Zach Fadem

Zach Fadem (Wells Fargo) asked about the performance of Home Depot's markets in 2025, specifically comparing regions with challenging housing turnover and home price appreciation (like Florida and Texas) to those with more favorable conditions, and whether any bifurcation continued into early 2026. He also inquired about the potential impact of 2026 dynamics such as snow, larger tax refunds, and a more manageable tariff environment on the flat to 2% comp outlook, particularly regarding first half versus second half performance.

Answer

Ted Decker, Chair, President, and CEO, noted that underlying comp performance was relatively stable across the year, with regional variations primarily due to lapping significant storm activity from the prior year. He explained that while housing prices and turnover are key correlations, the current low turnover rates across the country haven't led to significant regional differentials. Regarding 2026, Ted Decker stated the company's comp outlook of flat to 2% assumes outperforming the market, with potential upside from improved affordability (rising incomes, lower mortgage rates) and modest price adjustments. He downplayed the impact of tax stimulus, expecting limited support due to potential debt paydown or savings. Billy Bastek, EVP of Merchandising, addressed tariffs, stating that over 50% of products are sourced domestically and not subject to tariffs, and that tariff-related pricing actions from April are mostly complete, with teams advocating for customer value. Richard McPhail, CFO, The Home Depot, detailed expectations for stronger second-half comps due to easier comparisons, a gross margin decline of about 24 basis points for the year (heaviest in Q1 due to GMS annualization), and Q1 EPS performance expected to be mid-single-digit negative year-over-year, improving through the year.

Zach Fadem inquired about the performance of markets with challenging housing turnover and home price appreciation (like Florida and Texas) compared to more favorable markets in 2025, and whether any bifurcation was observed into early 2026.

Answer

CEO Ted Decker stated that underlying comp performance was relatively stable across the year, with no significant storm activity in 2025 creating tough comparisons. He noted that while home prices and turnover are key correlations, the current low turnover rates across the country mean no significant regional differentiation has been observed. Regarding 2026, Ted Decker, Billy Bastek, and Richard McPhail discussed factors influencing the flat to 2% comp outlook, including improved affordability, limited impact from tax stimulus, and ongoing analysis of tariff changes. CFO Richard McPhail provided specific guidance on the shape of the year, expecting stronger second-half comps, a gross margin decline of about 24 basis points (due to GMS annualization), and Q1 EPS to be mid-single-digit negative.

Zach Fadem followed up on the PRO strategy, asking if the Every Day Low Price (EDLP) strategy has been a headwind for the PRO business due to a lack of incremental discounts, and if Floor and Decor would consider adjusting its pricing architecture for the upcoming PRO loyalty program.

Answer

Brad Paulsen (CEO, Floor and Decor) acknowledged that while EDLP has been successful, competitors offer rebates/discounts that some PROs use as profit. He stated that the company is taking all of 2026 to develop a new PRO loyalty plan that could involve adjusting pricing architecture to deepen relationships and grow volume, even if it means a slight headwind to gross margin but is accretive to EBIT.

Zach Fadem questioned the decision not to bring back the '20 for 20' deal, given its past success and favorable wing costs, asking if Wingstop plans to lean more into value in 2026. He also asked about the data and KPIs that provide comfort regarding cannibalization not worsening in 2025, despite double-digit unit growth and challenging comparable sales.

Answer

President and CEO Michael Skipworth stated that Wingstop views value as a total proposition encompassing quality, experience, speed, and price. He noted opportunities to showcase existing value on the menu for specific cohorts or dayparts (e.g., chicken sandwich, tenders) to win fair share. SVP and CFO Alex Kaleida explained that market-level playbooks guide development, and while cannibalization in 2025 was about 40 basis points higher than prior years, 90% of the impact came from strategic decisions by brand partners to 'fortress' markets, typically affecting higher-volume, older, or capacity-maxed restaurants, which does not raise concerns.

Zach Fadem asked about Wingstop's value strategy for 2026, specifically regarding the '20 for 20' deal and leveraging favorable wing costs, and how the company assesses cannibalization amidst double-digit unit growth and challenging comparable sales in 2025.

Answer

President and CEO Michael Skipworth emphasized a holistic value proposition beyond price, focusing on showcasing existing menu value for specific dayparts and cohorts. SVP and CFO Alex Kaleida clarified that cannibalization in 2025 increased by only 40 basis points, primarily from strategic 'fortressing' by brand partners in high-volume or capacity-constrained locations.

Zach Fadem sought clarification on Advance Auto Parts' vendor finance commentary, specifically if taking suppliers off the program leads to better gross margins but weaker free cash flow, and if this is the ongoing strategy. He also asked for housekeeping items, including expectations for LIFO capitalized inventory costs and restructuring costs in Q1 and 2026, and quantification of the Pro comps benefit from 2025 store closures.

Answer

Ryan Grimsland (EVP and CFO) clarified there's no direct gross margin impact yet and no specific target to reduce supply chain finance, which remains stable. He stated they only reduce it if economically sensible, expecting a P&L positive impact if vendors come off. For housekeeping, Ryan stated a LIFO headwind of ~50 basis points for 2026 (about $30 million in Q1) and flat warehouse capitalization costs. He did not quantify the Pro comp benefit but confirmed Pro would still have been positive net of transfer sales.

Zach Fadem sought clarification on Advance Auto Parts' vendor finance commentary, specifically if taking suppliers off the program leads to better gross margins but weaker free cash flow due to payables, and if this is a future strategy. He also asked for housekeeping details on LIFO capitalized inventory costs and restructuring costs for Q1 and full-year 2026, and a quantification of the pro comp benefit from 2025 store closures.

Answer

Ryan Grimsland, EVP and CFO, clarified that there's no immediate impact to gross margin from vendor finance changes, and no specific target to reduce the stable supply chain finance program. He stated that if vendors were to come off the program, a positive P&L impact (cost of goods improvement) would be expected, as it's an investment of working capital. For LIFO, Mr. Grimsland projected a 50 basis point headwind for 2026 (compared to 40 bps in 2025), with a $30 million headwind expected in Q1 2026. Warehouse capitalization costs are expected to be flat. Restructuring costs include $10-$20 million in carryover expenses from 2025 into 2026, primarily related to leases. He confirmed that pro comps did benefit from transfer sales due to store closures in 2025, but would still have been positive without this benefit, as the team successfully maintained service levels for those pro customers.

Zach Fadem asked for color on the magnitude of operating margin performance in the first half versus the second half of the fiscal year, and the expected glide path for product and distribution inflation pressures to abate.

Answer

Brian Niccol, Chairman and CEO, and Catherine Park, CFO, explained that operating margins are expected to improve in the back half of the year. This is due to the anniversarying of Green Apron Service investments in Q4, the realization of savings from the $2 billion cost program, and the anticipated abatement of coffee price and tariff headwinds peaking in Q2. Sales leverage from continued top-line momentum is also a key factor.

Zach Fadem requested color on the expected magnitude of operating margin performance in the first half versus the second half of the fiscal year, and the anticipated glide path for product and distribution inflation pressures to abate.

Answer

Brian Niccol, Chairman and CEO, and Cathy Smith, Executive Vice President and Chief Financial Officer, explained that inflation (coffee, tariffs) is expected to peak in Q2 and abate in the back half of the year. Margin improvement will also be driven by anniversarying Green Apron service investments in Q4, the realization of savings from the $2 billion cost program in the back half, and sales leverage from continued top-line momentum, weighting performance more to the second half.

Zach Fadem asked to quantify the impact of moving away from less profitable sales and de-emphasizing the member program in Q3, and how these factors might influence the expected Q4 comp step-down. He also sought a general framing of broader category performance (dog/cat food, supplies, services) for 2026, layering in initiatives and net store openings/closings to achieve total sales growth.

Answer

Sabrina Simmons, Petco's Chief Financial Officer, noted the broad range for Q4's implied comp. Joel Anderson, Petco's Chief Executive Officer, explained that the impact of moving away from unprofitable sales is evident in growing pet EBITDA market share (sales down, EBITDA up), by identifying 'empty calorie' transactions. He stated it's too early to spell out 2026 specifics but expects a return to growth in consumables and supplies, with services already growing. Simmons added that 2026 sales growth would be a gradual ramp, with fewer net store closures than the approximately 20 in 2025.

Zach Fadem asked for a quantification of the impact of moving away from less profitable sales and de-emphasizing the member program in Q3, and how these factors might influence the Q4 comp. He also sought a level-set for 2026 sales growth, including category performance and the impact of Petco's initiatives and store changes.

Answer

Sabrina Simmons, Petco's Chief Financial Officer, noted the broad Q4 range. Joel Anderson, Petco's Chief Executive Officer, explained that the impact is evident in growing EBITDA market share despite lower sales, by eliminating 'empty calorie' transactions and focusing on lifetime value. He stated it's too early for specific 2026 details but expects a return to growth in consumables and supplies, building on services growth. Simmons added that 2026 would see a gradual ramp and fewer net store closures than the 20 expected in 2025.

Zach Fadem asked for more details on the improving pro survey sentiment, including its trend throughout the year, its reliability as a leading indicator, and the factors driving this recent improvement. He also inquired about early margin scenarios for FBM and ADG in both a status quo environment and one with potential tax stimulus and lower interest rates.

Answer

Marvin Ellison, Chairman and CEO, stated that the small to medium pro business remains stable, with 75% of pros confident in job prospects and focusing on smaller repair projects. Joe McFarland, EVP of Stores, attributed continued pro growth to the 'Transform Pro' offering, MyLowe's Pro Rewards, enhanced digital experience, Pro Extended Aisle, and investments in fulfillment. Marvin Ellison added that integrating FBM into the Pro Extended Aisle platform will significantly enhance fulfillment for large orders like drywall. Brandon Sink, EVP and CFO, clarified that FBM and ADG are expected to dilute operating margin by 20 basis points in 2025 and 50 basis points on an annualized basis in 2026, with the majority of the 2026 impact weighted towards gross margin.

Zach Fadem asked for more color on the improving pro survey sentiment, including its trend throughout the year, its reliability as a leading indicator, and the drivers behind the recent improvement. He also inquired about early margin scenarios for FBM and ADG in both a status quo environment and one with potential tax stimulus and lower interest rates.

Answer

Marvin Ellison (Chairman and CEO) and Joe McFarland (EVP of Stores) noted the small to medium pro business remains stable, with pros confident in job prospects, credit access, and hiring. They highlighted the 'flywheel effect' of the Transform Pro offering, including MyLowe's Pro Rewards, enhanced digital experience, Pro Extended Aisle, and fulfillment investments. Marvin Ellison also mentioned integrating FBM into the Pro Extended Aisle for efficient fulfillment. Brandon Sink (EVP and CFO) detailed FBM/ADG margin impact: 20 basis points dilution in 2025 (split evenly), and an annualized 50 basis points in 2026 (30 basis points wrap), primarily weighted towards gross margin.

Zach Fadem asked about the financial benefit from sale-leasebacks in Q1 and for an update on new store productivity.

Answer

CFO Kurt Barton reported a $17 million sale-leaseback gain in Q1. He stated that new store productivity remains strong at 62% on a rolling 12-month basis, which is near the company's historical target, and noted that new stores face the same macro headwinds as comparable stores. He also confirmed the Allivet acquisition is contributing as expected.