# The Home Depot, Inc. (NYSE: HD) — Business Narrative, FY2026 Q2

Fiscal quarter ended August 2, 2026. Home Depot's fiscal year ends on the Sunday nearest
January 31; "fiscal 2025" is the year ended February 1, 2026 (52 weeks) and "fiscal 2026"
is the year ending January 31, 2027 (52 weeks). Fiscal 2024, ended February 2, 2025,
contained 53 weeks, which distorts several year-over-year comparisons below.

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## Business

*From the fiscal 2025 Form 10-K, accession 0001628280-26-019436.*

Home Depot is the world's largest home improvement retailer measured by net sales. It sells
home improvement products, building materials, lawn and garden products, décor, and
facilities maintenance, repair and operations (MRO) products in stores and online, and
provides installation services and tool and equipment rental. At the end of fiscal 2025 it
operated 2,359 stores in the U.S. (including Puerto Rico, the U.S. Virgin Islands and Guam),
Canada and Mexico; 324 of those stores, or 13.7%, were outside the U.S. A typical store has
about 104,000 square feet of enclosed space plus roughly 24,000 square feet of outside garden
area and stocks approximately 30,000 to 40,000 items across sixteen merchandising departments.
The company was incorporated in Delaware in 1978 and is headquartered in Atlanta. It employed
approximately 472,400 associates at fiscal year end — 422,500 in the U.S., 31,700 in Canada,
17,800 in Mexico — of whom about 53,400 were salaried.

**Reporting structure.** The U.S., Canada and Mexico retail operations are three operating
segments aggregated into one reportable segment, the "Primary segment." Everything else sits
in "Other," which is the SRS specialty trade distribution business. SRS, acquired in fiscal
2024, distributes roofing and building products, interior and construction products, landscape
supplies and pool supplies; at the end of fiscal 2025 it operated over 1,250 locations across
the U.S. and Canada and was organized into four lines of business, each an operating segment,
none of which meets the threshold to be reportable. Fiscal 2025 net sales split $151,966
million Primary and $12,717 million Other, with operating income of $20,574 million and $316
million respectively — the distribution business is roughly 8% of sales and under 2% of
operating income, a structurally lower-margin, higher-volume model bolted onto a
high-margin retailer.

**Customers.** Two primary groups. DIY customers are homeowners completing their own
projects. Pros are professional renovators, general contractors, homebuilders, maintenance
professionals, property managers, building service contractors and specialty tradespeople —
electricians, landscapers, plumbers, painters, roofers, pool contractors, wallboard and
ceiling installers — working on residential, multifamily, hospitality and commercial
properties including data centers. Intersecting the two are DIFM ("do it for me") customers,
homeowners who hire Pros; Home Depot acts as general contractor through third-party licensed
installers in categories such as flooring, water heaters, bath, cabinets, countertops,
windows and HVAC. The Pro strategy is the company's central growth thesis: a dedicated sales
force, the Pro Xtra loyalty program, an extended delivery network, preferred pricing, Pro
Trade Credit, and order-management and project-planning tools. MRO products and services for
multifamily, hospitality, healthcare and government housing customers run primarily through
the HD Supply subsidiary.

**Merchandising and sourcing.** Proprietary and exclusive-brand products, which generally
carry higher margins than national brands, are a stated point of differentiation. Global
sourcing offices operated during fiscal 2025 in Mexico, Canada, India, Vietnam, Taiwan, China
and parts of Europe, reflecting a multi-year supply-chain diversification effort. Suppliers
are contractually bound to the company's responsible sourcing standards, subject to
risk-based factory audits.

**Interconnected retail and supply chain.** The strategy is to blend physical and digital
assets across the full project journey. AI-powered tools include Magic Apron for product and
project inquiries and a Blueprint Takeoffs Tool and Material List Builder that generate
project-specific materials lists and quotes for Pros. Store associates use "hdPhone" handheld
devices and the Sidekick application for on-shelf availability. The supply chain comprises
rapid deployment centers, stocking and bulk distribution centers, flatbed distribution
centers (FDCs) for lumber and building materials, market delivery operations focused on
appliances, and direct fulfillment centers, with a "ship from best location" routing
algorithm. Approximately 50% of U.S. online orders in fiscal 2025 were fulfilled through a
store. Management describes the multi-year supply chain build-out as "largely complete."

**Store growth.** A fiscal 2023 plan to open approximately 80 new stores over five years is
expected to complete in fiscal 2027, after which the company plans roughly 15 to 20 openings
a year. Twelve stores opened in fiscal 2025 (ten U.S., two Mexico).

**Capital allocation.** Stated priority order: reinvest in the business, then pay a quarterly
dividend, then return excess cash through repurchases. Fiscal 2025 capital expenditures were
$3.7 billion and dividends $9.2 billion. Share repurchases have been paused since March 2024
in connection with the SRS acquisition, and the company said it does not plan to resume them
in fiscal 2026 as it works to reduce outstanding debt.

**Competition and seasonality.** The industry is described as highly competitive, highly
fragmented and evolving, with competitors ranging from home improvement retailers and hardware
stores to electrical, plumbing and building materials supply houses, lumber yards, MRO
distributors, wholesale supply distributors, warehouse clubs and online-only sellers.
Management notes that online, digital and AI tools lower barriers to competitive entry and
increase price transparency. The second fiscal quarter is seasonally the highest-volume period.

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## Risk factors

*From the fiscal 2025 Form 10-K, accession 0001628280-26-019436. The Form 10-Q for the quarter
ended August 2, 2026 (accession 0001628280-26-058715) states there have been no material
changes to these risk factors.*

**Housing and macroeconomic conditions.** The company's performance depends on the stability
of the housing and home improvement markets. Management states directly that the high interest
rate environment that persisted through fiscal 2025 and the sizable increase in home prices in
recent years have hurt housing affordability, and that these factors have contributed to
historically low housing turnover, reducing demand for the projects and purchases associated
with buying and selling a home. This is the single most consequential named risk: it is the
one the company says has already materialized.

**Tariffs and trade policy.** Tariffs imposed since the beginning of fiscal 2025 raised costs;
the U.S. Supreme Court subsequently struck down tariffs imposed under the International
Emergency Economic Powers Act, which management describes as creating additional uncertainty
about the U.S. tariff regime and the possibility of new tariffs imposed under different
authority. Products are sourced from outside the U.S. including Mexico, Canada and China, and
retaliatory policy shifts in those countries are a stated exposure alongside foreign currency
volatility.

**Strategic transaction and integration risk.** The company regularly enters mergers,
acquisitions, investments and alliances and warns that integration is complex and
time-consuming, that delay or failure can forfeit expected synergies, that integration
increases complexity in financial systems, internal controls, technology and cybersecurity
systems, and that failure can produce goodwill or intangible impairment and restructuring
charges. Given SRS, GMS and Mingledorff's, this risk is currently live rather than
theoretical.

**Competition and customer expectations.** Failure to respond to shifting customer preferences
— including generative and agentic AI tools that may materially change shopping behavior — or
to compete on delivery and pickup speed, cost and reliability, could cost market share.
Management specifically flags that a greater concentration of online sales with direct
fulfillment could reduce store traffic and the cross-selling that traffic generates, and could
compress margins.

**Execution of the interconnected strategy.** Continual investment is required in operations
and IT. The company acknowledges an aging store base requiring maintenance, investment and
space reallocation, and the need to secure suitable sites for new stores, branches and supply
chain facilities. Investments may not deliver anticipated benefits or may take longer than
expected.

**Technology infrastructure and cybersecurity.** Extensive reliance on internal and
third-party systems, including cloud providers. The filing states the company has in the past
experienced errors, interruptions and service cessations, that unauthorized parties have
previously gained access to systems, that software obtained from third parties has contained
exploitable vulnerabilities, and that breaches have not always been detected promptly. Cyber
insurance may be inadequate. The regulatory environment for data privacy, cybersecurity and AI
is described as constantly changing and increasingly rigorous.

**Supply chain disruption.** Logistics and supply chain interruption from weather, cyber
incidents, trade disputes, customs actions, port congestion, labor disputes, driver shortages
and shipping capacity constraints can impair inventory flow, raise costs and cause lost sales.
Labor shortages at distribution and fulfillment centers are called out specifically.

**Shrink and store safety.** Heightened inventory shrink in recent years, particularly from
organized retail crime. Countermeasures raise costs, compress margins and can degrade the
customer and associate experience. Civil unrest, raids or protests in or around stores are
named as traffic and reputational risks.

**Labor.** Attracting, developing and retaining qualified associates — including
specialized-knowledge staff serving Pros, and technology professionals — while controlling
labor costs, against wage pressure, high hourly turnover and competition among employers. The
filing explicitly flags the risk of failing to manage management transitions within senior
leadership.

**Payments and trade credit.** Interchange and processing costs, fraud and theft (including
AI-assisted attacks), and payment-network compliance. Separately, trade credit is described as
an important part of serving Pros including SRS customers; if those customers cannot repay
trade credit invoices the company faces greater default risk.

**Weather, catastrophe and seasonality of storms.** Natural disasters and unseasonable weather
can disrupt operations and render inventory incompatible with demand; conversely, management
notes that sustained periods *without* storm events have in the past led to lower sales versus
prior periods.

**Suppliers, product quality and responsible sourcing.** Dependence on a global supplier base;
exposure to product liability, recalls, customs holds and detentions, and allegations of
supplier non-compliance. Expanding proprietary products increases regulatory, product
liability, intellectual property and supplier-relations risk.

**Installation services.** The company acts as a general contractor and is subject to
licensing, permitting and environmental requirements. The filing references the EPA
investigation and resulting April 2021 consent decree, and subsequent discussions with the EPA
regarding compliance with that decree, as an example of the exposure.

**Other.** Commodity price inflation and deflation, particularly lumber; predominantly
self-insured across general liability, property, workers' compensation, employee medical,
employment practices, automobile and cyber/privacy liability with third-party coverage only
above retention levels; brand and reputation; changes in accounting standards; and ordinary
course legal, regulatory and governmental enforcement proceedings.

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## MD&A — fiscal 2025 (year ended February 1, 2026)

*From the fiscal 2025 Form 10-K, accession 0001628280-26-019436.*

**Results.** Net sales of $164,683 million, up $5.2 billion or 3.2%. Gross profit of $54,865
million, a 33.3% margin versus 33.4% in fiscal 2024 — the decline reflecting the inclusion of
lower-margin SRS and GMS volume, partly offset by lower shrink and supply chain benefits in
the Primary segment. SG&A of $30,702 million rose 6.8% and reached 18.6% of sales from 18.0%,
on higher payroll and related costs and against a non-recurring legal-related benefit that had
helped fiscal 2024. Depreciation and amortization of $3,273 million rose 7.9%, driven by
intangible amortization from the SRS and GMS acquisitions. Operating income was $20,890
million, or 12.7% of sales, down from 13.5%. Interest and other, net rose 7.9% to $2,288
million on higher average long-term debt and lower interest income. The effective tax rate was
23.9% versus 23.7%. Net earnings were $14,156 million and diluted EPS $14.23, versus $14.91 —
of which roughly $0.30 came from the 53rd week in fiscal 2024.

**The sales bridge is almost entirely inorganic.** SRS (acquired June 18, 2024) and GMS
(acquired September 4, 2025) together contributed approximately $6.3 billion of incremental
net sales in fiscal 2025, against total growth of $5.2 billion; the extra week in fiscal 2024
was worth about $2.5 billion and a stronger dollar cost $307 million. Comparable sales rose
just 0.3%, composed of a 1.4% increase in comparable average ticket against a 1.0% decline in
comparable customer transactions. Management attributes the result to customer engagement with
smaller home improvement projects offset by macroeconomic uncertainty and a persisting high
interest rate environment pressuring broader demand. Total customer transactions fell 2.2% to
1,601.5 million while average ticket rose 1.4% to $90.56 (both measures exclude HD Supply and
SRS). Storage & Organization, Electrical, Bath, Plumbing, Indoor Garden, Outdoor Garden,
Kitchen & Blinds, Hardware, Power, Building Materials and Appliances posted positive
comparable sales; other departments were negative. Online sales were 15.9% of net sales and
grew 8.7% (10.4% on a comparable-week basis).

**The GMS acquisition.** A definitive agreement was signed June 29, 2025 for a cash tender
offer of $110 per share for all outstanding GMS common stock. All conditions including
regulatory approvals were satisfied and the merger closed September 4, 2025, with GMS becoming
a direct subsidiary of SRS. Cash remitted for the shares was approximately $4,257 million and
approximately $824 million of GMS debt requiring repayment on change of control was repaid at
closing, for total purchase consideration of $5,081 million; a further $354 million of GMS
long-term debt was also repaid at closing and treated as an assumed liability, bringing
aggregate cash consideration to approximately $5.5 billion. The preliminary allocation
recorded $2,610 million of goodwill and $1,800 million of intangible assets against $7,186
million of total assets acquired and $2,105 million of liabilities assumed. Funding came from
cash on hand plus approximately $2.0 billion of commercial paper, refinanced with a $2.0
billion senior note issuance in September 2025.

**Tariffs.** The company reported increased costs from tariffs in fiscal 2025 but said supply
chain diversification, some price increases, scale and vendor relationships allowed it to
mitigate the effect on results, and that it is monitoring the Supreme Court decision striking
down IEEPA tariffs.

**Returns and capital.** ROIC fell to 25.7% from 31.3%, driven by higher average equity from
the repurchase pause and higher average long-term debt from financing the SRS acquisition.
Inventory turnover slipped to 4.4 times from 4.7 on higher average inventory.

**Liquidity.** Operating cash flow of $16.3 billion — down $3.5 billion year over year on
working capital, principally vendor payment timing and higher inventories, plus the shift of
the fourth-quarter fiscal 2024 estimated federal tax payment into the first quarter of fiscal
2025, partly offset by lower cash taxes from the One Big Beautiful Bill Act signed July 4,
2025. Investing outflows fell $12.1 billion versus fiscal 2024 because fiscal 2024 carried the
much larger SRS purchase. Financing used $9.2 billion of dividends and $5.0 billion of
long-term debt repayment, offset by $4.1 billion of net commercial paper proceeds and $2.2
billion of net long-term debt proceeds. Cash at year end was $1.4 billion, of which $1.0
billion sat with foreign subsidiaries.

**Debt.** The commercial paper program was expanded during fiscal 2025 from $7.0 billion to
$11.0 billion, backed by $11.0 billion of facilities, in connection with financing GMS. At
February 1, 2026, commercial paper outstanding was $4.5 billion at a 3.7% weighted average
rate, with no back-up facility borrowings; senior notes outstanding totaled $48.8 billion of
principal with $4.6 billion payable within twelve months and $25.4 billion of future interest
payments, $2.0 billion of it within twelve months. Aggregate remaining lease payment
obligations were $15.9 billion; purchase obligations $1.9 billion; unrecognized tax benefit
liabilities $559 million. Approximately $11.7 billion of the $15.0 billion August 2023
repurchase authorization remained available and unused. On a floating-rate principal of $5.4
billion (about 11% of the senior note portfolio after swaps), a one-percentage-point rate
increase would add roughly $54 million of annual interest expense.

**Critical estimates.** Business combinations (fair values of acquired customer-relationship
intangibles, estimated with a multi-period excess earnings method) and merchandise inventories
under the retail inventory method, including shrink estimation — a 10% increase in the assumed
shrink rate would have raised fiscal 2025 cost of sales by approximately $79 million.

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## Current quarter — Q2 fiscal 2026 (thirteen weeks ended August 2, 2026)

*From the Form 10-Q, accession 0001628280-26-058715, and the results release furnished on Form
8-K, accession 0000354950-26-000145.*

**Results.** Net sales of $47,861 million, up 5.7% from $45,277 million. Gross profit of
$16,115 million, up 6.5%, lifting gross margin to 33.7% from 33.4%. SG&A of $8,424 million rose
8.5% to 17.6% of sales from 17.1%, which management attributes to higher operating costs
relative to comparable sales performance. Depreciation and amortization of $852 million was
1.8% of sales in both years. Operating income was $6,839 million, up 4.3%. Interest and other,
net was $524 million versus $550 million, helped by interest received on tariff refunds. The
effective tax rate was 24.5% versus 24.2%. Net earnings were $4,766 million and diluted EPS
$4.79, up from $4.58; the company also reported adjusted diluted EPS of $4.92 versus $4.68.

For the six months, net sales were $89,626 million (up 5.3%), operating income $11,820 million
(up 1.1%), net earnings $8,055 million and diluted EPS $8.09 versus $8.03 — first-half
operating income grew barely at all even as sales grew more than 5%, because gross margin fell
(33.4% from 33.6%) and SG&A rose 7.1%.

**Segments.** Primary segment net sales of $42,806 million versus $42,157 million and
operating income of $6,592 million versus $6,354 million. "Other" (SRS) contributed $5,055
million of net sales, against $3,120 million a year earlier, and $247 million of operating
income in the quarter — roughly 10.6% of sales and 3.6% of operating income, on a cost base of
$4.8 billion. That $1,935 million increase in "Other" is the large majority of the quarter's
$2,584 million of growth in consolidated net sales, against comparable sales of 1.7% in the
retail base. Intangible amortization ran $125 million in Other versus $53 million in Primary
for the quarter, a reminder that the acquired businesses carry a heavy non-cash charge.

**Comparable sales.** Up 1.7% for the quarter — comparable average ticket up 2.8%, comparable
customer transactions down 1.0%, with foreign exchange adding about 25 basis points. U.S.
comparable sales rose 1.3%. Thirteen merchandising departments posted positive comparable
sales: Storage & Organization, Electrical, Hardware, Power, Plumbing, Indoor Garden, Kitchen &
Blinds, Paint, Bath, Outdoor Garden, Building Materials, Flooring and Millwork. Management
characterizes the result as customer engagement with smaller repair and maintenance projects
despite consumer uncertainty and housing affordability pressure. Six-month comparable sales
rose 1.2%. Online sales were 16.6% of net sales in the quarter and grew 11.0%; a weaker dollar
added $105 million to quarterly net sales and $325 million over six months.

**Tariff refunds are the quarter's largest single swing factor.** Following the Supreme Court
decision invalidating IEEPA tariffs, the company began receiving refunds during the quarter and
had received approximately $730 million as of August 2, 2026 — described as the vast majority
of expected refunds. Approximately $685 million was recognized as a reduction of cost of goods
sold, with the remainder reducing inventory cost, nearly all within the Primary segment;
associated interest ran through interest income. Management states the gross margin increase in
the quarter reflects that benefit, largely offset by incremental fuel, energy and other product
input cost pressure and the inclusion of GMS. On a six-month view the direction reverses: gross
margin declined, with GMS mix and input costs outweighing the refund benefit.

**Mingledorff's acquisition, completed during the quarter.** On May 11, 2026, SRS completed the
acquisition of Mingledorff's, a wholesale distributor of HVAC equipment, parts and supplies
across the southeastern U.S., for total preliminary cash purchase consideration of approximately
$1.1 billion. The preliminary allocation records $410 million of definite-lived intangibles
with a 21-year weighted average amortization period and $412 million of goodwill. Net sales and
net earnings attributable to Mingledorff's were immaterial for both the three and six months,
and pro forma results were not presented. The deal created a fifth SRS line of business: SRS is
now organized as roofing and building products, interior and construction products, landscape,
pool, and HVAC products — each an operating segment, none reportable, all reported within
"Other." The GMS purchase price allocation remains preliminary as of August 2, 2026, chiefly
with respect to income taxes and any residual goodwill from measurement period adjustments;
adjustments recognized in the first half were immaterial. No acquisitions were disclosed as
pending at the balance sheet date.

**Footprint.** Three new U.S. stores opened in the quarter, bringing the count to 2,364 at
August 2, 2026, of which 325 (13.7%) are in Canada and Mexico. SRS operated over 1,340
locations, up from over 1,250 at fiscal year end. The company employs over 470,000 associates.

**Capital and liquidity.** Six-month operating cash flow of $11.4 billion, up $2.5 billion year
over year on working capital timing — vendor payments, inventory management, and fewer income
tax payments following the prior-year shift of the fourth-quarter fiscal 2024 federal estimate
into the first quarter of fiscal 2025. That funded $4.6 billion of dividends, $3.0 billion of
long-term debt repayment (including $2.8 billion of senior notes retired at maturity, with no
new senior note issuance in the half), $1.7 billion of capital expenditures and $1.3 billion of
acquisitions. Investing outflows rose $1.1 billion year over year on the higher acquisition
spend. Cash at quarter end was $2.1 billion, $1.4 billion of it held by foreign subsidiaries.
All short-term borrowing was commercial paper, peaking at $6.2 billion in the half and standing
at $4.2 billion at a 3.8% weighted average rate at quarter end, with nothing drawn on back-up
facilities. During the quarter the company entered a new 364-day $4.5 billion back-up facility
expiring July 2027, replacing prior 364-day $3.5 billion and $1.0 billion facilities that were
due to expire in July 2026; total facilities remain $11.0 billion against an $11.0 billion
commercial paper program.

**Buyback still paused.** No shares were repurchased under the program during the quarter — the
only purchases shown were 10,491 shares deemed repurchased through tax withholding and option
exercises under the equity plan at an average $323.72. Approximately $11.7 billion of the $15.0
billion August 2023 authorization remains available; repurchases have been paused since March
2024. Quarterly dividends run at $2.33 per share following the 1.3% increase announced in
February 2026, and the company paid $4.6 billion in dividends over the half.

**Capital plan and guidance.** Management expects approximately $4 billion of fiscal 2026
capital expenditures, about 2.5% of projected net sales. On August 18, 2026, the company
reaffirmed its fiscal 2026 guidance, which incorporates the IEEPA tariff refunds as a partial
offset to unplanned fuel, energy and other product input costs across the year: total sales
growth of approximately 2.5% to 4.5%; comparable sales approximately flat to up 2.0%;
approximately 15 new stores; gross margin of approximately 33.1%; operating margin of
approximately 12.4% to 12.6% (adjusted operating margin of approximately 12.8% to 13.0%); an
effective tax rate of approximately 24.3%; net interest expense of approximately $2.3 billion;
capital expenditures of approximately 2.5% of total sales; and diluted EPS growth of
approximately flat to 4.0% from $14.23 in fiscal 2025 (adjusted diluted EPS growth of
approximately flat to 4.0% from $14.69).

**Other.** The company reports that it is involved in litigation arising in the normal course of
business and that in management's opinion none of it is expected to have a material adverse
effect. There were no material changes to the risk factors from the fiscal 2025 Form 10-K, no
changes to critical accounting estimates or significant accounting policies, no new accounting
pronouncements with material impact, and no material changes to market risk exposures. Interest
rate swaps designated as fair value hedges remained in place; no new material hedging activity
occurred in the period.

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## Subsequent events

The Form 10-Q for the quarter ended August 2, 2026 (accession 0001628280-26-058715) contains no
subsequent-events note; its notes end with the acquisitions note. The material developments
between the August 2, 2026 period end and the August 25, 2026 filing were reported on Form 8-K.

**CEO medical leave and interim management (announced August 12, 2026; Form 8-K, accession
0000354950-26-000141).** Edward P. "Ted" Decker, Chair, President and Chief Executive Officer,
took a temporary medical leave of absence; the company said it expects him to return within the
next few months. The Board, in alignment with Decker's recommendation, assigned oversight of the
Office of the CEO to two executives during his absence: Ann-Marie Campbell, Senior Executive
Vice President, overseeing day-to-day operations, and Richard V. McPhail, Executive Vice
President and Chief Financial Officer, overseeing financial management and the Pro subsidiaries.
McPhail was designated interim principal executive officer for SEC purposes and signed the
quarterly report in that capacity. Gregory D. Brenneman, the independent lead director, is
chairing the Board during the leave. No compensation changes were made in connection with these
interim responsibilities.

**Second quarter results release and reaffirmed guidance (August 18, 2026; Form 8-K, accession
0000354950-26-000145).** The company reported its second quarter fiscal 2026 results, stating
that they exceeded expectations, and reaffirmed its fiscal 2026 guidance as set out above.

**Executive portfolio expansions and related equity grants (announced July 30, 2026; grants made
August 20, 2026; Form 8-K, accession 0000354950-26-000148).** Three executives took on expanded
responsibilities: William D. Bastek, Executive Vice President – Merchandising, assumed the
product development merchant portfolio including private brands; Jordan Broggi, Executive Vice
President – Interconnected Retail, assumed the loyalty, credit services and payments
organization; and Richard V. McPhail assumed responsibility for a newly described Office of Pro
Acceleration, intended to coordinate across Home Depot Pro, HD Supply, SRS Distribution and
Construction Resources. On August 20, 2026, the Leadership Development and Compensation
Committee granted each of the three an award of restricted stock with a grant date fair value of
$500,000, vesting on the second anniversary of grant subject to continued employment.

No post-period acquisition, divestiture, financing, borrowing or litigation outcome was disclosed
in the filings covering this period.