(FORTUNE Magazine) – Home Depot is growing like angry crabgrass these days. Its monstrous orange crates are already as much Americana as the Golden Arches. Two new stores open every week. In three years the landscape will be covered with 1,350 Depot centers--three times as many as in 1996. Arthur Blank, the company's 56-year-old CEO and president, and one of its founders, was at lunch not long ago with Chairman, former CEO, and fellow-founder Bernie Marcus when he started doing the math in his head. The two men had always visited every new store in the nation. Blank said, "Do you realize we'll open stores this year that we'll never see? There's no way we'll see every single store anymore. The tide's running against us."

It's a nice problem to have. And it's a far cry from the problem Wall Street thought Home Depot had only a couple of years ago. Back then the stock hit a lull after sizzling for more than a decade--largely because of a perception that Home Depot just couldn't grow much bigger.

Surprise! Sales are expected to reach a record $30 billion this year, 25% ahead of 1997--2 1/2 times the revenue of Depot's main competitor, Lowe's. And yet, 19 years after it opened its first store, Home Depot is at "one of the most critical times in our history," says Blank, who succeeded the popular Marcus 18 months ago amid some skepticism. The question isn't how many stores can Home Depot build before we can all walk to one, but rather how Blank will confront the challenges of rapid growth. For instance:

--Can Home Depot maintain its high customer-service standards while absorbing about 150,000 new employees--the company calls them "associates"--into its unique culture over the next three years?

--Can the company penetrate and dominate new markets, like the $216 billion professional maintenance industry, while keeping core customers from growing bored with existing stores?

--Can Blank--and this may be his most critical test--cultivate future leaders who are as fervent about the company's purpose as its founders?

Blank has already taken steps to address each challenge, and he says he's confident. But he's a numbers guy at heart, so he's also a realist. "The next ten years for the company are going to be much more complicated than the last ten years," he confesses during a 90-minute chat in mid-October. "The reality is, if Bernie has succeeded, then I'll be--and I don't mean this at all disrespectfully--a better CEO than he was; and if I end up succeeding, the next CEO will be better than me."

So far, results are solid, surprisingly so to some investors. When we last visited Home Depot, in March 1996, Wall Street wasn't buying. The company's stock had been--and these were our words--"flat as a two-by-four," up only 0.7% over three years. Now Wall Street is one happy shopper. What changed? Just this: the strongest housing market ever--thanks to tantalizingly low interest rates, the robust economy, and (in no small part on account of the Depot folks themselves) a wave of empowered boomers who feel more comfortable with a hammer than they have any right to be.

Since March 1996, Home Depot's stock increased 177%, compared with 65.3% for the S&P 500. It reached an all-time high ($49) in July before an inflated P/E and general market contagion caused Depot to tumble into the 30s in August. It has since recovered nicely, recently closing in the low 40s. "They're a great lesson in how to build a successful company," says analyst Skip Helm of Chicago's William Blair & Co. "They had the best mousetrap, and the marketplace was huge."

Home Depot also helped create the marketplace. Its emphasis on service and education eliminated much of the mystery surrounding things like drains, decks, and caulking. So much so that a lot of us go to the Depot these days the way we go to the grocery store--not because we're hungry but just because, well, you always need something, right? One of my co-workers says she walked into a Depot one day with no intention of buying anything but walked out with a bag of rocks. "Hey, they were on sale," she says. "And they came in three colors!"

With people like this walking around, you can see why Home Depot reported a record 180 million transactions during the second quarter of this year. Between 1990 and 1998, annual average household spending in Depot stores jumped 141%, from $191 to $462. That dropped the number of households needed to support a single store like, well, a bag of rocks--from 154,000 to 93,000 in the same period. Those changes fuel the meteoric growth in the number of Depot stores. Simply put, with more people spending more, you need more places for them to go. Today the typical Depot generates $43 million in annual sales, up from $29 million in 1990. With results like this, Blank and Marcus are almost forgiven for lapsing into hyperbole: "Home Depot has done more for America than Congress," gushes Marcus. (Is that really saying so much?)

"We're in the business of making people's dreams come true," Blank says. "Housing is still the biggest investment most Americans have, and rates of homeownership (65%) are as high as they've ever been. Home's where people live and raise their families. I don't see any limits to the number of stores we can build. I feel confident, with the dollars on the table, that we can continue to grow the core business." Blank and Marcus go so far as to argue that even a turn in the economic weather wouldn't dampen their growth much: When people aren't buying new houses, the thinking goes, they fix up their old ones instead.

Home Depot succeeded where others faltered by being the first on the block (now almost every block) to recognize just what the core customer wanted: everything. They built radical "big box" stores (the typical new store is 108,000 square feet) and loaded them with every imaginable home product, under one humongous roof. Nothing fancy, just rows and rows of building materials and good old-fashioned toolbox stuff. Then they hired carpenters, plumbers, contractors, and other industry professionals to stroll the aisles in bright-orange aprons with their names handwritten on the front, and drilled them in the founders' mantra: This is a service business, not a discount hardware store. Help customers solve their problems, don't just sell them a wrench. "It's not what we [Marcus and Blank] do, it's what happens in the stores," says Marcus. "He who gives the best service wins."

Game over? Almost. Home Depot owns 17% of the $165 billion home improvement market. Lowe's is making a gutsy catch-up play by remaking itself into a national player from a small and middle-market chain primarily in the Southwest. It's building 80 Depot look-alike "big box" stores every year for the next several years (see following story), most of them in new urban markets in the West and Northeast. Otherwise, it's pretty barren out there. Several home repair and improvement chains either went bust (Payless Cashways, Rickel), were sold (Hechinger's, Moore's), or resigned themselves to being regional bit players (Menard, Eagle) under pressure from Home Depot. Lowe's move, says CEO Bob Tillman, was purely a survival tactic. Without it, "Lowe's would have been gone too," he says.

As any homeowner knows, the best time to conduct a major maintenance or renovation is before you're forced to, say, by an upstairs shower leaking into the living room. Similarly, Blank is moving his own way just as the foundation seems as if it has never been more sound. What do you do when you feel you're outgrowing your home? Build an addition, naturally. So Blank expanded Home Depot's traditional do-it-yourself market to include major home renovation projects ($40 billion annually) and to appeal to housing professionals, such as managers of major apartment and condominium complexes and hotel chains, who together spend about $216 billion every year. To penetrate these segments, Home Depot is stretching the company in several intriguing new directions, each offering new opportunities as well as real risks. "It seems Arthur's intent on making his own mark," says Helm, the analyst. "As much credit as we give him for being a big part of the company's success, Bernie still gets most of the credit. Now [Arthur's] in position to make his own mark, and the pace of activity and innovation has accelerated."

A warning: Home Depot's glitzy Expo Design Centers are not for the weak of credit card. Upon entering the 88,000-square-foot store in Davie, Fla., last month, I didn't know which way to turn. Nearly 20 complete kitchens with fancy appliances were to my right, accented with exotic tiles, lighting, and stone floors. In front of me were dozens of finished baths with whirlpools and brass faucets, all so enticing I wanted to wrap up a couple of the rooms and take them home. A ceiling crowded with gleaming chandeliers was to my left in a room decorated with antiques (yes, they're for sale). Around the corner, I passed a $5,000 Sub-Zero refrigerator, a $7,500 Dacor range, $8,000 gas grills by Wolf and Viking, and an $8,500 Aquatic whirlpool bath. Honey, we're not in Home Depot anymore. "Where Home Depot stops, we start," says Bryant Scott, president of the Expo division. Actually, Expo and Home Depot share about 10% of the same inventory, but that's it. Expo contains dozens of unusual tiles, hundreds of bathroom and door fixtures, scores of patterns and materials for window treatments, floors, and carpets. You can even get your face done in tiles on your bathroom floor. "If you have really bad taste, we can accommodate you," says Scott. Nearby there is a three-foot-tall ceramic pig wearing a chef's hat and holding a chalkboard. It costs $29.95. It's meant to stand in the kitchen, I guess. Scott calls it his "million-dollar pig"--as in its total sales last year.

Just as the "big box" concept was radical for its day, Expo is breaking new ground. It's a one-stop-shopping venue for major renovations, which usually require homeowners to find trustworthy contractors and designers, then make separate trips to buy tiles, plumbing materials, drapes, appliances, and the like. You can get all that at Expo. Additionally, industry-certified designers and project managers oversee the entire project from beginning to end. Goodbye, general contractor.

In seven years of trial and mostly error, Home Depot toyed with the size of the new stores and mix of products and services, integrating customer suggestions along the way. Late last year Blank gave Expo the go-ahead. The company will build as many as 400 of the centers in the next five to seven years. Blank predicts Expo will produce "the same [growth] phenomenon" that marked Depot's rise--only faster.

Two other ventures are still in the testing phase. One is called the Pro Initiative, which is being conducted in Austin, Texas. Home Depot already provides industry pros with a few special services, such as hours when the stores are open only to them, but it is trying to develop other ways to attract this portion of the market.

The company is also getting ready to test a concept that is, for Home Depot, truly revolutionary: little stores. The idea is to open small (between 35,000 and 40,000 square feet) emporiums aimed at folks who don't want the mega-headache of trying to find a space in one of Home Depot's mega-parking lots when all they want is drywall screws. The company came up with the idea after seeing its own stores have little impact on a well-run chain of smaller stores out West called Fortress Supply. "As often as we would put stores next to them, they would just keep going," says Ron Brill, Home Depot's executive vice president and chief administration officer. At least one new store will open in the first quarter of next year in the central New Jersey area, much to the chagrin of local hardware-store owners already socked by the presence of Big Depots in the region. "If we can't give consumers as good an experience as they get at the hardware store that's been there for 50 years, then they'll continue to go to those stores," says Brill. "But if we can give them a better experience, they're entitled to it."

Not all of Blank's moves have been so speculative. Some were right between the eyes. Earlier this year he shook up Home Depot's management structure by creating an additional layer of executives--four group presidents--between the six division heads and the CEO. Then he bucked tradition by filling two of the powerful new posts with outsiders: direct-marketing expert Jeff Cohen, 40, and retail veteran David Suliteanu, 44, a former Macy executive. Feathers were ruffled; egos were bruised. "There was some tension," says Scott, the Expo president, a Depot veteran who now reports to Suliteanu rather than Blank. "In truth, there isn't much difference. David's great to work with, and Bernie's and Arthur's doors are still open."

Blank defused much of the potential damage by emphasizing the new guys' unique skills, then wisely putting them in charge of portions of the business outside the company's core. "We acquired certain expertise we didn't have in the company," he says. "And what I've told people is that their presence frees [group presidents] Larry [Mercer, who heads operations] and Bill [Hamlin, merchandising head] to focus on the mother ship, the core business. We can't take our eye off the ball. If we do, someone could run away with it."

Cohen is overseeing projects that could significantly improve the way Home Depot serves customers. Early last year the company bought Maintenance Warehouse/America, a private company that was the nation's top direct-mail marketer of maintenance and repair products to lodging and multifamily-lodging managers. The $130 million company distinguished itself by promising next-day delivery. "There are tremendous cost efficiencies in phone ordering," says Cohen. The real jewel here may be the company's telephone capabilities. Cohen oversees a test using Maintenance Warehouse's phone bank in San Diego that could make it easier for customers to find out whether their nearby Depot has the specific product they're looking for. Right now the only way to know is to call every store in your area and risk becoming a hostage in telephone hell--on hold while someone runs out to check the shelves and maybe to return before you either hang up or get disconnected. "We know what we don't do well," says Brill. "Our managers know retailing, not phones." In San Diego, telephone numbers for each of the city's stores ring at the Maintenance Warehouse facility. The operator can access the inventory of every store in the area. The operator will know if the product is available at the store closest to you (and how much it costs) or if it can be found at another Depot.

Last November, Home Depot acquired National Blinds, a $70 million catalog company specializing in window coverings and wallpaper. Again, its true value is its phone magic. Because it sells all its products by telephone, operators follow a strict script designed to ensure that the customer gets the right product in the right size and the right color. Brill admits that Depot employees, after helping a customer pick out a product in the stores, sometimes stumble in the fitting process, often omitting key questions, which can lead to disaster. The new system is being tested in Detroit, where a Depot customer picks out the product, then goes to a phone (located in the same department) that is connected to a National Blinds operator. The operator then runs through the script--measurements, models, color. It takes less than five minutes. The operator orders the product from the manufacturer. "That used to take us four hours," gushes Brill. When the product is shipped, the manufacturer notifies a Home Depot computer, which then calls the customer to let her know the order's been shipped. "Our associates are very good at taking care of customers," Brill says. "They get into trouble when there's a lot of paperwork involved."

Cohen is also trying to determine how best to introduce Internet sales to the company, which has so far resisted the tempting lure of the World Wide Web. "Customers are buying in a whole variety of ways, and it's pushing us," admits Blank. "We need to find ways to be there when the customer's looking for us, even in the middle of the night. We're not there yet."

Home Depot may not yet have the stomach for the economic uncertainties of virtual commerce, but the company settled nicely this year in Santiago, Chile, and in San Juan, Puerto Rico--diversifying an international portfolio that had consisted of 41 stores in Canada. An alliance with a local retail chain helped minimize potential cultural, language, and product barriers in Chile. So did having local associates work in stateside Depots for several weeks while they were indoctrinated with Depot orange. Both stores were a success right out of the box. The San Juan store, in fact, boasts the best opening week ever for a Home Depot. Globalization may not be de rigueur in much of the business world these days, but Blank is keeping his passport current. "I don't want to be in the business of collecting flags, but the issue of housing is the same throughout the world," he says. A second Chilean Depot opens this month in Maipu.

None of these new initiatives will create an economic windfall anytime soon. It costs about $20 million to build an Expo, $5 million more than a Home Depot. Quick calculations tell you the company could spend as much as $17 billion in the next five to seven years building new stores alone. Moreover, Expo's prospects are no bubble bath. The Depot folks like to tell you their business is largely immune to economic viruses--"Rain or shine, we've been able to do well," says Marcus--but with its reliance on consumers with $30,000 to $50,000 to spend on a project, Expo is particularly vulnerable. A significant and extended downturn in the economy, and we'll be putting off those new kitchens and baths, at least for awhile. All the more reason why Blank, despite his enthusiasm for Expo and other projects, recognizes that Depot's regular customers are its foundation. "The DIYer is the essence of our business," says Blank. "They're 70% of our business, and our success has been being able to bring them through the continuum of being a light shopper to a serious one."

Here's where Pat Farrah comes in. He's the last of the original founders. Heck, he really invented the "big box" concept; Blank and Marcus just stumbled into his 120,000-square-foot Homeco store in Southern California one day two decades ago, and the three struck up a partnership. Farrah left Home Depot in 1985 and returned to California to be near his children and "retire," having already made a fortune. Now, at 54, his kids grown up, he's back with a vengeance as a senior vice president and the company's chief merchandiser. He's not a suit guy. A muscular type, he's so at home prowling the aisles that co-workers used to call him the Forklift. "I've had my retirement, and I'm tanned," he said during a visit to an Atlanta store. "Now I'll just drop dead in the aisles." In 1979, Home Depot carried about 12,000 different products. Today the number is more like 45,000, and Farrah can probably tell you about every one of them. Products made outside the U.S. represent about 3% of Home Depot's inventory; within the next five years the level should rise to as much as 9%.

With its extensive store network and huge traffic volume, Home Depot is now an alluring distribution network for companies whose products are not typically available at retail. Some are small items, like the Zep line of commercial cleaning and pesticide products once available only through wholesalers. "We're providing companies with incremental income by getting their products to consumers they never reached," Farrah says. Other products are created with well-known vendors, "branded," and sold only at the Depot. An example: a line of Scotts lawn mowers produced by Deere, known for its riding mowers and heavy agricultural and construction equipment. Home Depot will soon announce an alliance with GE and Rheem, which makes water heaters, to produce the GE Smart Water filtration and water-heating system with a lifetime warranty. Why is Rheem building a product that will surely compete with its own? "Incremental sales," says Farrah. "No matter which one you buy, they win."

Farrah's pride and joy is a line of professional power tools called Rigid, which are sold only at Home Depot stores. In an Atlanta store, the products are prominently displayed up front. The line is produced at a plant in Paris, Tenn., that was set for extinction last year when Sears, for which it produced the company's popular Craftsman line, decided to build the tools overseas. More than 400 jobs were going to be lost--until Farrah, Marcus, and Blank got wind of it. For 15 years, Marcus had tried to do a deal with the plant to produce professional-quality tools, but the facility's contract with Sears forbade its working with a competitor. So when Sears bolted, Depot rode in, cut the deal, and kept the plant open.

For Blank it was critical that Home Depot not lose its stride during the CEO transition, because the move was viewed with some trepidation in many circles--largely because Arthur Blank, quite simply, just wasn't Bernie Marcus. Even today, Compare the CEOs is a popular game around the water coolers at the Depot. Marcus, at 69, remains to many the company's poster boy. He's gregarious, charismatic, and outgoing--a favorite uncle. He's spry too. (I practically sprinted trying to keep up with the guy as he charged through the halls at corporate headquarters in Atlanta.) He's called Mr. Outside, mostly for the legendary road shows he still conducts when he visits stores and meets with managers. Blank is Mr. Inside, the financial guy who amazes board members at meetings by citing sales figures from various stores with nary a note in front of him. He's an engaging conversationalist with a genuine smile and hearty laugh. Like Marcus, he's also quite fit. On the day before our visit, he ran ten miles in Central Park. But no one calls Blank gregarious. He speaks softly at times, but it doesn't hide his passion for the things that engage him. Calling Blank an intense golfer, say friends, is like calling Leonardo DiCaprio somewhat popular with teenage girls. "He's a pretty complicated guy," says one former senior-level Home Depot employee. "That can make some people uncomfortable."

Marcus, in contrast, is the Pied Piper. He's regularly recognized by happy shareholders as he visits stores across the U.S. "Hey, I've got your stock!" a woman yelled recently as she spotted Marcus in a mall, looking as if she'd seen an apparition. Blank is approachable too. Employees at an Atlanta store didn't shrink from walking up and shaking his hand or starting a conversation during a recent visit. But their reaction to him was more respectful, more reserved than it had been for Marcus the day before when the chairman was in the same store. Another ex-Depot manager offers a succinct description of each man's impact on the company's culture: "Bernie's the carrot," he says. "Arthur's the stick."

Perhaps so. But Blank just may turn out to be the very guy Home Depot needs right now--someone who can see the trees (the new initiatives under way or being tested) and the forest (overall store growth) without losing sight of either.

Blank considers having Marcus remain active a plus. In fact, they've worked together for so long that it's hard to distinguish where the CEO ends and the chairman begins. (Talk to enough folks in the company, and you begin to think the place is run by someone named Bernieandarthur.) Blank is clearly in charge, with classic CEO duties. He manages daily operations and maps the company's strategic vision. Marcus does what he does best--sell. Blank still regularly seeks Marcus' counsel, usually during their monthly dinners alone in one of their offices. Blank brings a list of questions and concerns, and says he shares all of the details regarding the company's operations. "I never make that list based on the fact that I'm CEO and therefore he's not entitled to know things," says Blank. The discussions aren't all centered on business, though. The two men rarely depart without sparring over the treacherous minefield of politics. Marcus, the son of Russian immigrants from Newark, N.J., is a Republican; Blank, whose working-class parents ran a pharmacy in Queens, N.Y., is a Democrat. They're both softies when it comes to underprivileged kids, the environment, health care, the arts, and the mentally disabled, and each has established a charitable foundation to support programs aimed at some of those areas. "We're both moderate, so we agree on social issues like gun control and abortion," says Marcus, smiling now. "As for candidates, we go our separate ways."

The challenge for Home Depot remains simple: Can Home Depot do it all? And can it continue to make Wall Street believe? Much will depend upon Blank's leadership. Home Depot empowers its employees--from group presidents to store personnel--to make decisions without clearing each one through management. Even at the risk of making a mistake. "People here ask for forgiveness more than they ask permission," says Cohen. Adds Blank: "Everyone's role here is to develop people behind them who are even better than they are for the business going forward, because our business is not going to get any easier."

Not that it's easy now. Last fall the company paid an $87.5 million settlement in an ugly and embarrassing class-action gender-discrimination suit after being accused of failing to promote women into management. Marcus and Blank are still angry about the outcome. "Bernie and I personally wanted to fight it out, but we had to look at it from the shareholders' perspective," says Blank. "They wanted us to go on with our lives and didn't want our senior managers diluted." The company admitted no wrongdoing, but Blank says steps were taken to increase the number of women in leadership roles, including management sensitivity training, education, and corporate support programs. Home Depot currently employs 151,000 "associates," 53,000 of whom are women. "Our stores need to be a mirror of the communities they serve," says Blank. "And we need every talented person we can get."

Just recently, four national environmental groups staged protests at Home Depots nationwide to call attention to the company's selling of "old-growth wood"--wood from trees hundreds of years old. This time, Marcus and Blank didn't offer a peep of dissension. Remember their soft spot for social issues? Now they're trying to use the company's clout not for profit but to force the home-building industry to create new standards for the harvesting and selling of wood. And they're especially pleased with how employees at a Sacramento store handled the protesters walking just outside the front entrance: They offered them chairs.