The Home Depot - Earnings Call - Q1 2026

Executive Summary

• Q1 FY2026 results were mixed: sales beat consensus while EPS was slightly below. Net sales were $39.86B (+9.4% YoY), above S&P Global consensus of $39.25B; adjusted EPS was $3.56 vs. $3.589 consensus, and GAAP EPS was $3.45. EBITDA was ~$6.13B vs. $6.15B consensus, a slight miss. FX was a notable headwind (~70 bps of comps, ~$275M revenue impact).
• Management reaffirmed FY2025 guidance: ~2.8% sales growth, ~1.0% comp growth, ~33.4% gross margin, ~13.0% operating margin (13.4% adjusted), ~24.5% tax rate, ~$2.2B net interest expense, EPS down ~3% (adjusted EPS down ~2%), capex ~2.5% of sales, ~13 new stores.
• Operating trends: comps -0.3% with U.S. comps +0.2%; transactions +2.1% and average ticket flat; Pro outpaced DIY; online comp +~8%; big-ticket transactions +0.3%; softness persists in larger, financed remodel projects; weather favored March/April and Easter shift aided March.
• Mix headwinds from SRS weighed on margins (gross margin 33.8% and operating margin 12.9% in Q1; adjusted OM 13.2%), partially offset by lower shrink and supply chain productivity; SRS delivered $2.6B sales in Q1 and remains a share-gain engine.
• Strategy/catalysts: robust Pro ecosystem expansion (trade credit onboarding, order management rollout), AI tools (Magic Apron) boosting digital conversion, and sourcing diversification to mitigate potential tariff impacts without broad price hikes (supports share gains).

What Went Well and What Went Wrong

What Went Well

• Sales beat and U.S. comps positive: Net sales $39.86B (+9.4% YoY) with U.S. comps +0.2% and transactions +2.1%; CEO: “continued customer engagement across smaller projects and in our spring events”.
• Digital and service momentum: Online comp +~8% with fastest-ever delivery speeds; generative AI “Magic Apron” improving online conversion. CFO cited supply chain productivity and improved shrink as offsets to mix pressure.
• Pro ecosystem traction: Pro comps positive and outpaced DIY; SRS delivered $2.6B in Q1 and exceeded expectations; trade credit program onboarding accelerating larger baskets.

What Went Wrong

• EPS/margin pressure: Adjusted EPS $3.56 missed consensus; operating margin fell to 12.9% (13.2% adjusted) on SRS mix and natural deleverage; gross margin declined ~35 bps YoY to 33.8%.
• Macro/FX headwinds: Comps -0.3% impacted by ~70 bps FX headwind and unfavorable weather in February; CFO quantified ~$275M top-line FX pressure.
• Large project softness persists: Higher rates and uncertainty continue to defer larger, financed remodels (kitchen/bath), limiting big-ticket acceleration despite some categories improving.

Transcript

Operator (participant)

Greetings, and welcome to the Home Depot first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Isabel Janci (VP of Investor Relations and Treasurer)

Thank you, Christine. Good morning, everyone. Welcome to Home Depot's first quarter 2025 earnings call. Joining us on our call today are Ted Decker, Chair, President, and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, Executive Vice President of Merchandising; and Richard McPhail, Executive Vice President and Chief Financial Officer. Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. As a reminder, please limit yourself to one question with one follow-up. If we are unable to get to your question during the call, please call investor relations at 770-384-2387. Before I turn the call over to Ted, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release and in our most recent annual report on Form 10-K and other filings with the SEC. Today's presentation will also include certain non-GAAP measures, including but not limited to adjusted operating margin, adjusted diluted earnings per share, and return on invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release on our website. Now, let me turn the call over to Ted.

Ted Decker (Chair, President, and CEO)

Thank you, Isabel, and good morning, everyone. Sales for the first quarter were $39.9 billion, up 9.4% from the same period last year. Comp sales declined 0.3% from the same period last year, and comps in the U.S. increased 0.2%. Adjusted diluted earnings per share were $3.56 in the first quarter, compared to $3.67 in the first quarter last year. Our first quarter results were in line with our expectations, despite unfavorable weather in February and unplanned pressure from foreign exchange rates. In local currency, Canada posted comps below the company average, while Mexico posted positive comps. The momentum in the business during the back half of fiscal 2024 continued into the first quarter. Our customers engaged across smaller projects and in our spring events.

Our associates remained focused in the quarter, and we feel great about our store readiness and product assortment as spring continues to break across the country. Let me take a moment to comment on our global sourcing strategy. Today, more than 50% of our purchases are sourced in the United States. Over the last several years, we have worked diligently with our vendors to further diversify our global supply chain. During that period, the vast majority of our supplier partners developed diversified sourcing strategies across several countries, including the United States. As a result, we now have tremendous sourcing flexibility. We are already taking action and anticipate that 12 months from now, no single country outside of the United States will represent more than 10% of our purchases. Our team has effectively navigated many economic cycles.

We believe we have the best merchants, supply chain, and finance teams with exceptional tools to help us understand cost impacts by country at the SKU level. We also have robust product and project elasticity models at the market level, and we have strategic vendor partners who understand the need to deliver the right value proposition to our customers. We remain bullish on the fundamentals of home improvement and are confident that we are best positioned to win. We operate in a highly fragmented, addressable market of approximately $1 trillion, and our consumer, the homeowner, remains healthy. For most people, their home is their biggest asset, and home prices continue to rise. This has led to record levels of home equity, giving our customers confidence to invest in their homes. The housing stock is aging, and 55% of homes are 40 years or older.

We know that as homes get older, they require more maintenance and updates. We will continue investing in our business to ensure we are best positioned to gain market share, particularly in periods of disruption. Our associates have never been more engaged and ready to serve our customers. You'll hear more from Ann in a moment, but we remain focused on our associates because we know that if we take care of our associates, they will take care of the customer, and everything else will take care of itself. We are also focused on maturing our pro ecosystem to better serve pros working on large, complex projects. SRS is now managing our trade credit program, and we are seeing tremendous results as we onboard pros to the program. SRS continues to perform above our expectations as our teams work together to gain share.

Despite the continued pressure and volatility across the market, our merchants, store and vet teams, and supplier partners and supply chain teams did an outstanding job serving our customers. I'd like to close by thanking them for their dedication and hard work, and also our thoughts are with those impacted by the severe storms and tornadoes yesterday. With that, let me turn the call over to Ann.

Ann-Marie Campbell (Senior Executive VP)

Thanks, Ted, and good morning, everyone. As you heard from Ted, we continue to invest in our business with a focus on taking care of our associates and customers. We know that having the best customer shopping experience in home improvement makes a significant difference and drives sales. Our stores are at the heart of the Home Depot experience, and our associates' deep product and project knowledge differentiates us from our competitors. Customers come to the Home Depot to solve their home improvement problems and build their dreams, and it is our job to consistently deliver the best interconnected shopping experience. To do that, we must be laser-focused on our associates, ensuring that we are providing the tools they need to continue to be engaged, knowledgeable, and ready to serve our customers.

Our business is not unique in that it provides our customers with what we refer to as a three-legged stool: having the best assortment, value, and exceptional customer service. We are continuously reinforcing that with our teams. One way we do this is at our store managers' meeting, which we held in March. That is where we celebrate the hard work and dedication of our 2,300+ store leaders and 200 distribution center general managers, among others. It is a fantastic event that reminds our leaders of what really matters: delivering a high level of service. We do this by creating a learning environment that empowers our associates with the knowledge and tools to have the confidence to sell. To do this, we are continuing to leverage existing tools like Pocket Guide, an application on the HD phone that provides extensive product knowledge, including tutorials and how-to guides.

We are also investing in additional training opportunities. This quarter, we launched a certification for live goods associates, providing them a deeper level of localized product knowledge to drive incremental sales during our biggest selling season. We are introducing new tools using generative AI that leverages our internal data and deep knowledge base to provide store associates quick access to operational and product knowledge via their HD phone. These tools, coupled with a multitude of other investments to drive better service, on-shelf availability, and better insights into our customers' projects, help us win with all of our customers, DIYs, and pros. Recently, we conducted our annual Voice of the Associates survey, which showed improvements scored particularly in development. It is clear that as we invest more broadly in our associates, including through tools and education, we continue to see record retention rates, better engagement, and improved customer service.

I am so excited about all we are doing for our associates to help them better serve customers and ultimately drive increased customer satisfaction and sales. Our amazing associates continue to go above and beyond to serve our customers regardless of the external environment, and I want to thank them for all that they do. With that, let me turn the call over to Billy.

Billy Bastek (Executive VP of Merchandising)

Thank you, Ann. Good morning, everyone. I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities. In particular, as you heard from Ted, we are well-positioned to navigate the current macroeconomic environment. Our best-in-class merchants, supply chain, and finance teams provide us with a competitive advantage and continue to position us for success. Their knowledge base and the tools that they have developed over the years provide us with visibility at the SKU level to help inform our global sourcing strategy. This deep business understanding, coupled with the strong collaboration with our vendor partners, is what enables us to move quickly to accelerate sourcing diversification.

Turning to our first quarter results, as you heard from Ted, our performance during the first quarter was in line with our expectations despite unfavorable weather that impacted February. As the weather improved throughout the quarter, we experienced similar engagement compared to what we saw in the back half of fiscal 2024, with customers taking on smaller home improvement-related projects. However, the higher interest rate environment continues to pressure larger remodeling projects. In the first quarter, six of our 16 merchandising departments posted positive comps, including appliances, plumbing, indoor garden, electrical, outdoor garden, and building materials. During the first quarter, our comp average ticket was essentially flat, and comp transactions decreased 0.5%. Inflation from core commodity categories positively impacted our average ticket by approximately 30 basis points, driven by inflation in lumber and copper.

Additionally, during the quarter, we continued to see our customers trading up for new and innovative products. Big-ticket comp transactions for those over $1,000 were +0.3% compared to the first quarter of last year. We were pleased with the performance we saw in categories such as building materials, lumber, and hardware. However, we continued to see softer engagement in larger discretionary projects where customers typically use financing to fund the project, such as kitchen and bath remodels. During the first quarter, pro-comp sales were positive and outpaced the DIY customer. In the first quarter, we saw strength across many pro-heavy categories like gypsum, decking, concrete, and siding. Turning to total company online comp sales, sales leveraging our digital platforms increased approximately 8% compared to the first quarter of last year.

We continue to invest in enhancing our interconnected experience, and this quarter, we continued to lean into marketing our speed of delivery that is resonating with our customers. Those customers benefiting from faster delivery are engaging more and spending more with us across our categories. Additionally, during the back half of last year, we began rolling out a new feature on our website called Magic Apron, a generative AI tool that helps customers find the answers they need related to their home improvement projects. Whether summarizing product reviews or answering live questions with our proprietary expertise, Magic Apron has seen strong customer engagement contributing to growth and online conversion. Our customers have always relied on the expertise of our associates in our stores to answer questions and help them solve problems.

Magic Apron is designed to bring that same expertise to the digital world, leveraging our proprietary knowledge base to support our customers and give them the confidence to tackle their home improvement projects anytime, anywhere. In the first quarter, we were extremely pleased to announce an expanded relationship with Behr to exclusively offer KILZ-branded primer products in the United States. With our new exclusive agreement, The Home Depot will become the only home improvement big box retailer to offer KILZ-branded primer products, including KILZ Original, All-purpose, Premium, Restoration, and more problem-solving primer products and aerosols. This new exclusive agreement will deepen our relationship with our pro customers, allowing us to continue to gain share in this important space. During the first quarter, we also hosted our annual Spring Black Friday and Spring Gift Center events and saw strong performance across both events.

Our merchants did a fantastic job curating the best products, and we saw strong engagement with our customers throughout the events. We're pleased with the results we saw, particularly in categories like appliances, power tools, grills, and paint. As we look forward to the second quarter, we are ready for spring across all our product categories. Our live goods look incredible with everything from shrubs to a variety of flowers, herbs, and vegetables for every type of gardener. Our merchants partner each year with global, regional, and local breeders to make sure we have the right plants with the right attributes to ensure that our customers will have success in their gardens. The innovation we continue to bring in this space helps bring gardening confidence, creating brand loyalty, while also putting our customers in a position to succeed in their gardens.

We're excited about spring breaking across the country, and we remain ready to help our customers with all of their outdoor projects and outdoor living needs. With that, I'd like to turn the call over to Richard.

Richard McPhail (EVP and CFO)

Thank you, Billy, and good morning, everyone. In the first quarter, total sales were $39.9 billion, an increase of $3.4 billion, or approximately 9.4% from last year. During the first quarter, our total company comps were -0.3%, with comps of -3.6% in February, +0.6% in March, and +1.1% in April. Comps in the U.S. were +0.2% for the quarter, with comps of -3.3% in February, +1.3% in March, and +1.8% in April. For the quarter, and in local currency, Mexico posted positive comps, whereas Canada was below the company average. Additionally, foreign exchange rates negatively impacted total company comps by approximately 70 basis points for the quarter.

In the first quarter, our gross margin was 33.8%, a decrease of approximately 35 basis points from the first quarter of last year, reflecting a change in mix as a result of the SRS acquisition, partially offset by benefits from lower shrink and supply chain productivity. During the first quarter, operating expense as a percent of sales increased approximately 70 basis points to 20.9% compared to the first quarter of 2024. Our operating expense performance was in line with our expectations. Our operating margin for the first quarter was 12.9% compared to 13.9% in the first quarter of 2024. In the quarter, pre-tax intangible asset amortization was $139 million. Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the first quarter was 13.2% compared to 14.1% in the first quarter of 2024.

Interest and other expense for the first quarter increased by $163 million to $591 million due primarily to higher debt balances than a year ago. In the first quarter, our effective tax rate was 24.4% compared to 22.6% in the first quarter of fiscal 2024. Our diluted earnings per share for the first quarter were $3.45 compared to $3.63 in the first quarter of 2024. Excluding intangible asset amortization, our adjusted diluted earnings per share for the first quarter were $3.56, a decrease of approximately 3% compared to the first quarter of 2024. During the first quarter, we opened three new stores, bringing our total store count to 2,350. At the end of the quarter, merchandise inventories were $25.8 billion, up approximately $3.3 billion compared to the first quarter of 2024, and inventory turns were 4.3x down from 4.5x last year.

Turning to capital allocation, during the first quarter, we invested approximately $800 million back into our business in the form of capital expenditures. During the quarter, we paid approximately $2.3 billion in dividends to our shareholders. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 31.3%, down from 37.1% in the first quarter of fiscal 2024. Now I will comment on our outlook for fiscal 2025. Excluding the unplanned FX rate pressure, our performance during the first quarter was in line with our expectations. The customer engagement we saw in the back half of 2024 continued into the first quarter and through the first two weeks of the second quarter. In addition, we are confident that we will be able to effectively navigate the environment as it stands today.

As a result, we are reaffirming our fiscal 2025 guidance. We expect total sales growth to outpace sales comp, with sales growth of approximately 2.8% and comp sales growth of approximately +1% compared to fiscal 2024. Our gross margin is expected to be approximately 33.4%, essentially flat compared to fiscal 2024. Further, we expect operating margin of approximately 13% and adjusted operating margin of approximately 13.4%. This primarily reflects natural deleverage from sales and continued investments across the business, as well as reflecting the mix impact from the SRS acquisition. Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $2.2 billion. We expect our diluted earnings per share to decline approximately 3% compared to fiscal 2024 when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024.

We expect our adjusted diluted earnings per share to decline approximately 2% compared to fiscal 2024. On a 52-week basis, adjusted diluted earnings per share would be essentially flat compared to fiscal 2024. We plan to continue investing in our business with capital expenditures of approximately 2.5% of sales for fiscal 2025. We believe that we will grow market share in any environment by strengthening our competitive position with our customers and delivering the best customer experience in home improvement. Thank you for your participation in today's call. Christine, we are now ready for questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Christopher Horvers with JPMorgan. Please proceed with your question.

Christopher Horvers (Senior Analyst)

Thanks. Good morning, everybody. There's a lot of noise out there with the weather, which you called out, perhaps some CNN effect given the news cycle. I wanted to get more insights on how you would characterize the overall demand environment. Do you think there was any uncertainty impact of sales trends in Q1 that could actually be understating the actual momentum in the business? More broadly, with respect to the momentum that emerged in the back half of last year, as we think about an environment where existing home sales is flat, wouldn't replacement cycles portend acceleration from the trends that you exited 2024 with, especially if there's a tick up in inflation?

Ted Decker (Chair, President, and CEO)

Hey, good morning, Chris. Thanks for that question. Let me just raise up a bit is how we see overall consumer and then drill down a little bit into that specific question. I think from the macro, the worst concerns I think have passed. We've gone from a dynamic of where we were going to have a near certain recession and stock market correction in early April to where today stock markets fully recovered. Recession expectations are way down in the past month. Morning Consult just came out with their daily consumer sentiment tracking that showed significant improvement just in the last two weeks. We know unemployment remains low. TCE grew nicely in April after a very strong March print, and inflation is trending down toward 2% in April. Home prices also continue to increase nationally.

As you said, with interest rates and mortgage rates remaining stubbornly high, housing turnover has remained at decades-long lows and starts are flat. You would think you've heard us talk before with so much home equity built up. Our consumer has a job, increasing wages, increases of home equity are up as much as 50% since the end of 2019. Why haven't we seen the larger remodeling cycle, particularly as people stay in their homes? Again, we've cited the increased engagement in Q4 of 2024 and how that continued into the first quarter of 2025, but we've yet to see that large project. The large project generally requires some sort of financing, and while there are literally trillions of dollars of equity available to be tapped in the homes, I think there's still enough macro uncertainty.

Those stubbornly high interest rates that people are painting again and working in their yards and doing smaller projects, but just have not engaged in the larger projects. Obviously, we think that will increase. We cited last quarter that we are at now a net cumulative shortfall of about $50 billion of home improvement spend on housing. We are very much looking forward to it as much as you are when people tap their equity, gain the stronger macro confidence, and engage in those bigger projects.

Christopher Horvers (Senior Analyst)

Thank you. My follow-up on the SG&A line. SG&A, I think, grew 12% year-over-year this quarter. That was a pretty sizable step up from the underlying growth rate over the past few quarters. Can you talk about was there anything one time in that that maybe the street missed? How are you thinking about SG&A growth as the year progresses? Thanks very much.

Richard McPhail (EVP and CFO)

Yeah, thanks, Chris. We did, as we've said, operating expenses can show a little bit of variability from quarter to quarter. In this case, we're overlapping a legal settlement of some size in Q1 of last year. That did have an impact. You also have to remember we're adding the SRS expenses to our expense base that didn't exist in Q1 of last year. When you take that noise out, we levered expenses exactly how we would have expected to in a comp environment like this. Our operators are managing their portfolios exactly how we would hope. Frankly, kicking up to the cost of goods sold, if I may just for a moment call out our incredible merchants and supply chain and operations teams who, again, show us great results in supply chain productivity and in shrink results.

For the remainder of the year, just kind of zooming back out, we've reaffirmed guidance. Let me just kind of reorient you to the year-over-year expectation. Year-over-year, 2024-2025, operating margin will decline from 13.8% to 13.4%. About 20 basis points of that is from what you would expect natural deleverage, right? We typically lever it around three points of comp. If you say at one point of comp, we've got kind of two points of deleverage headwind. 2x about 10 basis points each gives you about 20 basis points of deleverage. That is 20 of the 40. 15 of the 40 is the partial year-over-year impact of SRS. We will own SRS 12 months this year. We owned them for about seven months last year. That 15 is the year-over-year impact.

Think of the fully annualized impact of SRS, just mixed impact being around 40 basis points to adjusted operating margin. The year-over-year is 15. That is 20 from deleverage, 15 from SRS, and the remaining 5 is caused by going from a 53rd-week year to a 52-week year. Underlying all that, we are generating fantastic productivity, which we are reinvesting in the business to put ourselves in position to take share in any environment.

Christopher Horvers (Senior Analyst)

Thank you. Have a great rest of spring.

Richard McPhail (EVP and CFO)

Thanks.

Operator (participant)

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman (Director)

Hey, good morning, everyone. Thanks for the question. I want to follow up on the comp guidance for the year. The April exit and then May commentary sounds good. You're close to two. SRS will kick up, I think, at some point in the second quarter. I also think the back half was always expected to be a little bit better than the first half. Curious if there's any added caution or just prudence in how you're setting it up. You could get to one and a half to two. I'm not trying to get you on that. If trends that you're seeing today hold, you should do a little bit better maybe than the guidance, or is there some extra caution you're putting in with housing? Thanks.

Richard McPhail (EVP and CFO)

Simeon, thank you for the question. We're one quarter in. The team did an awesome job of hitting our expectations, except for the FX pressure, which was $275 million at the top line. Without that FX pressure, we would have exceeded our own expectations. We're a quarter in. We feel good about the business heading into Q2. Right now, we feel good about reaffirming our guidance where it is.

Simeon Gutman (Director)

Okay. I'll follow up on sales related to SRS. Can you talk about how much of a catalyst either order management or trade credits have been or are starting to be? Within that, if you're willing to share the relative strength of SRS's businesses between roofing, pool, and landscape. Thanks.

Ted Decker (Chair, President, and CEO)

Hey, Simeon. We're super pleased with SRS's performance. If you just look at their growth by the three verticals they operate in, we exceeded our expectation. We believe they're taking share in each of those three verticals. So couldn't be happier with SRS. They are operating per their playbook of organic growth made up of comp branch growth and opening new branches, as well as tuck-in acquisitions. That is active in all three verticals. In terms of how they're helping us on our pro ecosystem, the main thing they're working on right now is the trade credit program. As we talked about the six broad capabilities of delivery and sales force and pricing and order management, etc., credit is a key component of that ecosystem.

As we started to build out that capability in-house, we said, "Well, geez, SRS, that's their business model." They have 90,000+ accounts on trade credit. They have an extraordinarily capable set of managers and team members running that program for them. We just said, "Rather than build it ourselves here in Atlanta, let's let SRS build that for us and run our credit out of Dallas," which they're doing. We are still very early days. We are in the thousands of accounts onboarded to a credit program with our Home Depot Core Pro. Like every bit of our capabilities, as our pros engage in the new capabilities, whether it's be assigned a sales representative, engage in delivery, and now in this case, attaining a line of credit, we see accelerating comp.

Really happy with how this is going and look forward to increased growth as we onboard more customers. Remember, we have millions of pro customers. I'm not saying we're going to have millions of accounts anytime soon, but we're in the low single-digit thousands of onboarded accounts on our way to millions.

Richard McPhail (EVP and CFO)

Just one thing on the specific verticals, we feel great about performance across all three.

Simeon Gutman (Director)

Okay. Thanks. Have a great spring.

Richard McPhail (EVP and CFO)

Thank you.

Operator (participant)

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser (Equity Research Analyst, Hardlines, Broadlines, and Food Retail)

Good morning. Thank you so much for taking my question. My first question is on tariffs. A little less than 50% of your sales are coming from outside of the U.S. There is currently anywhere from a 10%-30% tariff on those goods. If we assume a blended rate of 20% and The Home Depot is absorbing half of that, it would mean on average, that is going to be about a 5% tariff on your cost of goods. How is The Home Depot approaching that from a pricing standpoint? If we assume you generally keep pricing steady, does that offset or absorb some of the productivity, supply chain, and shrink benefits that would potentially accrue to shareholders over the next few years that it potentially would not materialize now, given they will need to be used to offset the cost increases? Thank you.

Billy Bastek (Executive VP of Merchandising)

Good morning, Michael. Thanks for the question. You hit on a couple of the things that Ted mentioned in his prepared remarks. It is important, but over 50% of our purchases are sourced in the U.S., as you have mentioned. We have been working with our suppliers for years. I mean, one of the hallmarks of Home Depot has always been diversification and diversifying with their supply chain. During that time, a majority of our suppliers have diversified their sourcing strategies across several countries. We have got tremendous flexibility here. I cannot emphasize that enough. We are already taking action, moving quickly. We anticipate 12 months from now that no single country outside of the U.S. will actually represent more than 10% of our purchases. You think about our scale, the great, tremendous partnerships—I cannot reiterate those enough that we have with our suppliers.

You mentioned productivity, a hallmark of The Home Depot. We see in our business, we intend to generally maintain pricing across our portfolio. We will continue to use the portfolio approach that we have talked a lot about in the past. We do not see broad-based price increases for our customers at all going forward. It is a great opportunity for us to take share, and it is a great opportunity for our suppliers to take share as well.

Michael Lasser (Equity Research Analyst, Hardlines, Broadlines, and Food Retail)

Just to clarify, Billy, does that mean you will have to subsidize what would have been price increases with some of the other benefits that would have accrued to the gross margin otherwise?

Billy Bastek (Executive VP of Merchandising)

Listen, we have a number of different levers that we have in the portfolio, Michael. You mentioned a few of those. We have a number of different levers, including productivity. The other thing I would keep in mind is that if you think about our line structure today, there are items that we have that could potentially be impacted from a tariff that, candidly, we will not have going forward if it does not make sense inside the line structure. It is a little bit less about the item and the percentages that you mentioned and more about the line structure and how we will manage that going forward. There will be some things that do not make sense that just end up going away. If you think about it that way, really a limited impact from that standpoint.

Our suppliers, along with our teams, have done a terrific job diversifying their global supply chains. This is not new to The Home Depot. It has always been something that we have worked closely with our suppliers on. We feel good about all the productivity and the other things that we have in our arsenal to manage that accordingly for our customers.

Michael Lasser (Equity Research Analyst, Hardlines, Broadlines, and Food Retail)

Gotcha. My follow-up question is on Ted's comment that there could be $50 billion of deferred demand in home improvement. If we just simply apply Home Depot's market share of around 25% to that number, that would be $10-$15 billion of deferred demand that Home Depot could experience over the next few years, either as rates come down or as the consumer just comes in off the sidelines because a matter of time passes. Why shouldn't we think about that as providing an outsized benefit to Home Depot's sales growth over the next few years above and beyond the 3%-4% top line growth that is inherent in your algorithm? Thank you so much.

Ted Decker (Chair, President, and CEO)

That is certainly our expectation that that is exactly the type of share opportunity as we continue to dial in the core orange box business servicing the DIY in the Pro and then all the capabilities that we are building to capture more share wallet with the larger Pro. That would absolutely be the outside case where we are taking more share, Michael. That is exactly what we hope to do. We will talk more about that in December at our investor conference.

Michael Lasser (Equity Research Analyst, Hardlines, Broadlines, and Food Retail)

Understood. Thank you so much and good luck.

Operator (participant)

Our next question comes from the line of Scot Ciccarelli with Truist. Please proceed with your question.

Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)

Good morning, guys. Thanks for the time. Last quarter, you provided some extra comments on the 17 markets where you have extra capabilities rolled out for the Complex Pro. Can we get an update on what capabilities are kind of rolled out where and then any more color on the relative performance of those markets? Thanks.

Ted Decker (Chair, President, and CEO)

Scott, there are no additional markets. We're in 17 markets with our—and the distinction of the 17 markets, again, is where we have a flatbed distribution center. We're delivering in all markets as we've done for years. Again, the distinguish there is that we have a separate facility. We've just continued to make progress. The sales team continues to mature. Our pricing schemes continue to mature. Delivery, our on-time and complete scaled delivery has never been better. By the way, that is with the consumer DIY parcel business to the big and bulky deliveries out of our stores as well as out of our multiple distribution facilities, our MDOs, market delivery operations, our DFCs, and our FDCs. We've never been in a better in-stock, in-on-time, and complete delivery with the fastest speed of all time in our delivery rates.

The last and maybe longest hole in the tent is finishing up the IT work on order management and account management. As I said, the credit program is built, and we're onboarding just early days there and will be finishing up throughout 2025 the last initial build of the technology work to build more agile order management. That should only improve our on-time and complete and speed metrics.

Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)

Got it. Thank you for that. Richard, can you just comment on the expectations regarding SRS getting layered into the comp kind of mid-Q, kind of how you guys are thinking about that for the balance of the year? Thanks, guys.

Richard McPhail (EVP and CFO)

Yes. We closed on the acquisition of SRS mid-June last year. They will enter our comp base shortly, and we'll own them for a little more than seven months this year. Once they enter the comp base, we will report them as part of total company comp. Our U.S. comp that we report is principally our retail operations and reflects those. We have historically reported HD Supply, for instance, not in U.S. comp, but in total company comp to give you that clean look of the U.S. retail business. SRS will be treated similarly. They will not be reported as part of U.S. comp. They will be reported as part of total company comp. For the quarter, SRS actually exceeded our expectations. They delivered $2.6 billion in sales. We expect them to meet our expectations of mid-single-digit growth for the year.

We are looking forward to continued growth with them. That acquisition is one to be proud of. We are making, as Ted said, a lot of progress with SRS.

Scot Ciccarelli (Managing Director and Senior Equity Research Analyst)

Great. Thanks a lot, guys. Good luck.

Operator (participant)

Our next question comes from the line of Zhihan Ma with Bernstein. Please proceed with your question.

Zhihan Ma (Director and Senior Research Analyst)

Hi. Thank you for taking my question. First one on the inventory, which looks to be up about 15% this quarter, can you just help us understand how much of that was driven by SRS in the base? Has there been any pull forward of inventory? More broadly speaking, how do you feel about your inventory positioning ahead of the summer and more forward looking into the holidays? Thank you.

Ted Decker (Chair, President, and CEO)

Thank you. We feel great about our inventory position. We are at in-stock levels as good as they've ever been, but a little bit behind the numbers. First, recall, SRS was not reflected in our Q1 balance sheet last year. The majority of the increase year-over-year in inventory is simply from adding the SRS inventory into our base. We also made investments, though, as we saw gains from our speed initiative online and in our supply chain, and we saw momentum in that part of our business and that customer experience, we began heavier load-ins in our DCs to take advantage of that customer momentum. The inventory position is right where we want to be. Really no pull forward here. If you think about—Billy, maybe you want to talk a little bit about spring and how that works.

Billy Bastek (Executive VP of Merchandising)

Yeah.

I mean, this is our Super Bowl season, Q2 specifically. As Richard mentioned, we did not pull forward any inventory. Having said that, all of our goods for really the season—I will think of the first half of our business, depending on where it breaks across the country—has been in our DCs, in our network. It is a little bit slower, as we mentioned, in February. That has caught back up. All of that inventory has landed well before the fiscal year started. We feel great about our position. We mentioned our in-stock rates have never been better. Really thrilled with that. Thanks to our suppliers, again, for great work there. We feel we are in a great position as it relates to the biggest part of our year coming up. We talked about speed and how that is working for us with our customers.

Really pleased with the performance there. We've continued to invest in our DFC network, as we know speed is the key metric to conversion. We're really pleased with the productivity we're getting out of that inventory as well.

Zhihan Ma (Director and Senior Research Analyst)

Great. Thank you. A quick follow-up. In terms of the acceleration in comp over the course of Q1, was there any Easter timing shift impacted there? Are you seeing the exit rate continuing in May? Thank you again.

Richard McPhail (EVP and CFO)

There absolutely was an Easter timing shift that if you add to April, it benefited March to the detriment of April. If you adjust for that Easter week shift, April would have been closer to 2.5% comp in the U.S. than our reported comp.

Operator (participant)

Our next question comes from the line of Zack Fadem with Wells Fargo. Please proceed with your question.

Zach Fadem (Managing Director)

Good morning. Following up on pricing, as it sounds like you've got the levers at your disposal to hold pricing and margins relatively consistent. When you think about the industry and your competitors, is it fair to say in that scenario that your price spreads versus your peers would widen? When you look at your elasticity models, is there a specific level of tariff that would preclude you or the industry from being able to hold price constant?

Billy Bastek (Executive VP of Merchandising)

Yeah. Thanks, Zach. I'm not going to speak to our competitive set and what they're going to do with retails, as I mentioned a few minutes ago. We feel very good about our position in terms of where we are, diversification, and all the things that I mentioned there. We are always testing elasticity models in this environment and every environment. We have a great team with our merchants and obviously with our finance partners. We're always testing those elasticity models in any environment. We'll do the same here as we've done every other time. As it relates to our price positioning versus the market, I wouldn't speculate on that. We just feel great about our position. We've got the best merchants, supply chain, and finance teams.

We've got tremendous models down to the SKU level and where all of our assortments are and where they're going from a diversification standpoint. I’d say that we feel very confident about our price position, as I mentioned.

Zach Fadem (Managing Director)

Got it. Richard, from an accounting perspective, you're under the retail inventory method. I just want to make sure that there's no change in the way we should think about your gross margin. If there's any puts and takes, we should keep in mind as the tariff-driven costs flow through your P&L and how that will get recognized as you match that with sales.

Richard McPhail (EVP and CFO)

We are on the retail inventory method. Look, you will see a little bit of variability reflecting changes in retail where that happens, markups where that happens. There is really not anything significant to call out quarter to quarter for us.

Zach Fadem (Managing Director)

Got it. Thanks for the time.

Richard McPhail (EVP and CFO)

Remember, our retails move in ordinary course. In any quarter, you're going to see the effect of price changes, right, in that retail math method.

Zach Fadem (Managing Director)

Thanks, Richard.

Operator (participant)

Our next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.

Seth Sigman (Managing Director and Senior Equity Research Analyst)

Hey, good morning, everyone. I wanted to ask about the housing backdrop and if you could elaborate on regional performance in the period. I'm curious what you're seeing in markets where maybe housing activity has softened a bit, where home prices have softened. I guess if we do see home prices weaken, does that matter as much as maybe in the past, just given where home equity is versus history? Thanks so much.

Ted Decker (Chair, President, and CEO)

Yeah. Tough to prescribe, Seth, the exact dynamic there. There are a couple of markets that we saw a slight softening, but we've not seen any change in sales associated with that. This time of year, as you can imagine, weather is the dominant determinant of a particular region's performance. Nothing yet on any price changes in housing impacting the business.

Seth Sigman (Managing Director and Senior Equity Research Analyst)

Okay. Got it. As you think about the demand outlook, your business has been improving modestly in Q4 and then again the last several months. If you look out, even as you're not raising prices, it seems like a lot of other companies are going to be raising prices, even outside of the home improvement category. There's a growing concern that that's going to weigh on the consumer. It's going to weigh on spending power. How do you think about that? Do you see that as a risk to the outlook that you've laid out here? Thanks so much.

Ted Decker (Chair, President, and CEO)

I think there was a lot of talk of demand destruction, what I mentioned earlier in an earlier question, that if there was a significant shock to the economy and expectation of recession and overall demand destruction, I think we're well past that now. If there is some share of wallet dynamic due to raising prices in other sectors of the economy, we'll be watching that very closely. Again, the thing to keep in mind is we have a very different customer and a very different sort of use case for expenditure in home improvement. Our customer, from a broad basis, is one of the strongest in the economy. The average income is $110,000. 80% of our customers own their homes. We've talked about how much home price appreciation they've seen over the past year. Stock markets have recovered. Job and wage growth are strong.

Our customer is in a good spot right now. I mentioned Morning Consult. If you look at their views of different income levels and expectations of the economy and most recent impact on wage growth, that $100,000+ customer is by far in the best shape in the economy. It is something we are watching. Something like energy pricing is broad-based and obviously impacts everyone. Gas prices are going down, so that is a help. Food prices have remained high. It is something we obviously watch, but I think we are well past the dialogue of overall demand destruction.

Seth Sigman (Managing Director and Senior Equity Research Analyst)

Okay. Great. Thanks so much, Ted. Appreciate it.

Operator (participant)

Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Chuck Grom (Managing Director)

Hey, good morning. Thanks very much. On the consumer, I'm curious if you saw any pull forward in demand in the quarter or a change in project sizes, if there's any sense of urgency to get projects done sooner before prices rise. I might have missed it, but did you guys have a comment on how May has trended so far relative to the first quarter?

Billy Bastek (Executive VP of Merchandising)

Yeah. Chuck, thanks for the question. In terms of pull forward, we did not see a lot of that. We may have seen a little bit of that in appliances, but across our broader business, we really did not see any pull forward at all. We will wait and see on some of the appliance pieces. Across our business, we have not seen anything. In terms of engagement with projects, as I mentioned in my prepared remarks, we are seeing customers engage as they did in the back half of 2024, smaller projects. We know that finance projects are still feeling pressure, but we are really thrilled with the engagement that we saw in our customers where the weather was. As Richard mentioned in his remarks, the first two weeks of May, we are very pleased with the performance so far.

Chuck Grom (Managing Director)

Okay. Great. Thanks. Richard, just four consecutive quarters now of shrink, roughly probably called 30-40 basis points of a tailwind. Can you just remind us where the accrual sits today, maybe relative to 2019? I'm just trying to assess how much longer that benefit can continue to help you. Zooming out on SRS, we talk a lot about the sales benefit, but as you said, 40 basis points of a headwind to the margin profile this year on an annualized basis. How do we think about SRS in 2026 from a margin perspective?

Richard McPhail (EVP and CFO)

I'll take those maybe in reverse order. First of all, we're not in a position right now where we're going to talk about 2026, but we know SRS has a track record of growing faster than their competition and taking share in any environment. We expect there'll be an engine for growth for the company. For your shrink question, I think the most important point, because the world is a lot different now than it was in 2019, is that we're not where we want to be, but we're making great headway. We know that the external environment is not getting any easier, but our operators are getting better, and they are delivering results. We're not where we want to be yet, but we've bent that curve down, actually six quarters in a row on a VoY basis. Let's see.

Just to clarify something, you said 40 basis points of SRS. I think you got it right. That is the annualized impact for 2025 versus 2024. It is 15 basis points.

Chuck Grom (Managing Director)

Okay. Thank you very much.

Isabel Janci (VP of Investor Relations and Treasurer)

Christine, we have time for one more question.

Operator (participant)

Thank you. Our final question comes from the line of Steven Zaccone with Citi. Please proceed with your question.

Steven Zaccone (Director and Retail Equity Research)

Great. Thanks very much for taking my question. First one was just on the first quarter. When you look at performance by region, can you just help us understand how that played out? Because obviously, there was a good amount of weather volatility. Did the hurricane recovery efforts provide a benefit at all in the first quarter?

Ted Decker (Chair, President, and CEO)

We saw the majority of the tough weather kind of play out in the north and in Canada. With respect to hurricanes, there was some benefit in Q1 right around where we would have expected. That benefit is baked into our annual guidance because on a year-over-year basis, the benefit seen in 2024 is largely matched by the benefit in 2025.

Steven Zaccone (Director and Retail Equity Research)

Great. The follow-up I had is on pricing. I know it's been asked a good amount, but what are you seeing right now in terms of the competitive environment when it comes to pricing? Because presumably, some of the smaller players have probably needed to take up price sooner than others, just they've had less negotiating power. What have you seen in the competitive environment?

Billy Bastek (Executive VP of Merchandising)

Yeah. I mean, so far, Steven, we've seen pretty consistent pricing. I mean, we obviously are very focused on our price position and what we look at and the CPI that we look at. We haven't seen a lot so far in terms of price modifications in the marketplace. Again, it's somewhat early days still. I would just reiterate our position, as I mentioned, about not seeing broad-based price increases. That's The Home Depot.

Steven Zaccone (Director and Retail Equity Research)

Okay. Thank you.

Operator (participant)

Miss Janci, I'd like to turn the floor back over to you for closing comments.

Isabel Janci (VP of Investor Relations and Treasurer)

Thanks, Christine. Thanks, everybody, for joining us today. We look forward to speaking with you on our second quarter earnings call in August.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.