The Home Depot - Earnings Call - Q3 2026

Executive Summary

• Q3 2026 sales were $41.35B (+2.8% y/y), with comps +0.2% (U.S. +0.1%); adjusted EPS was $3.74 and GAAP EPS was $3.62, with results below management’s internal expectations due primarily to an unusual lack of storm activity and ongoing housing/consumer uncertainty.
• Versus S&P Global consensus, revenue modestly beat while EPS missed: revenue $41.35B vs $41.12B consensus; adjusted/Primary EPS $3.74 vs $3.83 consensus*.
• FY2025 guidance was lowered on margins and EPS and updated for GMS inclusion: gross margin ~33.2% (prior ~33.4%), operating margin ~12.6% (prior ~13.0%), adjusted operating margin ~13.0% (prior ~13.4%), diluted EPS down ~6% y/y (prior ~3%), adj. EPS down ~5% (prior ~2%); total sales growth raised to ~3.0% (from ~2.8%) with ~$2.0B contribution from GMS.
• Strategic execution continued: digital comp +11%, 400 bps improvement in customer satisfaction from faster fulfillment, and launch of an AI-powered Blueprint Takeoffs tool for Pros, reinforcing the Pro ecosystem and share gains despite macro headwinds.

What Went Well and What Went Wrong

• What Went Well

  • Digital strength and CX: online comp sales rose ~11%; faster fulfillment and tech investments drove “record in-stock and on-shelf availability” and a >400 bps increase in customer satisfaction scores.
  • Pro momentum and share gains: management reiterated confidence in share gains; big-ticket transactions >$1,000 were +2.3%, supported by Pro initiatives and managed accounts.
  • International and category breadth: Canada and Mexico posted positive comps (local currency); nine of 16 departments posted positive comps, including kitchen, bath, garden, storage, electrical, plumbing, millwork, hardware, appliances.

• What Went Wrong

  • Weather-driven shortfall: Lack of storms was the primary driver of the miss vs internal expectations, pressuring categories like roofing, power generation and plywood; Q3 comps slowed into October (-1.5%).
  • Macro/housing headwinds: Consumer uncertainty and housing turnover at multi-decade lows weighed on discretionary large projects and financing-sensitive categories; Pro backlogs softened from prior “months out” levels.
  • Margin deleverage/mix: Operating margin fell to 12.9% (13.3% adj.) with ~55 bps opex deleverage; transaction fees tied to GMS and wholesale mix (SRS/GMS) diluted margin structure; ROIC fell to 26.3% (from 31.5%).

Transcript

Operator (participant)

Greetings and welcome to the Home Depot third quarter 2025 earnings 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 and Head of Investor Relations)

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's third 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 McCabe, 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, and 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 our investor relations department 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 under the federal securities laws, including 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, in our most recent annual report on Form 10-K, and in our other filings with the Securities and Exchange Commission. 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 and 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 third quarter were $41.4 billion, up 2.8% from the same period last year. Comp sales increased 0.2% from the same period last year, and comps in the U.S. increased 0.1%. Adjusted diluted earnings per share were $3.74 in the third quarter, compared to $3.78 in the third quarter last year. In local currency, Canada and Mexico posted positive comps. Our results missed our expectations, primarily due to the lack of storms in the third quarter, which resulted in greater-than-expected pressure in certain categories. Additionally, while underlying demand in the business remained relatively stable sequentially, an expected increase in demand in the third quarter did not materialize. We believe that consumer uncertainty and continued pressure in housing are disproportionately impacting home improvement demand. Today, we've revised our guidance for fiscal 2025, which Richard will take you through in a moment.

We remain focused on controlling what we can control. Our teams are executing at a high level, and we believe we are growing market share. We continue to invest across the business, supporting our associates and delivering the value proposition expected by our customers. In September, SRS completed the acquisition of GMS, a leading distributor of specialty building products, including drywall, ceiling, and steel framing related to remodeling and construction projects. GMS further enhances SRS's position as a leading multi-category building materials distributor, bringing differentiated capabilities, product categories, and customer relationships that are highly complementary to SRS's existing business. We could not be more excited to welcome GMS to the family and look forward to bringing a truly differentiated value proposition to our pro customers.

We're excited to see many of you in person in a few weeks at our investor conference at the New York Stock Exchange on December 9. We will update you on our strategic initiatives, our unique positioning in the marketplace, our investments, and the traction we are seeing with our customers as we continue to position ourselves to win market share in both the near and long term. In closing, I would like to thank our store associates, merchants, supply chain teams, and vendor partners who continue to take care of our customers and execute at a high level. With that, let me turn the call over to Ann.

Ann-Marie Campbell (Senior EVP)

Thanks, Ted, and good morning, everyone. Our associates did an incredible job focusing on our customers and delivering exceptional customer service in our stores during the quarter. We continue to lean in on initiatives that help our associates do their jobs more effectively while also driving productivity in our operations. I'm going to highlight our progress across a number of initiatives that have helped improve the associate experience and are resulting in a better customer experience and increased customer satisfaction. Last year, we rolled out our freight flow application to all stores, which has improved our freight processes and driven efficiency in our operations. This initiative has significantly improved our cartons per hour metric, resulting in greater efficiency in our onload and pack-out process. We also continue to focus on on-shelf availability, and through computer vision and Sidekick, we have reached record in-stock and on-shelf availability levels.

Lastly, our faster fulfillment efforts, leveraging both our stores and distribution centers that you've heard about over the last few quarters, have driven an over 400 basis point increase in our customer satisfaction scores. In addition, we continue to focus on our pro ecosystem, maturing the new capabilities we have built for pros working on complex projects while enhancing the tools we have to serve pros. We're pleased with the progress we're seeing as our customers engage with our capabilities. There are two new tools we have deployed over the last several months that help us differentiate our offering. The first is a new project planning tool that we launched in September, which allows our pros to create and manage material lists and track orders and deliveries. The second tool, Blueprint Takeoffs, will transform the way pros plan and prepare for their projects.

This new tool leverages advanced AI and proprietary algorithms to deliver accurate blueprint takeoffs and material estimates in record time. Pros can then quickly and easily purchase all materials they need for their project through The Home Depot, simplifying this complex process by going through a single supplier. This technology replaces a manual intensive process that took weeks to complete, increasing accuracy and reliability. Adding this advanced technology to our ecosystem of capabilities to better serve the pro working on complex projects will further enable us to be the one-stop shop for all project needs, from initial planning to material delivery, saving our pros time and money. We look forward to seeing you in a few weeks in New York to provide a holistic view of how our full ecosystem is resonating with our pros and allowing us to gain traction and win in the market.

With that, let me turn the call over to Billy.

Billy Bastek (EVP 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. As you heard from Ted, the underlying demand in the quarter was relatively similar to what we saw in the second quarter. However, our results were below our expectations, largely due to a lack of storms relative to historic norms, which most notably impacted areas of the business such as roofing, power generation, and plywood, to name a few. Turning to our merchandising department comp performance for the third quarter, nine of our 16 merchandising departments posted positive comps, including kitchen, bath, outdoor garden, storage, electrical, plumbing, millwork, hardware, and appliances. During the third quarter, our comp average ticket increased 1.8%, and comp transactions decreased 1.6%.

The growth in comp average ticket primarily reflects a greater mix of higher ticket items, customers continuing to trade up for new and innovative products, as well as modest price increases. Big ticket comp transactions for those over $1,000 were positive 2.3% compared to the third quarter of last year. We were pleased with the performance we saw in categories such as appliances, portable power, and gypsum. However, we continue to see softer engagement in larger discretionary projects where customers typically use financing to fund renovation projects. During the third quarter, both pro and DIY comp sales were positive and relatively in line with one another. We saw strength across pro-heavy categories like gypsum, insulation, siding, and plumbing. In DIY, we saw strength across our seasonal product offerings, including live goods, hardscapes, and other garden products.

Turning to total company online comp sales, sales leveraging our digital platforms increased approximately 11% compared to the third quarter of last year. We're excited about the continued success we're seeing across our interconnected platforms. Our faster delivery speeds are resonating with customers and driving greater engagement and sales. We know that as we remove friction from the experience, we see incremental customer engagement leading to greater sales across all points of interaction. During the third quarter, we hosted our annual supplier partnership meeting where we focused on how we will continue to work together to bring the best products to market, deliver innovative solutions that simplify the project, and offer great value with best-in-class features and benefits. At the event, we recognized a number of vendors across categories who continue to transform the industry with the innovation they bring to our customers on a daily basis.

They include Leadersen, Cobra Torque, Feather River, Milwaukee, Ryobi, Frigidaire, Kita, Traeger, and many more. We are proud of the innovation and partnership that our suppliers bring to The Home Depot and the value we're able to offer both our pro and DIY customers. As we turn our attention to the fourth quarter, we're looking forward to the excitement we will bring with our annual holiday, Black Friday, and gift center events. In our gift center event, we continue to lean into brands that matter most for our customers with our assortment of Milwaukee, Ryobi, Makita, DeWalt, Rigid, Diablo, Husky, and more. We will have something for everyone, whether it's our wide assortment of cordless Ryobi tools or Milwaukee hand tools. In appliances for Black Friday, we have exciting offers on LG, Samsung, Bosch, Whirlpool, GE, and Frigidaire.

Our assortment includes multiple exclusive products like LG's stainless steel French door refrigerator with craft ice and Frigidaire's new Gallery dishwasher with a wash cycle time of only 50 minutes. This quarter, I'm also excited to announce the addition of PGT Windows to our wide assortment of exclusive retail brands, including American Craftsman and Anderson Windows. PGT's impact-resistant windows are engineered to meet some of the highest performance standards in the industry, reducing storm damage risk, providing energy efficiency, UV protection, and sound reduction, and they will be exclusive to The Home Depot and the big box channel. Our merchandising organization remains focused on being our customer's advocate for value. This means continuing to provide a broad assortment of best-in-class products that are in stock and available for our customers.

It is the power of our vendor relationships, coupled with our best-in-class merchant organization, that allows us to offer our customers the best brands with the most innovation to solve pain points, increase functionality, and enhance performance at the best value in the market. 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 third quarter, total sales were $41.4 billion, an increase of $1.1 billion, or approximately 3% from last year. Total sales include approximately $900 million from the recent acquisition of GMS, which represents approximately eight weeks of sales in the quarter. During the third quarter, our total company comps were positive 0.2%, with comps of positive 2% in August, positive 0.5% in September, and negative 1.5% in October. Comps in the U.S. were positive 0.1% for the quarter, with comps of positive 2.2% in August, positive 0.3% in September, and negative 1.7% in October. For the quarter and in local currency, Canada and Mexico posted positive comp. In the third quarter, our gross margin was 33.4%, flat compared to the third quarter of 2024, which was in line with our expectations.

During the third quarter, operating expense as a percent of sales increased approximately 55 basis points to 20.5% compared to the third quarter of 2024. Our operating expense included transaction fees related to the acquisition of GMS, but otherwise were in line with our expectations. Our operating margin for the third quarter was 12.9% compared to 13.5% in the third quarter of 2024. In the quarter, pre-tax intangible asset amortization was $158 million. Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the third quarter was 13.3% compared to 13.8% in the third quarter of 2024. Interest and other expense for the third quarter was $596 million, which is in line with our expectations. In the third quarter, our effective tax rate was 24.3% compared to 24.4% in the third quarter of fiscal 2024.

Our diluted earnings per share for the third quarter were $3.62 compared to $3.67 in the third quarter of 2024. Excluding intangible asset amortization, our adjusted diluted earnings per share for the third quarter were $3.74 compared to $3.78 in the third quarter of 2024. During the third quarter, we opened three new stores, bringing our total store count to 2,356. At the end of the quarter, merchandise inventories were $26.2 billion, up approximately $2.3 billion compared to the third quarter of 2024. In inventory terms, we are 4.5 times down from 4.8 times last year. Turning to capital allocation, during the third quarter, we invested approximately $900 million back into our business in the form of capital expenditures, and 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 26.3%, down from 31.5% in the third quarter of fiscal 2024. Now I will comment on our outlook for fiscal 2025. Today, we are updating our fiscal 2025 guidance to include softer-than-expected results in the third quarter, continued pressure in the fourth quarter from the lack of storm activity, ongoing consumer uncertainty and housing pressure, as well as the inclusion of the GMS acquisition into our consolidated results. For fiscal 2025, we expect total sales growth of approximately positive 3%, with GMS expected to contribute approximately $2 billion in incremental sales, and comp sales growth percent to be slightly positive compared to fiscal 2024. Our gross margin is expected to be approximately 33.2%. Further, we expect operating margin of approximately 12.6% and adjusted operating margin of approximately 13%.

Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $2.3 billion. We expect our diluted earnings per share to decline approximately 6% 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 5% compared to fiscal 2024 when comparing the 52 weeks in fiscal 2025 to the 53 weeks in 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 and 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 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 a line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Hey, good morning, everyone. My first question is more short-term on the fourth quarter. When you guided for the full year after the second quarter, we did not have GMS in the numbers. Now we do. We now know your third quarter came in a little light, and that the fourth quarter may be a little lighter on revenue as well, so there is some deleverage. We are having a tough time getting to the full amount of, call it EBIT dollar shortfall, because GMS looks like they made money last year. Are there any expenses that are tied to it, or how do we think about the deleverage?

Richard McPhail (EVP and CFO)

Yeah. Simeon, thanks for the question. I think you could look at it two ways. Let's talk about fiscal year, and let's talk about Q4. Fiscal year, as you know, we've revised our guidance by 40 basis points from 13.4% adjusted operating margin to 13% operating margin. The walk there, let's talk about the most significant item, which is GMS, the inclusion of GMS in our results. If you take their likely impact to 2025 and you add the transaction expenses to it, you're basically at 20 basis points of year-over-year impact to operating margin. You then take into account the decrease in our comp sales from one comp to slightly positive. That assumption would have obviously deleverage that we've spoken of previously. With respect to SRS and its impact, first, SRS continues to perform extremely well.

There is significant pressure in the roofing market. We know that shipments are down double digits from the absence of storm activity this year. SRS actually comp flat for Q3, and we think that they are taking a significant share. As our expectations have weakened slightly for them in the full year, rather than seeing them grow at mid-single digits, they are likely to grow low single digits. You do see some deleverage in SRS in the supply chain and in operating expenses. You add those together and get your revision to the fiscal year guide. Really, you just add to that if you are talking about Q4, you have all the same dynamics. Let's not forget, you are comparing Q4 last year has 14 weeks of expense. Q4 this year has 13 weeks of expense.

You have 50-ish basis points of operating expense deleverage in the quarter. Hopefully that will help you with the walk.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Yeah, that helped a lot. Thanks. Then a follow-up, you mentioned on this call and in the release that there was an expectation of increased or improving demand, I guess, for the remainder of the year at one point. Was that an expectation based on housing or an expectation that there would be storms? If there was any volatility related to government shutdown, do you have enough time looking backwards since the reopening that there has been an improvement in how the consumer is behaving?

Ted Decker (Chair, President, and CEO)

Yeah, Simeon, let me step back and just paint a broader picture of what we're seeing with the consumer in our sector. Our comps definitely slowed as the quarter progressed, but great work by the team to register the positive comp for the entire quarter. As we said, the primary driver of that sales pressure was the lack of storm activity in the quarter. We do not plan for storms per se, but there is always some weather impact in the baseline. Given last year, pretty significant storm activity, and this year, truly zero. There was no storm activity this year. We saw that most acutely in October. That was the single heaviest impacted month, and that is where, as Richard called out, the comp progression returned negative in October. You talked about the overall economy and housing.

We did expect to start seeing some pickup in demand in the second half of the year. This was not just the calendar dynamic of, "Oh, things will be better in the second half." We were expecting interest rates and mortgage rates to come down, which they did. That would have been some assistance to housing. We really just saw ongoing consumer uncertainty and pressure in housing that are disproportionately impacting home improvement demand. I think the good news is the team, as I said, is executing at a very high level, and we believe we are taking share. If you adjust for the storm activity, our Q3 comp, the underlying business comp, was essentially the exact same as Q2. In adjusting, again, for storm and weather, call that underlying business to be about a 1% comp in each of Q2 and Q3.

Now here we are going into Q4, and we're going to see even more quarter-over-quarter pressure from the storm activity. Again, there's nothing that's happened this year. The storm activity and the rebuild and repair continued into Q4 last year. We'll have even more storm pressure year-over-year in Q4. We just don't see the catalyst to increase that underlying storm-adjusted demand in the market. It's certainly a very interesting consumer dynamic out there. On the one hand, you look at certain economic indicators, and you say, "Geez, things are pretty good." You look at GDP, you look at PCE, those are both strong. On the other hand, what's impacting us in home improvement is the ongoing pressure in housing and incremental consumer uncertainty. Take housing. I mean, housing has been soft for some time.

We all know the higher interest rates and affordability concerns. What we are seeing now is even less turnover. The housing activity is truly at 40-year lows as a percentage of housing stock. I think we are at 2.9% turnover. Home prices have started to adjust in even more markets over this past quarter. When you look at the consumer, what is going to spark the consumer? We still believe we have one of the healthiest consumer segments in the whole economy. Again, the economic uncertainty continues largely now due to living costs, affordability is a word that is being used a lot, layoffs, increased job concerns, etc. That is why we do not see an uptick in that underlying storm-adjusted demand in the business.

As I said earlier, we're going to keep controlling what we can control, support our associates, and deliver just a great value proposition for the customer. I believe we took share in Q3 and year-to-date this year and will do the same thing in Q4.

Simeon Gutman (Executive Director and Senior Equity Analyst)

Okay. Thanks. See you in two weeks.

Operator (participant)

Our next question comes from a line of Zack Fadim with Wells Fargo. Please proceed with your question.

Zack Fadem (Managing Director)

Hey, good morning. I wanted to start on the average ticket. I guess any callouts on commodities versus same-skew inflation, and then with last quarter ticking down on promo, curious how Q3 played out and whether you'd expect the industry to be more or less promotional this Q4.

Billy Bastek (EVP of Merchandising)

Yeah. Hey, Zack, it's Billy. Thanks for the question. As it relates to ticket, as we've talked about on a few calls, I mean, we've continued to see customers trade up for innovation. In fact, we really haven't seen any trade down that we haven't spoken about in previous calls as it relates to that. So modest increase in ticket, but most notably, that was from people, innovation, and things in the marketplace that we've seen. As it relates to the promotional activity, it's really consistent year-over-year, both in Q3 and Q4. As Ted mentioned, the fundamental demand in our business, while it didn't increase, certainly was very consistent with what we saw in Q2 outside of, as we mentioned, the storm impact. From a fundamental demand standpoint, feel very good about that and continue to see customers engage projects.

As I mentioned, they're going to continue to tap pressure where they're financed. From a promotional activity standpoint, it's really a similar environment that it was in really for the balance of the year. Certainly, as it relates to Q4 a year ago, it's a similar environment for us as well.

Zack Fadem (Managing Director)

Got it. Richard, a couple of follow-ups on GMS. First of all, on operating expenses, could you help us understand what's one time in terms of impact transactions, etc., on Q3 and Q4? On the inventory growth, up about 10%, any color you can offer on how much is GMS versus underlying volume versus pricing?

Billy Bastek (EVP of Merchandising)

Sure. You can think about the GMS transaction fees as about five basis points of margin to the year or five basis points of expense, either way you put it, about 15 basis points to the quarter. Obviously, Q3 is one of our larger quarters. You can think of the impact as about $0.05 of EPS for the year for GMS transaction fees. Those all occurred in Q3. With respect to the inventory, inventory increases reflect principally the inclusion of GMS now in our balance sheet and the fact that we've leaned into investments, in particular, investments with respect to hitting our speed promise. We have seen fantastic results from improving our speed and reliability of delivery over the last year. That is something we've leaned into. We have our DFC network, which we think is unmatched in our market.

As we see results from it, and obviously, this quarter, you saw an 11% comp online, we're going to continue to lean into that investment. For the most part, it's investments in the business.

Zack Fadem (Managing Director)

Thanks for the time. See you in a couple of weeks.

Billy Bastek (EVP of Merchandising)

Thanks.

Operator (participant)

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

Michael Lasser (Equity Research Analyst)

Good morning. Thank you so much for taking my question. Given all the comments from this morning, it begs the question, can home improvement demand recover without some assistance from either an increase in underlying housing activity or a reduction in interest rates? How should this foster the market's expectation towards a recovery or potential recovery in 2026? Thank you very much.

Ted Decker (Chair, President, and CEO)

Thanks, Michael. We've talked about all the different drivers of demand in our segment and their leads and lags and all of them. We've clearly called out over time that the most statistically relevant would be home price appreciation and household formation and housing turnover. Those three right now are pressured for sure, but we also know that we've more than worked our way through the pull forward of the COVID years. There are many industry reports and calculations of now underspend per household. On one hand, we're looking at something as much as a $50 billion cumulative underspend in normal repair and remodel activity in U.S. housing. On the other hand, we have less turnover and home price appreciation. That tension is going to have to balance itself out as we work through the rest of this year and into next year.

Fundamentally, our job is to put great value propositions in front of the customer and take share in any environment. Can The Home Depot grow? The answer is yes. Will the industry have some shorter-term pressures with turnover in home price? Yes as well.

Michael Lasser (Equity Research Analyst)

Thank you for that. My second question is, as The Home Depot has taken a significant number of big steps over the last few years to gain market share, particularly in the pro segment, has The Home Depot increased its fixed cost structure such that it's now experiencing deleverage as sales are under pressure, but this can act as a significant tailwind to the earnings outlook as sales improve? Thank you very much.

Ted Decker (Chair, President, and CEO)

Yeah. I mean, you're right, Michael. We have had a number of big steps on pro. We've talked about the size of the overall home improvement TAM at one-plus trillion dollars and evenly split between pro and consumer and how strong we've always been in both sectors out of our stores, the pro and the consumer, but identified real opportunity to bring increased value proposition to that pro space by building out wholesale-esque type capabilities to capture more share of wallet with that customer. That's what we've been doing. We'll talk a lot about that more in a few weeks in New York. We're very, very happy with all the initiatives and the organic investments we've made to build out those capabilities. We've augmented that with two acquisitions of very, very strong wholesale platforms with each of SRS and GMS.

Now, your question specifically on fixed cost structure, what's interesting, we've mentioned this several times, the organic effort is reasonably asset-light. Regardless of whether we lease our DCs or not, the capital deployed in those DCs is first and foremost for general store replenishment. It is an added benefit that we're able then to deliver to the customer out of those buildings. As Richard said, the speed equation is a flywheel that works. All our investments in our direct fulfillment centers, regardless of what we're doing with the pro, that's to serve all customers and increase the speed, which we have done very effectively. All the other related operating costs, we have variable incentive pay structures for our outside salespeople. We lease trucks, and we add trucks and take trucks away from markets as volume ebbs and flows through the season.

Really, other than an IT spend, which is a modest investment in the scheme of things, there's not been a lot of incremental fixed cost put into the business to support the pro organic initiatives.

Michael Lasser (Equity Research Analyst)

Thank you very much and good luck.

Operator (participant)

Our next question comes from a line of Christopher Horvers with JP Morgan. Please proceed with your question.

Christopher Horvers (Senior Analyst)

Thanks. Good morning. I wanted to follow up on the implied Q4 operating margin question. It looks like you're saying about 10.3%. Did you say that 50 basis points of that was the 53rd week lap? Is there anything unique that we should think about that this is or is not the right level to start to think about building the business as we look to the outyear? For example, 53rd week lap or perhaps the seasonality of the SRS and GMS business structurally changing the normal flow of operating margin over the year?

Billy Bastek (EVP of Merchandising)

Yeah. Thanks, Chris. I would use our full-year guide as the appropriate jumping-off point. I think Q4 has a couple of items of noise. The first was the 53rd week. The second actually is the shape of the business. If you look, you can actually see, for instance, the public filings of GMS when they were a public company and see the Q4, or rather our Q4 is a significant low point from a volume perspective. That is true for SRS as well. SRS and GMS see seasonal swings that are greater than Home Depot. You are going to just see that amplified if you hold Q4 in isolation. That is why I would really point you to full year as the right jumping-off point for your modeling.

Christopher Horvers (Senior Analyst)

That's super helpful. Thank you. I mean, if you step back about the third quarter.

Billy Bastek (EVP of Merchandising)

The 53rd week is a year-over-year construct. So it does not impact your 2025 numbers, but it does impact the year-over-year.

Christopher Horvers (Senior Analyst)

Got it. Makes sense. If you think about this quarter, I mean, if you look at the monthly basis, even with the really tough weather/hurricane-driven compare in October, if you also look at the first three quarters of the year, the two-year trend seems to be improving on the line, which points to replacement cycle demand and maybe some pricing, and just life moves on. There is some research out there that points to maybe the consumer is waiting for the full effect of the head. We have a couple of meetings coming up. You had all this noise with a government shutdown that impacted even retailers that sell milk and eggs and take share every day. Why would we not think that the launch point into 2026 is sort of one or, if not better, than this 1% sort of underlying demand?

Just because uncertainty goes away, full effect of the Fed, housing stock ages, and life moves on, and replacement cycle demand continues to build.

Billy Bastek (EVP of Merchandising)

Yeah. Chris, there's another positive ad. There will be more robust tax returns and the tax rates going into effect in 2026. Yeah, there's a positive story there. Again, the underlying 1%, that is what it was. This ongoing consumer uncertainty we're talking about, and specifically housing turnover and now price, those are near-term and newer phenomenon. Chris, may I just circle back? I was focusing on your question in context of Q4 being a jumping-off point and thinking about 53rd week. Let me add something, though. When you pro forma GMS, we do need to take that into account. On a pro forma basis, recall we've sort of guided you to, within the Home Depot numbers now with SRS included, SRS changes our margin profile by about 80 basis points of gross margin and about 40 basis points of operating margin.

GMS, which was about half the size of SRS, is about half the impact. You have a pro forma—this is not fiscal year—but a pro forma impact of about 40 basis points of GMS and about 20 basis points of operating margin for GMS. So 40, 20. You add those together, you roughly have a change in our profile with both of them together of 120 basis points of gross margin and 60 basis points of operating margin. Now, when you are talking fiscal year 2025, obviously, we have some wonkiness in the comparison periods. We have owned SRS for a full year of 2025, but only owned them a partial year in 2024. We owned GMS for about five months in 2025 and owned them for no months in 2024.

I'm just going to avoid all the steps in the math and tell you, on a fiscal year perspective, you've got about a 55 basis point impact to gross margin year over year, reflecting the ownership of both SRS and GMS, and about a 35 basis point impact to operating margin mix, reflecting the year-over-year comparison of those ownership periods of SRS and GMS. We'll clarify this more just one more time when we move forward and in the future talk about future years. Hopefully, that gives you a little bit more clarity. I do want to put an asterisk. The jumping-off point is our full-year guidance, but you also have to include that comparison, or rather the full-year impacts of GMS next year.

Christopher Horvers (Senior Analyst)

Right. Offset by a tick of transaction fees.

Billy Bastek (EVP of Merchandising)

That'd be correct. Yep.

Christopher Horvers (Senior Analyst)

Awesome. Thanks so much. We'll see you soon.

Billy Bastek (EVP of Merchandising)

Thanks.

Operator (participant)

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

Zhihan Ma (Director and Senior Research Analyst)

Hi. Thank you. I wanted to follow up on the complex pro and GMS side. Firstly, a short-term question on the $2 billion contribution to sales from GMS this year. I think if we do the math based on the reported numbers last year, it kind of implies a high single-digit % decline on a year-over-year basis. I do not know if I completely got that math right. If that is true, how much of that is macro weakness versus underlying share dynamics? Is there any additional color you can provide on that underlying market?

Billy Bastek (EVP of Merchandising)

You're owning it for a quarter plus eight weeks, and you're heading into the lowest quarter of the year for GMS's fiscal year. There was also weather impact across Home Depot, SRS, and GMS. No one was immune to the broader weather impacts in the market. $2 billion is an approximation. We know that GMS continues to take share. We continue to take shares in enterprise, and particularly in all of GMS's categories. We feel great about that business going forward.

Zhihan Ma (Director and Senior Research Analyst)

Got it. Thank you. Then a long-term question to your point about the current margin dilution impact from the acquisitions. Now, is there a long-term argument that as you further consolidate, assume if you further consolidate in the complex pro space, is there a path for you to structurally improve or recover your margins as you start to gain more bargaining power versus suppliers? Thank you.

Ted Decker (Chair, President, and CEO)

There are structural differences in the margins of the wholesale business and retail. I mean, at the highest level, retail would have higher gross and lower operating cost, and the inverse with wholesale. Of course, as we drive synergies between the two platforms, and the most important synergy is the cross-sell and the value proposition to the pro, we'll be able to leverage incremental sales in both retail and wholesale platforms to leverage the businesses. Of course, just operating efficiencies across a larger scale business will be able to drive efficiencies as well. The fundamental difference of wholesale margin structure and retail margin structure would be the case going forward. Those would not dramatically change.

Zhihan Ma (Director and Senior Research Analyst)

Got it. Thank you very much.

Operator (participant)

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

Seth Sigman (Consumer Research)

Hey, good morning, everyone. I had a couple of follow-up questions. Just first on transactions slowed while ticket accelerated this quarter. I'm just curious, how do you read that? Are there any signs of elasticity? Maybe just elaborate on price changes that you made in the quarter, or is the slowdown in transactions just really storm-related?

Billy Bastek (EVP of Merchandising)

Yeah. Thanks, Seth. It's Billy. I'll answer your last question first. As it relates to the transactions, that was really related strictly to the storm impact that we called out. As I mentioned in our Q2 call, after some policy changes were made around tariffs, that we would take some moderate price moves with the entire strategy to make sure we protected the project. As it relates to elasticity, it's a little early. You couple that with a lot of dynamics in the marketplace over the last 60 days, 90 days since our last call, it's a little early to say how much of that was going to be elasticity piece will play out. I'm thrilled with the work that the team has done.

If you go into our stores right now and look at Gift Center and all the value that we have there, and certainly with our holiday program, same thing. We're watching that. Again, our entire goal was to protect the project. It bears also to point out that over 50% of our inventory is not part of tariffs and is obviously sourced domestically. We'll continue to watch that and look forward to the Q4.

Seth Sigman (Consumer Research)

Okay. Thanks for that. Just to follow up on some of the demand comments today and what seems like a more cautious view on the consumer, I'm just trying to figure out how to reconcile that with big ticket still outperforming. You've had a few quarters of big ticket being positive, that continued this quarter. I guess just based on what you've seen historically, should that be a leading indicator for big projects that have still been pressured? How do you think about that?

Billy Bastek (EVP of Merchandising)

I mean, you pointed it out correctly in my prepared comments. I talked about big ticket transactions over $1,000 are positive 2.3%. I would not read into that from a project standpoint. Think about appliances. Think about power tools and some of those pieces. Those are individual items as we have kind of talked about that metric in the past versus more the project-oriented pieces that customers are still challenged with based on all the things that we have talked about earlier.

Ted Decker (Chair, President, and CEO)

I think some of that, some of the big ticket as well, we've called out this pressure on commodities overall. Some of that big ticket is the success in our pro initiatives. I mean, the managed accounts, the activity that my growing team are driving to capture more share of larger pro complex purchase. That is also driving that. It's not so much that it's an indicator of demand as it is an indication of our taking share in bigger ticket pro-oriented project.

Seth Sigman (Consumer Research)

Got it. Okay. That's helpful. Thanks so much.

Operator (participant)

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

Chuck Grom (Senior Analyst for Retail)

Hey, thanks a lot. Good morning. There's a lot of talk about a K-shaped economy right now, but we're starting to see more evidence of job losses for white-collar employees. I guess I'm curious, when you look at your data, is there anything you see that supports more fatigue in your upper-income customer base? I guess as a follow-up, anything regionally that you'd call out over the past couple of months?

Ted Decker (Chair, President, and CEO)

I think regionally, the most acute difference, again, is the storm and weather patterns. On the larger or the higher-income cohort, we do not see anything specific. As Billy said, there has not been a lot of trade down. We have talked in the past, things like countertops, there has been some trade down, but we have still not seen trade down across the broader assortment in the store. If there is an indication of maybe some fatigue in taking on bigger projects, we have seen pro backlogs and larger backlogs start to diminish a little bit. Our pros are reporting months that they are booked out. As we know, some time ago, you could not find a pro. They all had full books. We are seeing a little softening in larger project backlog. I cannot say we have tied that directly to an income cohort, but we have definitely seen the dynamic.

Chuck Grom (Senior Analyst for Retail)

Okay. Thank you. Richard, can we just double-click on the opportunity to improve the margin structures of both GMS and SRS? It sounds like 35 basis points of pressure this year. You probably have some wrap of that into 2026. I mean, just broader picture over the next few years, how should we think about the improvement line for those two businesses? Thanks.

Richard McPhail (EVP and CFO)

We do not like to separate them out. While they do operate independently, as Ted said, the name of the game here is synergies, and synergies in the form of cross-selling. I think the leverage in the businesses is going to be a function of how we create a differentiated value proposition across the entire enterprise, including SRS and GMS. SRS, the combined entity, is an engine for growth for The Home Depot. We are just getting started. I would not put a formula on it, but it is all going to be a function of how fast we can drive cross-sell.

Chuck Grom (Senior Analyst for Retail)

Thank you.

Operator (participant)

Our next question comes from a line of Steve Forbes with Guggenheim. Please proceed with your question.

Steven Forbes (Senior Managing Director)

Good morning. Maybe, Richard, on the idea of cross-selling, would love to sort of hear high-level thoughts on, I do not know if you can rank order how you guys see the cross-selling opportunities today now that GMS is integrated. Sort of what are you sort of building the business for from a cross-selling standpoint as we head into next year? Rank order the opportunities would be great.

Richard McPhail (EVP and CFO)

Yeah. I mean, it's Mike here. Thanks for the question. We see just from the relationships that have already been established between the outside salesforce that we've got, we're here within Home Depot, combined with the salesforces that they have originally with SRS and now with GMS, there is account handoffs that happen. A great example recently with GMS engaged in a large roofing sale on a property. The customer was looking for much more in terms of product, in terms of whether it be framing, flooring, and more. That relationship then that SRS introduced to the Home Depot outside salesforce to come in and sell that engagement to the contractor worked quite successfully.

That is just one example of many that have happened, and they happen both ways, whereby the Home Depot sales organization recognizes a large roofing opportunity that they can pass over to SRS or a large drywall opportunity that they can pass over to GMS. Those engagements are happening on a daily and weekly basis.

Steven Forbes (Senior Managing Director)

Just a quick follow-up. I was hoping maybe to explore the branch growth opportunity across SRS, GMS, and Heritage. I do not know, Ted, if you can provide a current update on branch counts across the various assets. What is the right way to think about or think through the out-year branch growth opportunity? I do not know if you can sort of talk about what is the end state as you see it today versus the 1,200 you have today. How do we sort of think about the footprint evolving over the next three, five or so years?

Ted Decker (Chair, President, and CEO)

Yeah. We'll certainly go into a lot more detail in a few weeks. The model that SRS deploys is very similar to GMS, that they'll drive organic comp growth through existing branches. They open greenfield branches, and then they'll focus on tuck-in, customer list, expansion-oriented acquisitions. They've been doing that, excuse me, quite successfully on the branches. Think of SRS, GMS, 40-50 branches a year. They've been sort of running at that pace since we acquired SRS. They've done a handful of little tuck-in acquisitions. These can be a one-branch, $5 million acquisition or a smaller regional $30-$50 million, couple few branch operations. It's going really, really well. We see that continuing as a key part of their business model.

I mean, just to, it's not just about our plans.

Steven Forbes (Senior Managing Director)

It's actually happening right now. If you talk about our non-comp sales, putting new stores and new SRS branches together, you've got about half a point of sales growth driven by those two investments. We're thrilled with that.

Ted Decker (Chair, President, and CEO)

Thank you.

Isabel Janci (VP and Head of Investor Relations)

Christine, we have time for one more question.

Operator (participant)

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

Steven Zaccone (Director and Retail Equity Research)

Great. Good morning. Thanks very much for squeezing me in. I wanted to follow up on the storm impact. It sounds like it was 80 basis points to the third quarter. Pressure to same-store sales. How large will that be in the fourth quarter? We should be mindful of that, that that's also a headwind to think about in the first half of next year.

Richard McPhail (EVP and CFO)

As Ted said, the underlying demand for the business was sort of similar Q2 to Q3. If you talk about storm Q3 to Q4, we absolutely are lapping strong results. In fact, even slightly higher sales last year in Q4 than in Q3. Let's call it relatively even. Let's say you basically, if you've got underlying minus the storm impact, you've got pretty much similar run rates for Q3 and Q4.

Seth Sigman (Consumer Research)

Okay. Understood. Your comments on the housing pressure, how does that inform your maybe near to medium-term outlook for SRS and GMS, right? These are new assets for Home Depot. Should we think that original expectation of mid-single-digit growth for SRS stepping down to low single digits, is that kind of a run rate we should consider for the near to medium term?

Ted Decker (Chair, President, and CEO)

I mean, I would not say that. We will again talk more about this in a few weeks. The first thing to remember is SRS is much more in the re-roof than new construction. They are 80-plus % re-roof. Yes, there are 15-20% of the business that goes into new construction is impacted. The fundamental business is re-roof activity, which is why it is disproportionately impacted with storms, particularly in their home and biggest market, which is Texas, which is by far. We think of hurricanes. We think of hail and other wind events. There was none such in 2023. No, we look at SRS as a long-term mid-single-digit grower. This is principally a storm-impacted dynamic that has taken them down to flattish right now.

As Richard said earlier, we think roofing shipments, you can see this by reported data, roofing square shipments into the market are down mid-teens. SRS was flat. Clearly taking share.

Steven Zaccone (Director and Retail Equity Research)

Okay. Understood. See you guys in two weeks.

Operator (participant)

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

Isabel Janci (VP and Head of Investor Relations)

Thanks, Christine. Thank you all for joining us today. We look forward to speaking with you at our investor conference on December 9.

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.