HOME DEPOT, INC. Q2 FY2025 earnings call

• Sales for the second quarter were $45.3 billion, up 4.9% from the prior year, with comp sales up 1% and U.S. comps up 1.4%.
• Adjusted diluted earnings per share were $4.68, in line with expectations.
• The momentum from the back half of last year continued, with customers engaging in smaller home improvement projects.
• Completed acquisition of SRS over a year ago, which has exceeded expectations, and pending acquisition of GMS, which will add a complementary vertical to SRS's business.
• Technology investments to drive productivity, pro ecosystem development, and faster delivery are growing market share.
• Ann-Marie Campbell discussed improved delivery speeds (fastest in company history for same day and next day), added order fulfillment associates, and enhanced HD phone app for order management.
• Billy Bastek noted 12 of 16 merchandising departments had positive comps, comp average ticket increased 1.4%, big ticket comp transactions up 2.6%, and online comp sales up ~12%.
• Richard McPhail provided financial details: total sales $45.3B, gross margin 33.4%, operating margin 14.5%, opened 3 new stores, and discussed fiscal 2025 guidance.

Sales for the second quarter were $45.3 billion, up 4.9% from the same period last year. Comp sales increased 1% from the same period last year, with U.S. comps increasing 1.4%. In local currency, Canada and Mexico posted positive comps. Twelve of the 16 merchandising departments posted positive comps. Total company online comp sales increased approximately 12% compared to the second quarter of last year. Revenue contribution percentages weren't explicitly stated in absolute terms for each segment but key segments showed positive comps and growth in online sales.

• Reaffirmed fiscal 2025 guidance: total sales growth expected to outpace sales comp at ~2.8%, comp sales growth ~1%.
• Gross margin expected to be ~33.4%, essentially flat vs fiscal 2024.
• Operating margin expected ~13%, adjusted operating margin ~13.4%.
• Effective tax rate targeted ~24.5%.
• Net interest expense expected ~$2.2B.
• Diluted earnings per share expected to decline ~3% vs fiscal 2024, but adjusted diluted earnings per share expected flat on 52-week basis.
• Plan to continue investing in business with capital expenditures of ~2.5% of sales for fiscal 2025.

• Market uncertainties and economic volatility.
• Foreign exchange rate impacts on total company comps.
• Tariff fluctuations affecting pricing in some categories.
• Uncertainty regarding recovery in larger discretionary home improvement projects due to economic factors.

Q: Starting with the July improvement, do you view this more as a catch-up due to weather or an underlying change in trend? And then as you think about the second half comp, about a 50 basis point improvement implied from Q2, a couple of points on a two-year basis. Perhaps we could level set on the drivers across traffic, ticket, pricing, etcetera, and whether you anticipate any changes there.

A: Ted Decker said they feel great about Q2 performance, with broader engagement across the portfolio, some weather impact, and underlying momentum. Richard McPhail added guidance assumptions were based on continued momentum.

Q: There's been a lot more talk about the potential for rate cuts later this year. And we also have some tax reform dynamics as well. So just curious to what extent these could be positive catalysts for your business. And if you have any thoughts on the level of rate cut you'd need to see to begin seeing that impact?

A: Ted Decker said lower mortgage rates could help, economic uncertainty is the top reason for deferring large projects, and tax package passed helps with discretionary spending.

Q: When you think about some of the clarity you've gotten on the tax package and then we're waiting on rates, how does it inform your view on the shape of recovery in that large project activity? As we sit here today, do you think that's something to materialize in the next twelve months?

A: Ted Decker said lower rates would help, but uncertainty remains on when rates will change and if large project recovery will materialize in 12 months.

Q: Following up on this last line of the question, there are a number of like puts and takes on in the back half around comp cadence that I'd love for you to talk about? Do you expect much difference between the quarters? It looks like the hurricane lift was pretty similar, but then, you know, ticket inflation given inventory receipts and seasonal probably accelerates over the year. But then on the other side of this, you have this sort of euphoria December post-election with the consumer. So any thoughts there on the puts and takes of comp cadence in the back half?

A: Ted Decker said no big uptick needed to meet guide, U.S. business comp rate similar, ticket higher due to mix and less promotions in outdoor garden.

Q: Could you compare and contrast the business relative to the roofing business, which is SRS's largest vertical? From the outside, it seems to some that, you know, GMS is maybe more commodity-oriented and something that perhaps you could have achieved through the expanded fulfillment offering that you have in about 20 markets in the large pro side. Is there something particularly in the assets that you acquire that you want to acquire that was easier to buy than build? Is it sort of drywall so foundational and so thus a big part of the market? Is it the Salesforce and so forth?

A: Ted Decker said GMS is a complementary vertical to SRS, with similar business models, cultures, and go-to-market strategies, and adds distribution nodes and capabilities.

Q: I want to please on with the phrase that Richard you used in prepared remarks and then I think Ted said it again, this notable improvement in underlying demand. You qualified it with some commentary around weather I assume also maybe bathtub effect is the same definition. Can you talk about the degree to which you think there is underlying turning in housing? Or was this market share? Or was this weather? Are we seeing an inflection?

A: Richard McPhail said customers are healthy with employment and equity, but rate environment still a pause for larger projects, and demand persists but guidance doesn't assume housing turn.

Q: I guess this is a bit of a follow-up to Simeon's question. You have previously given us some figures on the incremental sales you've been able to generate from your complex pro efforts. Can you update us on that most recent performance and where you have rolled it out? Obviously, you just talked about kinda the what's that are happening. But how should we be thinking about the growth curve in those markets?

A: Ted Decker said they're reviewing incrementality weekly, on-time and complete delivery is key, trade credit is early days, and momentum is building.

Q: Over the last several years, The Home Depot, Inc. has taken some big swings, made some big calls, including building the pro ecosystem, buying SRS, and now GMS. Are these calls driven by something that you are seeing that is changing in the home improvement market or something that's changing in The Home Depot, Inc. that's needing the prompting the need to take bigger calls in order to gain market share? And as part of this, how do you weigh the potential trade-off between growth and returns in these capital allocation decisions, or is that just a moot point? Because The Home Depot, Inc. is gonna be able to achieve both in a robust recovery situation in the next few years.

A: Ted Decker and Richard McPhail said they're capitalizing on scale, attractive addressable market, and investments have higher return profiles than traditional stores.

Q: The decision to reduce promotional activity during the quarter was tied to the tariff situation. So a, how do you expect this to unfold? It's likely that tariffs are gonna be with us for a while. Does that mean The Home Depot, Inc.'s posture around promotional activity will be reduced? And, b, how do you expect this to impact the P&L over the next few quarters, and what have you assumed within your guidance?

A: Billy Bastek said they'll continue EDLP, tariffs are in guidance, and they'll focus on value for customers.

Q: My question is for Billy on category performance. I was hoping you could maybe double click on the areas where the business has most notably improved. You guys have called out 12 out of the 16 categories. That's the best breadth of performance, I think, since the '2. So maybe just click on the categories a little bit. And then also regionally, any callouts in the quarter?

A: Billy Bastek talked about 12 departments with positive comps, broad-based performance across various categories including portable power, cleaning, dimensional lumber, etc., and North region picking up.

Q: For Richard on gross margins. Flat year over year. Can we just talk about the moving parts in the quarter? How are you thinking about the cadence in the back half? And then zooming out, this will be the third straight year gross margins will be around 33.4. I guess how are you thinking about that line item in the out?

A: Richard McPhail said gross margin is guided to be flat at 33.4% for the year, with seasonal swings, and future years will be addressed in December.