(FORTUNE Magazine) – If you are giving your valedictory speech to 4,000 of your troops, in a setting that resembles a revival meeting, and if they all love what you did for them as CEO--if they especially remember how you got them through a rough patch--it's a little bit unrealistic to think you can get by with your normal routine of ducking acclaim. Wal-Mart Stores' David Glass, 64, nonetheless tried that a couple of months ago at a Kansas City convention for the company's store managers. Asking that the emcee not introduce him, Glass simply stepped to the front of the stage, gave a modest wave, and opened his mouth to speak. The crowd took an instant to realize what was going on, and then it exploded into the kind of cheers usually reserved for rock stars. Glass stood there, in an open-collared shirt and slightly baggy pants, looking awkward and emotional and trying to restore order. He got it six minutes later.

Behind him onstage, Wal-Mart's new CEO, Lee Scott, now 51, grinned. Glass had personally recruited Scott 21 years before in an unusual courtship (see box "The Education of a Future CEO"). Scott came from Queen City Warehouse Corp. in Springfield, Mo. (Wal-Marters seldom come from glamorous backgrounds) and took the job of assistant manager of the truck fleet (Wal-Marters seldom get glamorous titles). Founder Sam Walton, who died in 1992, had a liking for Wal-Mart's truck drivers, and on the 1979 morning that Scott reported for work at Bentonville, Ark., headquarters, he learned from Glass that Sam would like to "interview" him. Scott got the impression that if the "interview" didn't go well, he might not exactly have a job.

Scott sat down in Walton's inelegant office while the chairman propped himself against a table. "How old are you? " Walton asked. "I'm 30," answered Scott. "Do you think you can do this job?" Walton asked. "Yes, sir," said Scott. Walton looked hard into Scott's eyes for a long moment, and said, "I reckon you can."

If Wal-Mart had a company flag, you could find worse slogans to stitch on it. The words obviously fit Scott; they also fit Glass, who is one of the great unsung achievers of American business; and they aren't bad for Wal-Mart itself. This is a company that did not exist when this magazine started the FORTUNE 500, in 1955--Sam Walton did not open his first Wal-Mart store until 1962--and yet this year it is second on the list, outranked only by General Motors. More than that, barring some megamerger that remakes the top tier, Wal-Mart will surely rank No. 1 next year. It will get there because a combination of growth and acquisitions is causing its revenues to make mountain-lion leaps every year--in 1999 they went up by 20%, from $139 billion in 1998 to $167 billion--and no other 500 giant is doing more than a fast lumber. Don't knock Wal-Mart's profits either: They jumped last year by 21%, to nearly $5.4 billion, enough to make the company 15th on the profits list. And to cite another truly mountainous number, this time a cost center, Wal-Mart has 1,140,000 employees (known as "associates"), almost three times the head count at the runner-up, GM.

In dollars, Wal-Mart could well just keep going and going, hitting revenue figures that simply leave the rest of the corporate world eating Arkansas dust. That won't suit the many people who hate the "big boxes" that Wal-Mart and its Sam's Club division put up or the drubbing they often give smaller merchants. But growth has been a fundamental of Wal-Mart culture since Sam got things started, and the mere fact that the company now has 3,998 stores and about 100 million customers does not remotely suggest to the management that it can start coasting. From his new job as chairman of the executive committee, Glass says, appearing to believe in his vision, wild though it seems, "There's far more opportunity ahead than anything we've experienced."

He makes grabbing the opportunity sound sort of easy. It isn't. There's no price inflation these days to help Wal-Mart grow, so it has to bear down on two longtime specialties, cutting costs and gaining turf. Some of the places it's going today, though, are a long reach and also a big strain on the culture that has brought Wal-Mart so far. Pardon us for the slight change in locale, but this is a "Toto, I've a feeling we're not in Arkansas anymore."

In the U.S., of course, the goal is what it's always been--many more stores and then more still. But they're not precisely the general-merchandise variety that made Wal-Mart famous and clobbered so many competitors. Instead the emphasis is on a format that Glass has long championed and that's big on Scott's agenda as well: "supercenters," Wal-Mart's word for the mammoth stores that sell not only general merchandise but also food, and that in some locations do more than $100 million in sales a year. Wal-Mart's annual food and grocery sales in the U.S., including those made by Sam's, are probably only about $40 billion right now. But that puts it ahead of Albertson's ($37 billion) and within striking distance of the biggest chain, Kroger ($45 billion). Wal-Mart will keep driving butcher knives into competitors: To its current count of 721 supercenters, it plans to add about 150 a year, a rate that will more than double its total by 2004. It is also testing a line of medium-sized food and pharmacy operations, called Neighborhood Markets, that it is likely to roll out soon.

Then, for more growth, there's the stuff not in the neighborhood: overseas expansion and--what else?--e-commerce. Doubters have always found reasons to predict that Wal-Mart can't keep growing, and today their skepticism is beamed on those realms. Wal-Mart executives brood about problems there too--such as losses in Germany. But they see both fronts as imperative. And this company--here is a big fact about Wal-Mart--does not give up.

The alternative to growing, of course, would be bad news for Wal-Mart's stock, whose price just happens to matter to about 800,000 associates who are shareowners. The stock had a swell 1999, rising to an all-time high of $70 per share in December. But that translated into a premium price/earnings multiple of nearly 60, and in the gyrations of the market this year, the premium has been shaved. In late March the stock was around $55, a price giving Wal-Mart a total market value of about $245 billion. Among the shareholders who find that figure of some fascination are Sam's immediate family: his widow, Helen; three sons, including Chairman Rob Walton, 55; and a daughter. The family partnership that Sam set up more than 40 years ago still owns 38% of Wal-Mart's stock, or a stake of more than $90 billion.

There was a time in the mid-1990s--this is the rough patch that Wal-Mart went through--when a $245 billion market value would have seemed ridiculously out of sight. The business slumped, the stock (split adjusted) fell below $10 a share, and Wal-Mart's market cap dropped to under $50 billion. Critics sniped at the company, sure that David Glass lacked the talent to run it; in an April 29, 1996, article entitled "Can Wal-Mart Get Back the Magic?" FORTUNE questioned whether the institution could ever again shine as it once had under Sam.

The nadir was the fourth quarter of Wal-Mart's 1995 fiscal year (ended January 1996), when bad Christmas sales caused earnings per share to fall below their year-earlier level for the first time since Walton took the company public in 1970. And this wasn't the sort of quarter you could quietly hide in a cupboard: It was Wal-Mart's 100th. It was as well a moment for resolve, as management promised itself that this would never happen again. Promise kept, so far: The company has since had 16 up quarters.

In describing how Wal-Mart reclaimed the magic, its executives tend first to explain how it slipped away. The death of Sam Walton, an icon, was itself a downer. A broader reason, so Glass feels, is that management, bred to be "opportunistic," grabbed a lot of opportunities all at once. The company poured money into building supercenters. It snapped up 100 Pace warehouse clubs, which it converted into Sam's Clubs, increasing that division's units by more than a third. And it made two big moves internationally, picking up 122 struggling Woolco stores in Canada and stepping up expansion in a joint venture with Mexican retailer Cifra (of which Wal-Mart now owns 53%). Speaking in his bland, underplayed way, Glass says that though these were all fine opportunities, he would have preferred that they not end up on his plate at the same time. When they did, he concedes, "we probably didn't run our everyday business as well as we should have."

Key to the comeback from that excruciating quarter were some management changes. Bill Fields, who'd been head of the Wal-Mart stores division and was viewed by many as a future CEO, quit of his own accord in spring 1996 to become head of Blockbuster. (He later left that job, then left another, and is today on the sidelines.) He was not replaced. Instead, the two men who had just months before been named to the jobs right below him--"operations," which means running the stores, and "merchandising," which means buying and promoting the goods the stores carry--worked jointly to right the ship. The operations head was Tom Coughlin, now 50 (and today in the job Fields once had), and the merchandising boss was Lee Scott.

Scott's move into this job was a total surprise. After his start in trucks, he'd spent most of his time in logistics, an arena in which Wal-Mart is famous and Scott was a particular standout. But he had absolutely no experience in merchandising, so was as startled as everyone else to find himself tapped to take it on. The call came in October 1995 while Scott was on a logistics scouting trip in Europe. Instructed by fax to call Bentonville at 7 a.m. Arkansas time (when many a meeting at headquarters convenes), he stood at a Paris pay phone and heard a team of executives--Glass, Rob Walton, Fields, and Don Soderquist, Wal-Mart's influential senior vice chairman--ask him to step into the job the following Monday. Glass says he knew that Scott had the potential to be CEO, but also knew that if the organization was to accept Scott as a leader, he would need direct experience in the retailing side of the business.

Scott and Coughlin, representing two camps that in retailing often find reasons to war, turned out to work together with unusual smoothness on a set of problems they quickly identified. Coughlin says Wal-Mart's stores were not as fully stocked as they needed to be, that their general competitiveness was not "sharp," and that some of Wal-Mart's celebrated technology wasn't delivering the payoff it should. In 1997 he brought the technology matter to a head at a meeting of 225 district managers, asking each to take a Telxon 960--a handheld electronic device used in the stores for tracking inventory--and take a simple, basic test on its operation. Only 24% passed. Eight days later Coughlin repeated the test and got the idea that the managers had been going steady with their Telxons: More than 99% passed, he says, "and one retired."

The big-picture item that most clearly shows how Wal-Mart turned itself around is inventories, which through the early and mid-1990s had been galloping upward. Scott and Coughlin bore down on stripping inventory, and its costs, from the system (not forgetting, though, that they were also working to keep the shelves better stocked). Both men pressured their organizations to make better use of the technology already in place (including the Telxons) so that the stores could get accurate readings on their stocks and the buyers a better handle on quantities to buy. Coughlin made store managers flush out old, unsold inventory that was clogging up their back rooms. Scott held the buyers accountable for their decisions--not for an isolated bad buy but for the entirety of their work and the thinking behind it. Pretty soon all the effort began to translate, Scott says, into picking up $1 billion here and there, and "really having fun." As sales rose by 78% in the 1996-99 period, inventory climbed only 24%--a mind-bending achievement.

Today, in the middle of a tight labor market that is exceptionally onerous when you have 1,140,000 jobs to keep filled, a big bundle of Wal-Mart effort is aimed at the costs that go with that army. Forget fancy euphemisms like Human Resources; at Wal-Mart there is simply the People Division. It is headed today, though, by a human resources professional--a point worth noting because Sam Walton had no truck with such types. His technique, instead, was to pick a store manager and direct him to take charge of People, including the many aspects of Wal-Mart's culture that bear on the welfare of associates: respect for the individual; an open-door policy for complaints; promotion from within whenever possible; and, heaven forbid, no unions to get between the company and its people.

But by 1994, Don Soderquist says, when the sticky issues got to be such things as benefits and executive compensation in the face of a slumping stock and even sexual harassment, management decided it was time to learn how grown-up companies handled such things. So it hired Coleman Peterson, now 52, who had been at Venture Stores. He has had plenty of issues to keep him busy--most bitterly, this February, Wal-Mart's first-ever loss of a union election. The associates who voted to let in the United Food and Commercial Workers were a tiny troupe, 12 meat cutters in a Texas supercenter. All the same, this union toehold shakes Wal-Mart's culture and has certainly brought no joy to Bentonville.

Peterson's main campaign today is to cut turnover. Retailing chews up people, many of whom decide within an hour of taking a store job that it is awfully hard work. Wal-Mart's retention record has been about like the industry's, which means that each year it has been losing some 70% of the hourly workers in its stores. That equates to around 400,000 walking out the door, including some of those famous "greeters" who normally stand at the door (and whose job description, in case you didn't know, includes the apprehension of shoplifters). Wal-Mart not only has to replace these legions but also must continually raise its head count to keep pace with growth. Worldwide, it hires an astonishing 550,000 people a year (far more than GM has in total).

So just think, says Peterson, what the company could save in recruiting and training costs--and gain in customer service and satisfaction--if that turnover rate of 70% could be knocked way down. He has an extraordinary ambition to halve it by 2004. Last year proved a good start, producing a drop to 65%. The way to keep things going, his staff was telling the store managers convened in Kansas City, is by hiring smart, training effectively, recognizing and rewarding good work, paying for performance, communicating well, and developing the talents of all. But down to 35%? If Peterson can do that, he would deserve the ultimate Wal-Mart accolade: "Sam would be proud."

Sam, it turns out, also liked the idea of foreign expansion, and you'd have to know why: The market that beckons outside America's borders is colossal even by Wal-Mart standards. (Never mind that U.S. retailers have always found international expansion difficult.) Internationally Wal-Mart already has some bulk. It operates in eight foreign countries and Puerto Rico (which in Bentonville they class as international); foreign sales were $23 billion last year, and operating profits $817 million. Those profits are fueled by Canada, Mexico, Puerto Rico, South Korea, and Britain, where Wal-Mart just bought supermarket company ASDA for $10.7 billion. Wal-Mart's other four countries, Germany, Brazil, Argentina, and China, are losing money.

Jeffrey Feiner, a Lehman Brothers retailing analyst, goes so far as to predict that by 2008, Wal-Mart's international revenues will have risen, through acquisitions and growth, to around $170 billion--which slightly exceeds the company's total revenues last year and is seven times its international revenues. In Bentonville, they don't come close to endorsing that figure. They simply say they want to see international sales and profits accounting for one-third of Wal-Mart's total growth.

Okay, but analyze this: If Wal-Mart were to increase its sales at an annual rate of 15% (which is slightly below its rate for the past five years) and international were to account for one-third of the growth, total sales in 2008 would be nearly $590 billion, and the international slice would be $164 billion--very close to Feiner's $170 billion. So Feiner and Wal-Mart aren't talking two different languages. They're just into different dialects.

To get international moving upward fast, Wal-Mart recently named its own CFO, John Menzer, 49, to run the division. He'd like to see half of international growth come from acquisitions and half from building what's in hand. In the building part of this exercise, Wal-Mart has placed locals in most of its jobs and also gone along with local ways whenever possible--putting up multistory stores in Korea, for example. But it has also insistently pushed the concepts that made Wal-Mart famous, especially Every Day Low Prices (EDLP). Recently the Mexican subsidiary, Cifra (renamed Wal-Mart de Mexico earlier this year), swung its supercenters away from EDLP toward a "promotional" strategy, meaning that it kept throwing sales at the public and leaving people to think that only sale items were worth buying. Not pleased, Wal-Mart stepped in, closed each store for one day to roll back 6,000 items to EDLP, and re- opened, saying in effect, "We are a new store." Menzer says customers hung back for a while, waiting for promotional sales they were sure would reappear. But when the sales didn't reappear, the customers returned--and have stayed.

Wal-Mart's international acquisition strategy used to be largely opportunistic. But under Menzer, says Jeffrey Cohen, a Wasserstein Perella investment banker who has worked closely with Wal-Mart, the company is looking at international possibilities in a very "disciplined" and financially thoughtful way. It has also widely thrown out its hooks: Menzer says that at any one time, Wal-Mart is likely to be looking at about ten acquisition possibilities.

The belle catch would be something in France. Using still another metaphor, Andrew Fowler, a Morgan Stanley Dean Witter analyst in London, says that France is a "jigsaw piece" Wal-Mart must own to get full efficiencies out of its European operations, now embracing only Britain and Germany. Since building from scratch in France is impossible--there are too many environmental and planning constraints--Wal-Mart will have to buy, probably at a high price. It's known to have talked to Auchan, a family-owned retailing company.

In the meantime, Wal-Mart's British and German operations don't look the least alike. ASDA is a profitable chain with a brand name that Wal-Mart wishes to keep and with sophisticated distribution techniques that Wal-Mart--always eager to learn--wants to copy. Germany, in contrast, is a mess--or as Menzer more discreetly states it, "We have a big job to do there." The operations Wal-Mart bought, Wertkauf in 1997 and Spar in 1998, are in the red, need large remodeling investments, and possess weak names that Wal-Mart is replacing with its own. Meanwhile, a price war among rival German chains is pinching the entire pack, Wal-Mart included. And not all onlookers find Wal-Mart's management impressive: An executive of a U.S. company that supplies Wertkauf and Spar says that Wal-Mart doesn't exactly "get it" when it comes to dealing with the German consumer. Apparently unconfident itself, Wal-Mart has called in help from Britain, giving ASDA chief Allan Leighton authority over Germany as well. Leighton is reporting not to Menzer but directly to Lee Scott.

Whenever Wal-Mart gets down and out about Germany, or agonizes over currency convulsions in Latin America, or worries about getting from its six stores in China to critical mass, it thinks of one of its favorite things, Canada. For nearly three years after Wal-Mart bought the Woolco stores in 1994, its Canadian operations inhaled money and exhaled losses. Every Wal-Mart executive knows the story of a Year Two meeting at which Rob Walton asked, "Will somebody remind me why we got into this?"

But late in Year Three, after Wal-Mart had majored in Canadian remodeling and finally learned how to supply Yellowknife in the Northwest Territories, Canada broke even. Next, it turned into a retailing powerhouse. By now, sales have quadrupled to $6 billion. Returns, says Wal-Mart, are running slightly ahead of those in the U.S., which probably means that Canada is making operating profits of about $460 million. And earlier this year Rob Walton presented the Sam M. Walton Entrepreneur of the Year award, a prized trophy, to Mario Pilozzi, senior vice president of merchandising and sales in Wal-Mart's Canadian operation and, that night, a man reduced to happy tears.

What all this says to Wal-Mart is that foreign operations can be expected to break even in three years and make returns within five years that allow Wal-Mart to earn its cost of capital, which it figures is 17% before taxes. On this schedule, Germany might break even in 2001. On the other hand, David Glass might then still be saying with deep feeling, as he does today, "The big challenge for American business is doing business globally."

In a sense, e-commerce is another foreign country for Wal-Mart--one in which it has lately recognized a pressing need to hire locals. Though Wal-Mart won't release figures, it appears Wal-Mart.com had an unmerry Christmas at best--and one it ended early by discouraging orders after Dec. 13. A study of e-retail sites by Resource Marketing of Columbus, Ohio, ranked Wal-Mart.com dead last for overall service, slamming the site for unresponsiveness to customer e-mail, a bad search engine, and numerous other e-sins.

Small wonder that in January Wal-Mart turned to Silicon Valley for help. It announced it was joining with Accel Partners, a well-known Palo Alto venture capital firm, to form an independent company, Wal-Mart.com. Accel, in turn, has hired a CEO for the company: Jeanne Jackson, 46, who had previously run both Gap's online operations and Banana Republic. Jackson and Accel are now staffing the dot-com company and expect that down the road it will go public. Meanwhile, Wal-Mart will own at least 80% of the business and will consolidate its financial results.

Jackson says one reason she took the job is that she has always admired Wal-Mart and has in fact often said so publicly. But she initially rejected Accel's overtures, only to be won over by a February trip to Bentonville. Talks she had there with Scott, Glass, and Rob Walton convinced her that they were deeply committed to online selling and excited about its potential for leveraging the Wal-Mart name. But what really swung her to a yes, she says, was a Friday-morning management meeting she sat in on, at which she got a full dose of the detail regularly discussed there. This time the topic was hosiery--or, more precisely, "empty pegs" where hosiery should have been. "I was so impressed by the way they went at it," says Jackson. "It just blew my mind."

As head of Wal-Mart.com, she is inheriting a Website that is meant to closely parallel a full Wal-Mart store. (You can, for example, order toothpaste. Glenn Habern, the executive who until January had responsibility for the site and now is helping move it to California, says some people actually, and amazingly, have done that.) Wal-Mart's thought is that its stores can be adjuncts to the Website, and vice versa. Suppose, say, you use it to buy a toaster, but the toaster sent you does not strike your fancy. You may then return it to your nearby Wal-Mart store, saving yourself the hassle of mailing it back. Suppose, on the other hand, that you don't have a Wal-Mart nearby. In that case, the Website can serve as one.

Wal-Mart surveys suggest another positive for online sales. When customers are asked, "What does Wal-Mart mean to you?" Habern says, the No. 1 response is not the "low prices" Wal-Mart expected but rather "trust." That's not a bad reputation to have in the wired world. The reputation has in fact pulled traffic, even though the site hasn't been promoted: Media Metrix reports that in February about 1.4 million unique visitors found their way to Wal-Mart.com, placing it 46th among the most-visited shopping sites.

Pointing to all this and 100 million customers too, Jeanne Jackson says the opportunity is "phenomenal." But she also says that when she was still at Gap and checking out competitive Websites, she found Wal-Mart's to be no great shakes. It was slow to load, she says, and "when you got to checkout, you couldn't get back to shopping." Such things, she says, will need to be fixed. She may also discover there isn't really a full store online: This writer couldn't find several items that would have been generally available through the stores, such as legal-sized Pendaflex file folders.

Here's a question, too, about the potential for Wal-Mart.com: How will all those store managers feel about this potentially nimble newborn, poised to suck business from the brick-and-mortar establishments that in effect gave it life? No problem, answers Habern. Those managers, he says, recognize that there are going to be many billions of consumer dollars going into online orders, and they want Wal-Mart to be in there fighting for business. Says Habern: "We are as competitive a group of people as you'll ever meet in your life. And we want our fair share of this market." By Wal-Mart's definition, of course, "fair share" is all you can take.

With the changing of the guard at Wal-Mart--Glass out as CEO, Scott in--the world is not likely to see much more of a blip in this company's agenda than occurred in its offices: The two men, next door to each other before, simply switched quarters, with Scott moving into the corner office where Sam sometimes used to chew him out. Glass plans to stay on for at least a year. "If this bunch doesn't do a great job, I'll come back and kill them," he told the January conventioneers. He and his family are also in the process of buying the Kansas City Royals for $96 million. For a Major League Baseball team, that's an Every Day Low Price if there ever was one. To raise the cash needed, Glass is selling about two million Wal-Mart shares. He will still hold around 3.2 million shares, recently worth $175 million.

As Lee Scott begins his years of running Wal-Mart's 24-by-7-by-365 world, he wants to build on the Walton and Glass legacies but also to pick up speed. The market is so dynamic, he says, that you have to gear up a "high-performance team" that can at times move "at an extremely fast rate." That ambition might well cause competitors to break out into what Arkansans call "chill bumps." Nobody has noticed up to now that Wal-Mart was stuck in slow.

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