Home Depot steadies the house as housing malaise meets Pro-led resilience

Macro fatigue, micro gains

The Home Depot closed fiscal 2025 with the feel of a retailer trading water against a stubborn current. The housing backdrop remains notably unsupportive: mortgage rates have reset affordability, home prices are still carrying a roughly 50% increase since 2019, and housing turnover is languishing at multi-decade lows. Management was explicit: there is, as yet, “no catalyst for an inflection in housing activity.”

Against that, Home Depot eked out modest growth. Full-year sales rose 3.2% to $164.7 billion, with company-wide comps up 0.3% and U.S. comps up 0.5%. Underlying demand, once storm-related volatility is stripped out, was described as “relatively stable” across all four quarters, with comps under 1% but consistently positive. The fourth quarter told the same story in miniature: sales of $38.2 billion were down 3.8% year-on-year, but that decline was entirely a function of lapping a 53rd week that had added roughly $2.5 billion to the prior-year base.

On earnings, the picture was softer. Adjusted diluted EPS for the year fell 3.6% to $14.69, while GAAP diluted EPS declined 4.6% to $14.23. Management repeatedly reminded investors that the prior year’s 53rd week alone added around $0.30 to EPS, a distortion that makes the year-on-year compression look more severe than the underlying operations might suggest.

Looking ahead to fiscal 2026, guidance deliberately hugs the middle of the road. Home Depot forecasts total sales growth of 2.5% to 4.5%, with comparable sales flat to up 2%, and adjusted EPS flat to up 4%. Implicit is an assumption that the broader home improvement market will likely range between down 1% and up 1%—and that Home Depot will again take share.

Margin pressure and the GMS footprint

Where the top line has shown modest resilience, the income statement is absorbing the cost of expansion, especially the acquisition of GMS and the integration of SRS. The fourth-quarter gross margin slipped 20 basis points to 32.6%, primarily due to mix effects from GMS—an outcome that management stressed was “in line with expectations.” For the year, gross margin edged down 10 basis points to 33.3%.

Operating expenses, however, grew faster than sales. In Q4, opex rose to 22.6% of sales, up 105 basis points, reflecting natural deleverage on a softer top line and the absence of the 53rd week. Full-year operating expenses increased 70 basis points to 20.6% of sales. The net effect: operating margin compressed to 10.1% in Q4 (11.3% a year ago) and to 12.7% for the year (from 13.5%). On an adjusted basis, excluding intangible amortization, operating margin came in at 10.5% in Q4 and 13.1% for the year, both down 60–70 basis points versus 2024.

The FY26 guide bakes in further mix drag from the professional distribution acquisitions. Gross margin is expected at about 33.1%, down approximately 24 basis points year-on-year, largely due to the full-year annualization of GMS (which carries an estimated 40-basis-point pro forma impact to gross margin). Management flagged that this effect will be most visible in the first half: gross margin could be down around 50 basis points in the first half before flattening in the back half, as the comparison base normalizes.

Operating margin is guided to 12.4% to 12.6%, with adjusted operating margin of 12.8% to 13%. Combined with elevated operating expense ratios at the start of the year—driven by timing, integration and the layered-on GMS cost base—this yields an earnings profile skewed to the back half. EPS is expected to be down mid-single digits in the first quarter before improving through the year.

On the balance sheet, inventories rose to $25.8 billion, up $2.4 billion year-on-year. The increase reflects three forces: the addition of GMS stock, higher unit costs due to tariffs, and a deliberate decision to support faster delivery and protect in-stocks. Inventory turns slipped to 4.4x from 4.7x, but management said it is “fantastic” with its positioning heading into 2026.

Return on invested capital, a long-standing point of pride for Home Depot, has inevitably dipped as acquisitions bulk up the capital base and margins come under pressure. ROIC for the trailing 12 months came in at 25.7%, down from 31.3% a year earlier—still enviable by retail standards, but a reminder that the company is transitioning from a pure capital-return story to a more investment-intensive model.

Capital allocation remains orthodox. The company invested $3.7 billion in capex during the year and plans to keep capex at about 2.5% of sales in 2026. It opened 12 new Home Depot stores in 2025 (to 2,359 locations) and plans roughly 15 more in 2026 along with 40–50 new SRS branches. Dividends remain the primary vehicle for returning capital: $9.2 billion was paid in 2025, and the board approved a 1.3% increase in the quarterly payout to $2.33 per share. Share repurchases are on hold until the balance sheet returns to what management calls an “excess cash position,” expected in the first half of 2027.

Pro ambitions and interconnected execution

Beneath the headline numbers, the most strategically important storyline is Home Depot’s unrelenting pivot deeper into the professional contractor market and the increasingly digital way it serves both Pros and DIY customers.

In the quarter, Pro sales posted positive comps and again outpaced DIY. Pro-heavy categories such as gypsum, wire, concrete and plumbing showed notable strength, even as “larger discretionary projects remain under pressure.” On the consumer side, the appetite for smaller-ticket, value-rich offerings remained robust: Gift Center and Black Friday events achieved record sales, and categories like hand tools, storage, portable power and hardscapes performed well.

Digitally, the company is quietly reshaping the customer experience. Online sales leveraging its digital platforms rose about 11% in the quarter, and more than half of all online orders were fulfilled through stores—a statistic that underscores how central the physical footprint is to the e-commerce proposition. Home Depot rolled out real-time delivery tracking for big and bulky items across all categories, allowing customers to watch flatbeds of lumber or appliance trucks approach with the same granularity long associated with small parcels. The feature depends on newly deployed handheld devices for delivery drivers, which also feed back real-time status and customer-specific service requests.

For Pros, the ecosystem is becoming more sophisticated. Management highlighted record levels of delivery reliability, with the chain achieving its “2 Sigma” goal for on-time and complete deliveries to professional customers. It is also layering in job-site preferences and customer business hours into its order management systems, and expanding communications so multiple stakeholders—from the owner to site managers—can be notified on delivery status.

Perhaps most striking is the introduction of AI-based tools for Pro project planning. An “AI blueprint takeoff” capability allows contractors to generate project lists by simply inputting the type of job, with the system pre-populating hundreds of items that can be edited, saved and reused for future jobs. Pro-focused digital tools on the B2B platform are gaining traction, with “tens of thousands” of projects started each week, leading to higher conversion and engagement, particularly for complex projects.

Significantly, these digital and operational investments are not confined to the four walls of a Home Depot store. The integration of SRS and GMS is starting to unlock the cross-sell logic behind these acquisitions. While SRS’ comps were down low single digits in the fourth quarter, that came against an extraordinary industry backdrop: ARMA data showed shingle shipments down 28% year-on-year in Q4, pulling full-year volumes to their lowest since 2019. In that context, SRS still gained share, though it did so by investing in price amid a weak, storm-starved market—a strategy that will depress near-term margins but is already embedded in 2026 guidance.

With GMS now on board, management is turning to “revenue synergies” across the enlarged Pro ecosystem. National account teams are pitching combined offerings that span Home Depot, HD Supply, SRS and GMS. One cited example: transforming a large multifamily owner from a substantial client of just one entity into a shared customer of all four. Sales teams across the units now have mapped customer overlaps and are incentivised to make “warm handoffs,” resulting in what CEO Ted Decker described as “tens of thousands of incremental homes” won through cross-selling.

At the same time, Home Depot is still investing to round out its Pro infrastructure. Trade credit capabilities, currently more concentrated in outside sales, will be pushed more deeply into stores this year. Pricing systems are in pilot markets, with plans for broader rollout. And the B2B digital stack is being extended into e-procurement and construction management software integrations—the plumbing that makes Home Depot a seamless vendor inside professional workflows.

Storefloor culture and the spring ahead

While the Pro platform and digital infrastructure are the obvious growth vectors, management was keen to anchor the narrative in the day-to-day reality of stores and associates. Ann-Marie Campbell, who now oversees much of the field organization, described a deliberate reorientation around “core and culture.”

One structural shift is the continued migration of non-selling tasks—planograms, bay resets, merchandising changes—to the MET (Merchandising Execution Team), freeing “Orange Apron” associates to spend more time with customers. In pilot stores, this has already yielded “meaningful” labor productivity gains. Store organizations have also been realigned, adding an operations experience manager role to harmonize customer service and fulfillment processes, and a Pro customer experience manager to serve as a single point of contact for contractors.

The human capital metrics suggest this is resonating internally. Customer satisfaction scores increased every quarter in 2025, and tenure among hourly associates is at its highest since 2017. For a retailer whose differentiation increasingly lies not just in price and assortment but in advice and project support, that is more than a soft metric.

From a merchandising standpoint, Home Depot is entering the spring season with confidence. Eight of 16 merchandising departments posted positive comps in the fourth quarter, including power, electrical, storage, indoor garden, hardware, plumbing, bath and kitchen. Gift Center and Black Friday, as noted, had record quarters, demonstrating that the chain can still galvanize demand around curated events.

Spring will again lean heavily into cordless outdoor power and exclusive brands. The company is pushing 40-volt and 18-volt platforms from Ryobi, Milwaukee, Makita and DeWalt, many exclusive in the big-box channel, alongside an expanded live goods program curated with national and regional growers. For investors, these are the categories that tend to respond quickly to weather and sentiment; a late thaw or a prolonged cold snap can shift demand between the first and second quarters, but rarely erases it.

Investor calculus: patience and positioning

For a stock used to being rewarded for high-return, capital-light growth, the Home Depot of 2025–2026 presents a more nuanced investment proposition. The company is voluntarily trading some near-term margin for share gains and strategic positioning: expanding into lower-margin, higher-volume Pro distribution via SRS and GMS; absorbing mix dilution; and spending heavily on digital and logistics capabilities.

At the same time, it is navigating a macro environment that dampens the very discretionary big-ticket projects that historically have acted as its earnings turbocharger. Management was transparent: the inflection signal they are watching is a broad-based recovery in large discretionary projects, which has not yet arrived. For now, growth is driven by maintenance, repair and modest upgrade spending, particularly among Pros, while homeowners remain cautious amid economic uncertainty, job concerns and elevated financing costs.

The trade-off is clear. In the short run, investors must accept compressed margins, modest EPS growth and the absence of buybacks. In return, they get a company that is building what amounts to a vertically and digitally integrated home improvement platform—spanning retail, distribution, trade credit and job management—designed to capture greater share of wallet whenever housing turnover and large project activity eventually normalize.

Management’s tone was not exuberant, but it was quietly confident. They are not betting on a macro rescue; tax refunds are treated as potential upside, not a baseline, and the recent tariff turbulence has been largely priced through, with an estimated 3% SKU-level price impact already worked into 2026 expectations. Instead, the bet is that by investing through the downcycle, Home Depot will emerge with deeper Pro relationships, a sharper omnichannel edge and a more productive store base.

For investors accustomed to the company as a pure cash machine, that may require a shift in time horizons. But for those willing to view 2025–2026 as an extended foundation-laying phase, the scaffolding now visible—from AI takeoffs to SRS roofing referrals—suggests that Home Depot is building not just more stores, but a more ambitious version of itself.