Story Stocks^®

Home Depot's (HD) 1Q26 results marked a rare miss on EPS with the shortfall primarily driven by softer-than-expected demand for big-ticket items as consumers continued to defer large home renovation projects as mortgage rates hover around 7%. Despite the earnings miss, the stock rallied post-earnings, buoyed by a revenue beat, positive transaction growth, and a reaffirmation of FY26 guidance, signaling management's conviction in the company’s ability to navigate macroeconomic headwinds, including tariff pressures and a sluggish housing market. That conviction partly rests in the solid growth of HD's Pro business and the successful integration of SRS Distribution.

• Comparable sales in Q1 came in at (0.3)%, slightly below the expected (0.2)%, slipping back into negative territory after HD generated positive comps for the first time in two years last quarter at +0.8%. This downturn was driven by cautious consumer behavior, particularly in big-ticket discretionary categories like appliances and flooring, where high prices and financing costs deterred purchases. However, smaller project categories, such as spring seasonal products and tools, showed resilience, supported by strong customer engagement in these areas.
• Average ticket was essentially flat yr/yr at $90.71, supported by strength in smaller, high-margin purchases, while comparable transactions increased by 2.1%, driven by heightened engagement in smaller, high-frequency purchases, particularly in spring seasonal categories like gardening supplies, outdoor tools, and lawn care products. HD’s focus on enhancing its digital ecosystem, with online sales contributing significantly to revenue, also likely boosted transaction volume through convenient e-commerce channels.
• Gross margin contracted by 30 bps yr/yr to 33.8%, primarily due to the integration of SRS Distribution, which carries lower margins than HD’s core retail operations. Additional pressure came from increased trade spending and inflationary costs, though these were partially offset by productivity gains and favorable product mix shifts toward higher-margin smaller projects. HD reaffirmed its FY25 gross margin guidance of approximately 33.4%, signaling confidence in its ability to keep margins stable. Notably, HD’s CEO emphasized a commitment to maintaining pricing levels despite tariff uncertainties, with the recent reduction of Chinese import tariffs from 145% to 30% and a suspension of reciprocal tariffs to a 10% universal duty providing some relief.
• The Pro business, which accounts for roughly 50% of HD’s customer base, continued to be a bright spot in Q1, with positive sales growth driven by strong engagement from professional contractors. The acquisition of SRS Distribution, finalized last summer for $18.25 bln, significantly bolstered this segment, expanding HD’s addressable market to an estimated $250 bln. SRS Distribution likely performed in-line with HD's expectations (inferred by its reaffirm of FY26 guidance), contributing to the quarter’s revenue growth of +9.4% while enhancing HD’s reach in building materials and specialty trade services.

HD is demonstrating resilience following a mixed 1Q26 earnings report, with the revenue beat and reaffirmed FY25 guidance overshadowing the EPS miss. Investors appear optimistic about the company’s strategic focus on the Pro business and SRS Distribution’s growth potential, anticipating stronger performance as macroeconomic headwinds ease and housing market conditions potentially improve.