunk down almost 400 more over the next four years. Where will they go? Into a lot of smaller markets, particularly in the Midwest. The Midwestern states generally have less dense populations, lower-income shoppers, and tougher competition than areas like California and the Northeast.
David Bolotsky, an analyst at Goldman Sachs, argues in a recent report that incipient market saturation is one main reason sales in the typical Home Depot store have flattened--even as the company has been opening larger and larger outlets. Bolotsky likens Home Depot to Toys "R" Us and Circuit City, companies with slowing growth and contracting profit margins. These companies, he says, "are aging growth retailers."
The label stings Marcus. "This is not a numbers company. It's an emotional company. What David doesn't understand is the emotion that drives Home Depot." He adds, "If we keep doing what we're doing today, David may have a shot at being right. But I know things we're going to do that he doesn't. You can't measure the creativity that's possible."
WHICH BRINGS us to the return of the native. Who is this guy Pat Farrah, and what's he going to do? "A lot of people have been asking that," laughs Farrah, 52. Even though Marcus and Blank have gotten the credit as co-founders, Farrah, a jaunty, friendly Irishman, is the real inventor of Home Depot. He was 34 when he bought an old discount store in Long Beach, California, and converted it into the world's first home-improvement warehouse, called Homeco. It was right at this time that Marcus and Blank got fired from Handy Dan, a now defunct home-center chain. The two men were looking for a business to launch, and they happened to visit Homeco. They'd never seen anything like it: humongous assortments of merchandise stacked on pallets, super-low prices, and licensed tradespeople prowling the aisles to help ham-handed homeowners become deft fixer-uppers.
Instantly, Marcus and Blank knew: This was the magic mix. They wanted to buy Homeco. But they didn't. Farrah's business, they found out, was essentially bankrupt. "I'm definitely not an operator," laughs Farrah. So he shut Homeco down, moved to Atlanta, and joined his new friends to start Home Depot.
Farrah was brilliant and erratic back then. In the very first Home Depot stores, when the partners couldn't even afford to buy enough merchandise to fill the aisles, Farrah stacked up thousands of empty paint cans and hundreds of empty boxes. "It was a heck of a sales job," he recalls. People who worked at Home Depot during the Farrah years say he was the company's real merchandising innovator. "I take a backseat to Pat," says Marcus. "Pat's the most alive person you'll meet in your life. He's like a rocket ship." Farrah's fuel, unfortunately, was liquor. "I wasn't real good at moderation," he says. "I worked more than I should have. I drank more than I should have. I did everything to the extreme."
Sometimes he got physically violent at work. Once he jumped on a forklift and drove it through a Depot store wall--just to make a point. Recalls Marcus: "Pat was self-destructive. He was going to kill himself."
The "prince merchant," as Farrah was known, left Home Depot in 1985. He bought a house in Hawaii, sailed for a few years--even won a couple of ocean-racing trophies. "Overachieving again," he says. He quit drinking. As a businessman, though, Farrah still veers toward excess. He bought a lighting manufacturer, MG Products, overexpanded it, and lost millions. His return to Home Depot is a mutual convenience. "Bernie and Arthur needed me, and I needed them," he says.
Farrah, who owns nearly $100 million of Home Depot stock, has no actual title at the company. "I have the best title of all: Pat Farrah," he says. Officially, he reports to Bill Hamlin, executive vice president of merchandising. Unofficially, he reports to no one. So he's crisscrossing the country, visiting stores, working the selling floors, training workers, and essentially trying to battle entrepreneurial arthritis.
"This is a basic and simple business," he tells employees. "People create problems by not trusting their own judgment. By creating a committee. By constantly needing validation. You guys are empowered. You can find 99% of the answers in the aisles, where the customers are." Farrah describes Home Depot's 120 buyers--whom he calls "merchants"--this way: "They're pencil whippers. They sit in their office and make buying decisions." He has asked them to conduct their meetings with suppliers right in the stores--where the customers are. No surprise, Farrah is also cutting into strategic issues. He says Home Depot shouldn't try to look like Lowe's, whose fancier, brighter stores attract a lot of female shoppers. "We have to distinguish ourselves from that 'softer side of hardware,' " he says. Marcus agrees.
IN ADDITION to being coach and adviser, Farrah is something else at Home Depot: the soulful, charismatic counterweight to Blank. Says Marcus, "If I'm out of the picture, there has to be someone with my style to balance Arthur out."
Not that Marcus plans to retire anytime soon. He is remarkably vital and fit for 66. "When I lose my fire, I'll go," he says. He began formally preparing for succession about a year and a half ago, during a golf game in Florida. That's when Jack Welch told him that one of his most effective tools for developing senior executives at General Electric is the 360-degree review. That is, managers get evaluated by their subordinates as well as by their bosses. Home Depot developed its own program; the evaluations focus on skills such as taking care of customers, getting the job done, and building relationships.
Blank, 53, got reviewed first of all. What came to light was what everyone already knew: He's a smart, aggressive Mr. Hypercontrol. If you want to meet with Blank, you have to schedule a session several days ahead and write him a memo on the issues you want to discuss. "Yeah, I do this, to impose discipline on the meeting," he says. He picked up the habit from his good friend Jimmy Carter. "I'm one of the best people I know at time management," he says.
A FITNESS BUFF who has raced in five marathons, Blank is the picture of order and discipline--until he blows his stack. "There's nothing wrong with people losing their temper," he says. "I want to see people at this company show spirit and passion. And maybe even a temper. You can't tell them to stop showing emotion when they become an officer." Some managers say they so fear Blank's wicked temper that they tend not to argue or openly disagree with him. "I certainly don't think I lead that way," he says, trying not to let the temper flare. He says his new marriage--his second, to Stephanie Wraye, a 28-year-old who used to work in an Atlanta Home Depot store--has calmed him, made him a little looser, less intense.
Marcus defends his partner. "If this company had been run by me alone, I would have dreamed about 400 stores and opened 20," he says. Is Blank his choice to be Home Depot's next CEO? "There's no question about it. It's the board's decision, of course. But if I'm here to recommend my successor, it'll be Arthur." He adds, "We have the exact same vision of what the company is and what we have to do. We just express ourselves differently."
Step two of succession planning involves finding a new partner at the top for Blank. He and Marcus have always believed that their contrasting personalities are key to Home Depot's success. "This is the beauty of the Home Depot," says Marcus. "You have a choice. You can become Arthur. Or you can become me. Or someone anywhere in between." Wanted: a "Bernie" for president. Could it be Pat Farrah? "I don't know that Pat could be in an operating position," says Marcus matter-of-factly. Farrah agrees. He's an expert at killing companies, after all.
Executive vice president Jim Inglis was once viewed as presidential material. Then he burned out. "Have you ever heard of Pecos Bill, who jumped on a tornado and rode it across the West?" asks Inglis, 52. "Well, I'm like Pecos Bill." Inglis, who came to Home Depot 13 years ago, was the longtime merchandising boss. But two years ago he asked for a lighter workload. Since then he's been in charge of international development --insignificant at Home Depot--and new concepts. One Inglis invention appears to be a winner: upscale home-decor warehouses called Expo. The company has opened Expos in four cities. Home Depot recently ditched another Inglis idea called CrossRoads, which were hardware/farm supply stores that opened in rural markets. "Jim has worked 100 hours a week, literally," says Marcus. "He isn't thinking as sharply as he needs to be." Inglis started a six-month sabbatical in January. The buzz in the retail industry is that he's been job-hunting. But he denies that. "I hope Jim comes back," says Marcus. "He'll be one more genius we need in merchandising."
Inglis is obviously off the succession ladder. Climbing fast: Larry Mercer, 49, who started almost at the bottom rung. Mercer joined Home Depot in 1979 as an assistant manager of its first store. He's been heading the company's Northeast division for the past few years, and in February he got promoted. He's now an executive vice president, in charge of Canada as well as the Northeast. "There's a lot of Bernie in me," says Mercer. True, he's passionate and infectiously upbeat. But some people think Mercer is too "Arthur" to be his president. Another superfit marathoner, he runs on discipline and goal setting. Blank is his mentor.
The best guy to balance Blank, many people believe, is Bruce Berg, the freewheeling boss of Home Depot's Southeast division. Says Berg, 47: "I'm not your typical corporate animal." He operates primarily out of his mobile office, a black Suburban. Considered a terrific motivator, he spends at least half his time inside his stores. "Home Depot is a tough place to work. Your feet hurt. Your back hurts," he says. "That's why I want to keep letting my associates know that I feel what they feel. What I want to do is wear out my shoes on the floor of a store." Berg has 24 identical pairs of Reeboks--in case. His weaknesses? Volatility and impatience. "I have 27,000 employees. It's not like I'm running a football team," he says. "So I need to become more organized, more exacting, less impetuous."
Berg, with everyone else at Home Depot, is learning, quite simply, to deal with maturity. The wisest perspective may belong to Donald Keough, one of Home Depot's board members. Keough is the retired president of Coca-Cola and a director of McDonald's--so he's sampled the fountain of corporate youth. About Home Depot, Keough, 69, says: "Of course there are problems, but they're the problems of success. What people have to keep in mind is that you don't put your stock in an elevator every day and just press the button to make it go up. Intense competition is the price of leadership. When you're successful, you get imitated. It's that competitive juice that Home Depot needs to move to the next millennium." Home Depot, he observes, has a particular challenge: "Retailing is a wild beast. Success or failure depends on the attitude of the employees."
Bernie Marcus, of all people, understands this. He says, "Home Depot now has to be a more professionally run company. It can be that, and keep the heart and soul."And, he hopes, get its stock price moving up again.
REPORTER ASSOCIATE Wilton Woods