Home Depot

Home Depot's second-quarter sales grew 5.7%, helped by 1.7% same-store sales growth, the Gypsum Management & Supply acquisition, and new distribution branches. The adjusted operating margin of 14.7% (down 10 basis points) was hurt by higher costs, partially offset by $685 million in tariff refunds.

Why it matters: Organic growth is elusive as the housing market remains stalled. Over the past five years, the monthly mortgage payment for a median US home has risen by around $1,000, more than half of which is due to higher financing costs. This has led to lower turnover and home improvement spending. Still, Home Depot's ability to merchandise for both DIY and pro customers has allowed it to capture increased market share, given that industrywide, building material and garden equipment and supplies dealers' retail sales rose less than 1% over the past three months. We think investments to raise brand awareness, including the launches of express delivery (three hours) and Magic Apron (artificial intelligence tool), as well as exclusive launches (USG, Ruco), support ticket growth (2.8%) via pricing strategies and lead to customer stickiness.

The bottom line: We see no major change to our $325 fair value estimate for wide-moat Home Depot and see shares as fairly valued. We think fear of more interest rate hikes by the Federal Reserve, which could crimp housing demand, might plague the near term. Although the firm will see a $730 million gross margin aid in 2026 from tariff refunds, it held its 33.1% margin outlook. Upside is bound by inflation (fuel, energy, input costs) and a negative mix from the GMS tie-up. In turn, the 2026 adjusted operating margin is set to drop only 20 basis points. We don’t believe big-ticket projects will be pressured in perpetuity, and that when such undertakings resume, Home Depot should be able to capture 4% same-store sales growth (including SRS). As such, costs should lever again, driving operating margin back to nearly 15%.

We are maintaining our $325 per share fair value estimate for Home Depot. Despite incorporating second-quarter results (same-store sales growth of 1.7% and adjusted EPS of $4.92) that were slightly better than our expectations, we are largely maintaining our 2026 outlook. The firm reiterated its 2026 forecast, which included 2.5%-4.5% sales growth, an adjusted operating margin of 12.8%-13%, and EPS growth of flat to 4%. Our updated forecast includes 4.2% sales growth (from 3.9% prior) and 2.1% EPS growth (1.5% prior) in fiscal 2026, along with a 12.9% adjusted operating margin (up 10 basis points).

Given the maturity of the domestic home improvement industry, we expect total demand to largely depend on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards. We project 4.5% average sales growth over the next decade, as housing market stabilization boosts DIY spending back toward historical levels, supported by offerings such as buy online/pick up in store, better merchandising, and improved delivery options, which will drive market share gains. In the longer term, we forecast gross margins to hold steady over the next decade (ending 2035 at around 33.5%) while the SG&A expense ratio improves incrementally (leveraging 130 basis points over the next decade, to 17.3%) as the firm capitalizes on its scale and supply chain improvement initiatives while investing to protect its market leadership. This leads to a terminal operating margin of 14.7%, in line with its prepandemic peak.

Operating margins and ROICs could improve as the firm focuses on continued supply chain efficiency and on better penetrating the pro business with market delivery centers that leverage its delivery capabilities. Additionally, we believe Home Depot still has opportunities to expand its business. It can capitalize on product lines with weak market share leaders, as it has previously done, for example, in appliances as Sears faltered. Also, having deeper product lines to cross-sell (with brands like Company Store offering exposure to textiles) could add incremental revenue potential. The service business, backed by a major national brand, as well as the commercial business coming from Interline and HD Supply, could build brand loyalty and keep consumers returning to a trusted source, something that could be hard to duplicate for a new entrant.

Home Depot earns a wide moat thanks to its brand strength and cost advantage as the world’s largest home improvement retailer. Its scale has helped it outperform the industry: over the past decade, Home Depot’s annual sales growth exceeded the sector’s 4.3% average by 230 basis points (US Census Bureau), signaling brand relevance. With midteens market share in a fragmented $1.2 trillion North American home improvement market (supported by roughly $172 billion in expected 2026 sales), we expect its brand equity and scale to drive continued share gains.

Home Depot’s 5.1% average same-store sales growth over the past decade underlies a strong brand intangible. Its broad assortment, with 30,000-40,000 stock-keeping units in stores and 1 million online, lets customers complete projects in one trip, reinforcing loyalty. To stay aligned with evolving demand, Home Depot uses consumer data, supplier collaboration, and regular merchandising resets to refine assortments. Alongside national brands, it offers exclusive private labels aimed at do-it-yourself shoppers, providing wider choice and higher margins (typically a few hundred basis points above national brands). Value-added services like tool and truck rentals, installation, and remodeling, further streamline project execution and elevate the customer experience.

Home Depot’s omnichannel and delivery capabilities are a core part of its brand strength. Long-running investments in digital tools ensure customers can buy and receive products in whatever way suits them, reducing attrition and reinforcing loyalty. Although Home Depot maintains a large store base, its digital channel has become central—about half of e-commerce orders are buy online/pick up in store, or BOPIS, representing more than $25 billion in volume. Online penetration has risen from 10% in 2019 to the midteens today, a level we expect to persist as BOPIS and other omnichannel behaviors continue to persist. Ongoing investment to match customer-led demands—localization, personalization, faster fulfilment—should keep Home Depot’s omnichannel platform a key protector of its competitive edge.

Additionally, we think Home Depot’s emphasis on topnotch customer service further supports its brand intangible asset. We attribute Home Depot’s superior service levels to its commitment to invest in its talent through career development opportunities, competitive benefits, and wellness packages, to name a few. We think Home Depot’s continued investment in its people (in 2023, it announced a $1 billion investment for frontline hourly workers) should help it deliver reliable services to its customers and remain top of mind.

Home Depot has strengthened its brand and relevance to professionals through a series of acquisitions. Interline Brands and HD Supply expanded its maintenance, repair, and operations reach—adding $1.6 billion and $8 billion in sales at acquisition—and lifted pro penetration by a high-single-digit level. These deals support cross-selling and deeper engagement, contributing to a 54% increase in average ticket size (from $59 in 2014 to $91 in 2025). More recently, Home Depot has pushed further into complex pro categories. The 2024 acquisition of SRS Distribution expanded its pro addressable market by $50 billion (to $700 billion) across roofing, landscaping, and pools. In 2025, partnerships with GMS (about $5.5 billion in annual sales) and Mingledorff’s broadened exposure to building products and HVAC distribution.

Home Depot’s pro offering is a differentiator, reflected in higher transaction frequency and larger average tickets relative to DIY customers. To deepen pro loyalty, the company has expanded Pro Xtra rewards, added time-saving services (pro checkout, call-ahead ordering, dedicated service managers), and invested in outside sales, order management, and digital tools aimed at complex pros. Credit programs have further boosted engagement—roughly 7,000 pros using these programs increased spending 30% on average, reinforcing brand stickiness. As a result, Home Depot’s pro mix has risen from 30% in 2013 to about 50% in 2025. With GMS and Mingledorff’s now in the ecosystem, continued investment in the pro experience should support this momentum.

Home Depot’s scale—2,364 core stores plus 1,340 branches—gives it a cost advantage by enabling high volume purchasing and efficient distribution across diverse markets. Its size also provides significant vendor bargaining power in sourcing, advertising, and logistics. Replicating these vendor relationships would be extremely difficult; reaching comparable pricing power would require 1,000-plus locations, a threshold few competitors could realistically achieve. This structural advantage shows up in profitability: Home Depot’s 13.1% adjusted operating margin (2025) exceeds peers, reflecting superior leverage over its fixed cost base even as it continues investing in the business.

Home Depot’s vendor leverage, rooted in its scale, allows it to pass savings to customers through everyday low pricing, reinforcing loyalty and repeat visits. Bulk purchase negotiating power makes EDLP possible, creating a flywheel where value drives traffic and traffic strengthens scale. Customer response supports this, as transactions reached 1.6 billion in 2025, up 14% from 2015. Gross margins have stayed at 33%-34% for a decade, a sign that scale benefits are consistently passed through to consumers.

Home Depot’s position is hard to disrupt. Smaller retailers lack the scale to build vendor relationships strong enough to challenge its pricing power, and manufacturers are unlikely to succeed by creating their own retail networks; they move more volume by partnering with a wholesale channel like Home Depot. This advantage supports long-term returns. We expect return on invested capital to remain above the 7.5% cost of capital for the next two decades, ultimately reaching 23% by 2035, reinforcing the company’s wide moat.

Home Depot's continued investments in logistics and merchandising should improve productivity and support its leadership position in the home improvement market.

The firm has returned $71 billion to its shareholders through dividends and share buybacks over the past five years, more than 20% of its market cap. We forecast Home Depot will return another $65 billion to owners over the next five years.

The large professional market is $300 billion. As Interline and HD Supply make up a low-double-digit share, SRS reaches these specialists, and GMS joins the mix, share is up for grabs.

Weak consumer spending, perpetually higher interest rates, or an economic downturn could stall demand for home improvement projects and affect Home Depot's growth.

Productivity improvement gains could prove more challenging to achieve, as simpler efforts have already borne fruit. New initiatives could face some implementation risks, creating inconsistent profitability.

As Home Depot digests more than one sizable acquisition, integration risk remains, and management could be distracted by idiosyncratic issues at larger tie-ups like SRS or GMS.