Monday, June 25, 2018

Texas Instruments CFO to Home Depot Co-Founder: "Your margins are too low to be able to make any money."

This part of a series linked to how to make money in a theoretically impossible manner in retail: see also ( )

Home Depot has been a great investment since it went public: but not everybody believed in it when Ken Langone was raising money to start the company. In his autobiography "I love Capitalism", Langone explains.
Cash flowing at Home Depot checkouts

"Bernie Marcus' revolutionary idea for a new chain of home-improvement stores sounded great ... In Bernie and Arthur's vision, the new stores' huge size, wide inventory, and low prices would produce $7 to $9 million in annual sales per store (Handy Dan stores averaged $3 million in sales per annum), at gross profit margins of 29 to 31 percent (the industry standard was 42 to 47 percent). Sheer sales volume would compensate for the lower profit margins.
And not just volume. The salespeople in the stores wouldn't only be there to operate cash registers. They would be highly trained in home repair and home improvement, ready to answer all questions and guide customers through any project, small or large." Langone  continues: "I calculated that the initial stage would take a couple million dollars in venture capital... I needed a contrarian with a couple million dollars lying around.
Who else but Ross Perot?" (Langone had helped with Perot's EDS IPO).
Ross Perot entrepreneur & candidate
Langone: "I took Bernie down to EDS's Dallas headquarters to meet Ross, and the initial meeting went well...Ross sat there behind his big desk, all ears...So far, so good. Except for Bryan Smith, who from the jump was the sceptic in the room. He was a very nuts-and-bolts guy who simply didn't believe that -- no matter how great the new stores' service and product selection and sales volume -- Bernie and Arthur could make a go of it on a 27 percent gross margin (markup), when the industry standard was 44 percent. No matter how hard I insisted that service and selection and store size were certain to create big sales volumes, Bryan Smith kept shaking his head. 
At the end of the meeting, Langone spoke to Perot: " "Look, Ross," I said. "We're all thinking about where we are. Bryan's clearly got reservations about the deal. Why don't we all think this over for a couple of weeks, and we'll come back and see where we are."
"Okay, " Ross said, "If you want to come back, come back."
We knew we wouldn't be coming back. As we waited for the elevator outside Perot's office, Arthur was despondent. "Oh, my God, what are going to do, what are we going to do?" he said. "We haven't got any money!"
"Arthur, here's what we are going to do," I said. "I'm going to go out and raise the two million bucks. You guys are going to get 45 percent instead of the 25; the investors are going to get 50, and I'll get 5."
Arthur looked amazed. "Hell, that's a much better deal than we would've had with Perot," he said.
"Yes, Arthur," I said. "In the retail business, when you can't sell something, you guys mark it down. In my business, when you can't sell something you mark it up."

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