The Home Depot, Inc. (HD) Earnings

Management highlights

### Strategic Acquisitions & Pro Market Expansion - Completed the acquisition of Mingledors, a leading HVAC wholesale distributor with 42 locations across 5 southeastern U.S. states. The acquisition is highly complementary to existing SRS Distribution business, expanding Home Depot's addressable market by $100 billion to a total of $1.2 trillion, and opens opportunity for national penetration of the fragmented HVAC parts and supplies market. - The total pro customer addressable market is $700 billion; combined, Home Depot, SRS and acquired businesses operate ~16,000 delivery assets and a 5,000+ associate professional sales force, creating a unique, hard-to-replicate pro service platform. ### In-Store Operational Improvements - Transitioned non-selling store tasking to the specialized Merchandising Execution Team (MET) in over 1,000 stores, allowing frontline Orange Apron associates to focus on customer engagement and service. The full rollout to all stores is on track to complete by the end of fiscal 2026. Early results show higher customer engagement, improved likelihood-to-recommend scores, and higher task productivity. ### Fulfillment & Digital Customer Experience - Implemented the 'ship from best location' proprietary order routing model, which routes online orders to the optimal fulfillment location based on distance, inventory availability, and delivery speed. Early results include reduced order cancellations, faster fulfillment times, and higher customer satisfaction scores. - Consolidated all AI-enabled pro tools into a single unified digital pro workspace, which functions as a end-to-end project management platform: pros can build material lists, plan large job staging and delivery, track deliveries in real time, access purchase history, share access with team members, and schedule complex job-site deliveries with custom preferences. On-time complete delivery performance and pro delivery satisfaction are at record highs. ### Merchandising & Marketing - Q1 Spring Black Friday and Spring Gift Center events delivered strong performance, particularly in power tools, outdoor power equipment, live goods, and patio categories; power category set a Q1 sales record led by portable power and outdoor power equipment, with an unmatched cordless tool lineup across top brands. - Added exclusive Ramboard heavy-duty job-site floor protection to the big box retail channel, expanding pro-focused assortment.

Guidance

- Management reaffirmed its full fiscal 2026 guidance, maintaining all prior outlook ranges, despite increased external volatility from higher interest rates and energy prices. - Full-year comp sales are expected to range from flat to 2% growth; total company sales growth is projected between 2.5% and 4.5% YoY, reflecting contributions from the GMS acquisition, new stores, new SRS locations, and smaller tuck-in acquisitions. - SRS organic sales growth is expected to be mid-single-digit for the full year, with comp impact improving in the second half due to easier year-over-year comparisons (the second half of 2025 saw historically low storm activity that pressured SRS results). - Full-year gross margin is expected to be ~33.1%, consistent with prior guidance. Operating margin is projected between 12.4% and 12.6%, with adjusted operating margin between 12.8% and 13%. - Diluted earnings per share and adjusted diluted earnings per share are expected to increase between flat and 4% YoY. - Capital expenditures are planned to be ~2.5% of total sales for the year; approximately 15 new full retail stores and 40-50 new SRS locations are planned to open.

Segment performance

Overall company: Q1 2026 total sales of $41.8 billion, up 4.8% year-over-year (YoY); total comparable (comp) sales up 0.6% YoY, with U.S. comp sales up 0.4% YoY. 9 of 16 merchandising departments posted positive comps, including storage, power, hardware, plumbing, electrical, bath, indoor garden, paint, and kitchens. Comp average ticket increased 2.2% YoY, while comp transactions decreased 1.3% YoY. Big-ticket transactions (over $1,000) were up 0.8% YoY. Pro segment posted positive comps and outperformed the DIY segment: pro saw strength in power, pipe and fittings, water heaters, fasteners, and paint; DIY saw strength in spring-related categories including live goods, outdoor power equipment, patio, grills, and storage. Larger discretionary projects remained under pressure. Digital/online: total online comp sales increased over 10% YoY, marking the fourth consecutive quarter of double-digit growth. International: Mexico posted positive local-currency comps, while Canada posted negative local-currency comps. SRS Distribution: delivered $4 billion in Q1 sales, with positive total and organic sales growth; comps were slightly negative overall, driven by low single-digit negative comps in roofing (a market under pressure), while SRS gained market share from competitors. Gross margin: 33% for the quarter, down 75 basis points YoY, with the vast majority of the decline due to the GMS acquisition mix change; core gross margin was stable.

Risks & headwinds

- Persistent high mortgage rates and low housing turnover continue to pressure large, cross-category discretionary home improvement projects, with larger new construction activity also trending downward. - Rising fuel and commodity input costs, along with new import tariffs, create upward pressure on costs and gross margin, with a volatile external environment making it difficult to forecast final cost outcomes for the full year. - General consumer uncertainty around the economic environment continues to suppress large project spending, with ongoing housing affordability pressure adding to demand volatility. - Higher interest rates have increased net interest expense for the company, contributing to lower net earnings compared to prior periods.

Analyst Q&A

• Q: How exposed is Home Depot to the pressured large-ticket project segment, and why is this drag shrinking? /

  A: Management does not disclose a specific overall sales percentage for large-ticket projects. They note that large cross-category projects are currently seeing muted demand, with these projects typically corresponding to larger baskets that span multiple merchandising departments, while smaller project categories are seeing positive comps. Management did not provide a specific overall sales figure for the large-ticket segment.

• Q: Even as business has stabilized to slightly positive comps, what will drive better comp performance in the second half of 2026, and how is pro strategy progress benchmarked? /

  A: Management stated there is no expected marked improvement in underlying overall demand; the projected better comp in the second half is solely due to a return to normal storm activity, after the abnormally low storm activity that pressured results in the back half of 2025. For pro strategy, Home Depot's core goal is to gain more share of wallet from large residential pros (remodelers, small home builders) by building specialized capabilities like field sales, enhanced delivery, and trade credit. This quarter, the pro segment outperformed DIY, with the highest growth coming from complex large pro purchase occasions, which management views as clear evidence the strategy is gaining traction.

• Q: If the period of moderated home improvement demand lasts much longer than expected, will Home Depot change capital allocation, including returning to share buybacks by 2027? /

  A: Management views the current slow demand as a cyclical period of moderation following the multi-year pandemic demand spike, and remains committed to its long-term three-pronged strategy: investing in the core retail business, interconnected omni-channel offerings, and winning the pro market. They note long-term demand drivers (aging U.S. housing stock, home value retention) remain intact, and there is no plan to change core capital allocation to these strategic priorities. The company already pays a healthy regular dividend to shareholders, and is currently focused on creating long-term value through market share gains.

• Q: What does success look like for the SRS wholesale distribution business, and is cross-selling between Home Depot retail and SRS wholesale a key goal? /

  A: First, each individual specialty vertical platform (roofing, interior building materials, HVAC, pool/landscape) must perform well on its own within its sector, which SRS has done, outperforming public competitors by hundreds of basis points in Q1. Cross-selling between platforms is a key long-term goal: management is aligning customer relationship management systems, product catalogs, and delivery assets to share customer leads and offer broader product sets across the enterprise. The company expects a $400 million annual cross-sell run rate by the end of 2026, with plans to double that in 2027.

• Q: What is the progress on pro trade credit adoption, and what benefits has the MET rollout delivered so far? /

  A: Pro trade credit is seeing strong steady momentum, with particularly strong adoption from large single/multi-family builders and remodelers, especially for long-lead-time categories like windows, doors, and appliances. Pros value the 30-day payment terms from shipment (instead of point of sale) which improves their working capital position. Online rollout of trade credit is being piloted successfully, and will expand to e-procurement and construction management platforms in Q2. For MET, in the 1,000 rolled out stores, separating tasking from selling has improved task productivity, increased customer engagement, raised average basket size, and improved customer likelihood-to-shop scores, on track to complete full rollout by year end.