Morning.
Morning.
All right.
Kate, nice to see you.
Yeah, long time no see.
Yeah.
Thank you so much for joining us today. Hi, everybody. Thanks for joining us for our fireside chat with Home Depot. We're happy to have with us Ted Decker, Chairman, President, and Chief Executive Officer, and Billy Bastek, Executive Vice President of Merchandising. Thank you so much for joining us today. I think it's pretty much on everyone's minds, t here's two buckets of questions I think that we get asked the most about when it comes to Home Depot.
M aybe we can start with the first, which is just the health of the U.S. consumer, your outlook for housing. I think it's fair to say that it seems like there was a little more momentum in the business in the second quarter. You saw a broader swath of growth than you've seen in some time. M aybe we can start there, and you can talk about what you're seeing from the consumer and why now, and w hat you expect.
Yeah. W e feel much better than we did last year, Kate. W hen we were here last year, we were entering, I think it was our eighth quarter of negative comps. Now sitting here today, we just wrapped up in Q2, our third quarter of positive comps in the state. There definitely has been a momentum switch that started in the back half of last year, and continued into the full first two quarters of 2025. It's really broad-based, short of the large project that tends to be financed. The engagement in smaller projects and repair projects is as broad-based as it's been in several years now frankly, in terms of geographies, in terms of merch departments, which Billy can hit on the number of departments that we've seen positive traction.
O ur consumer has been healthy throughout these past couple of years, even in terms of, our average homeowner is sort of squarely in that fourth quintile of median economic income participating in home price appreciation, which has gone up 50-odd% since the end of 2019. While we're not seeing national price increases to the extent we had the prior years, nationally home prices are still increasing. That's because of a fundamental shortage of homes. We have a supply and demand imbalance. People feel good in terms of equity returns. W e have an employed, healthy core customer, who's now starting to re-engage in home improvement. Housing hasn't been particularly helpful. Y ou asked about the housing market. Some people are saying it's close to frozen in some of the numbers would suggest, with 40-year lows of housing turnover.
I mentioned the fundamental shortage of housing. We're barely building enough new homes to keep up with current household formation, s o we're not really making a dent in the shortage of housing. T here's just been a lot of economic uncertainty that we think is preventing people from taking out a HELOC or cash-out refi their home. They have a tremendous amount of equity in the home. We've never seen more untapped equity, b ut is there going to be a recession? What's going to happen to my tax rates? What's going to happen with general inflation because of tariffs? All these things have been so noisy in the everyday media, not just financial media. People have cited that as the number one reason that they haven't engaged with big projects, b ut we think that will come.
That's a matter of time, getting used to the rates, whether they come down dramatically or not. What people anticipate is Fed cuts on the horizon. We need to get turnover up. That would be nice, to get off 40-year lows. A ll things being equal, I feel much better sitting here with you this year than a year ago. Billy, you can talk about the breadth.
Yeah. A s you mentioned, Kate, you said about our Q2 call. We did see the broadest base across our store impact. If you look at our top 20 categories that made up, essentially the one for U.S. comp we had, we had 13 of 16 departments in the U.S. positive comp. O nly four of those categories were seasonally related.
We know we had a different type of spring, as we seem to every year, certainly here in the North. I t was really less of an impact to, spring finally came in much more broad-based. I call it the middle of the store, concrete, dimensional lumber, water heaters, a lot of businesses like that, vanities, stuff on the smaller project piece. R eally pleased, the first time, going back to I think the back half of 2022, we saw that broad-based impact across the business in a very positive way.
I'd also say, Kate, our growth, in addition to I think a more supportive environment, we continue to take share. W e're taking share with the consumer part of our business and the Pro part of the business. A ll the things we're doing to build out Pro capabilities are resonating with our Pro customers. H alf the business, half the market is still that consumer DIY. W e're doing a tremendous amount in terms of delivery, our digital platforms, marketing to continue engaging with that consumer. W e're growing in virtually every category, faster than the marketplace, s o we'd love the customers responding to the capabilities and service levels we're putting into the marketplace.
That's great, y eah. It's definitely a different tone than it was last year, so i t's great to hear. T he other thing that's maybe a little bit different from last year is tariffs. Billy, you had talked again on the quarterly call, of just that we should not expect to see broad-based price increases on your product. Can you walk through a little bit how you've been able to manage this? Half your business is, or imports are outside the U.S., s o how has the supply chain functioned in this very volatile environment? How has the merchandising team operated? W here has the mitigation come from?
Yeah, s o you're right. Things certainly have changed on the tariff front since we were here a year ago. E ven candidly back to Q1, I made some comments during our Q1 call, that based on that point in time and the rates then, we were very comfortable that we could mitigate virtually all that cost and I said as much. Obviously, things have changed over the course of the last 90 days, policy changes. L isten, we said on the call, prices will move. There's no question about it, b ut if you step back, more than 50% of our goods are manufactured in the U.S., are not associated with anything tariff-related. W e feel great about that.
We feel great about the diversification strategies that we've had in play for several years with our supplier partners, outside of certain geographies and feel great about our diversification as it relates to the different countries, and even continents where products are manufactured. We have a great pricing finance team. We work closely with our suppliers. O ur number one piece, as we said on the call, is going to continue to be, we're a project retailer. We're going to continue to keep that project, the least amount of impact we can have on those projects. The team is solely focused on that. We have a really great line of sight to what the impacts are financially. We have a number of levers we can use.
While prices will move, we're going to be laser-focused on creating the best value for our customers. Protecting the price is going to be a real key to us in the back half of the year, a nd we think we'll continue to manage that the way we have. We'll see more in the back half of the year, based on when the changes were made to policies and now that subsequent inventory coming in. W e have all of our inventory in-house already as it relates to the back half of the year.
Think of our big events, holiday, and some of the stuff we do in tools. W e feel great about that position and how we'll manage that going forward, and r eally going to protect the project is a key piece to us. There are key items and key indicators, and key pieces of those projects that we are laser-focused on, ensuring that pricing is going to be as competitive as it's always been. W e love our shelf price every day. We'll continue to protect that project at all costs.
Could you just maybe talk to assortment then, assortment planning in the context of this environment? You're protecting the project, so I would imagine you're not compromising the assortment there as much. M aybe for holiday or Halloween or more of the discretionary occasions, have you had to work through that assortment a little bit differently years past?
Yeah. I think the holiday things you referenced, that's even a little bit different. While that's discretionary, yes, that's more of a one-time impact. A gain, this was a moving set of circumstances throughout the spring. Specifically to Q4, you're planning that in that timeframe. W e are thrilled that we'll have a very competitive holiday program. We know that price and price impression there is important. Our customers see us in that space specifically, s o there's a lot of good understanding about what the prices have been historically. We feel great about our position as it relates to the holiday pieces specifically, both Halloween, holiday, and then our Q4 more tools business.
I'd say more broadly, across assortment and line structure, is depending on the tariff impact, w e've talked about this many times, t here will be items that just don't make sense in the line structure. If you've taken certain costs associated with these products and now they're sitting on top of other projects, just by definition, they're not going to make sense from an assortment standpoint. W e've seen some rationalization of that because prices that haven't been impacted, costs that haven't been impacted, end up in a different place in the line structure, just don't make sense going forward. There's really no demand for it out there. It's really the impact, so the merchants are heads down.
That's the only job right now among the five other things they're doing, is really going bay by bay, SKU by SKU, assortment by assortment, and seeing , if a retail has ultimately moved, is there going to be an impact to that product? M eaning, it doesn't fit in the line structure anymore. We've made a number of changes through that process, and the teams continue to work through that in the back half of the year.
Okay. T hat was the first bucket of questions we get, the macro and tariffs. The second is about the complex Pro. T here are a couple of different directions we can go with this, b ut maybe we could start with capital allocation. You have a long history now of making acquisitions. You've always been very consistent with these acquisitions, and acquiring companies that can help you build out capabilities, HD Supply and Interline, for example, and the MRO space, and now more recently SRS and GMS. C ould you maybe talk about how you are viewing your acquisition strategy going forward, and in the context of your capital allocation priorities?
Sure. C apital allocation, Kate, hasn't fundamentally changed. We'll always invest in the core business, the core retail business in the 2,350 stores that we have. We'll always pay a healthy dividend. I n the past, when we had excess cash after those demands, we would buy back shares. That's still the play in capital allocation. O ne of the things we've done, as you said in the last couple of years, is part of growing the core, particularly our Pro capabilities, w e've made two decent-sized acquisitions, a nd because we have a pretty conservative outlook on leverage, we said that we would suspend buybacks until we got our leverage back down to more or less to our target of two times. T hat pushes out buybacks just on our cash flow forecast into the back half of 2026.
A ll things being equal, we'll continue with the capital allocation play to invest in the core, which would include some acquisitions, pay the dividend, and buy back shares. A s we build out our capabilities, which we've been doing to get more share of wallet with our existing core customer base, those organic efforts of building out a field sales force, delivery capabilities, leveraging our balance sheet to provide trade credit, order management, account management, all those activities continue at a pace. Those haven't changed at all. In fact, they've been accelerated somewhat. SRS, for example, has a very robust trade credit practice. It's what they've always done. T hey're running Home Depot's trade credit rather than us build that capability.
GMS, as a drywall and ceiling distributor, very similar sort of set of capabilities, branch-based delivery, boom and scatter, distribution assets, very similar operating model and culture. We just thought that was a great fit. The GMS team and the SRS team have known each other for years, as well as SRS was going, it just made sense to engage GMS. T hey were super open to the prospect of not just joining Home Depot, but joining the SRS platform. GMS will be rolled in, as two more verticals of ceiling and drywall, into SRS. That management team, happily, the operating team is staying and the sales force team's staying, and they will report into the SRS team. W e'll continue to look at opportunities from an M&A perspective.
One thing that I can assure you we'll do, it's very normal with distribution that you would have roll-up or bolt-on smaller acquisitions. SRS, for example, in the year we've owned them, year plus, they've done 10-odd bolt-ons. These can be one-branch outfits in a new town that we might not have a presence, or in a different part of a town that we don't have a presence.
We always look at the cost-benefit analysis of greenfielding a new site versus acquiring an operation that has a robust customer base. T hese are very modest in the scheme of things, acquisitions. Whether we do anything at scale anytime soon, we'll continue to review that. T he main focus is to continue to build out the organic opportunities and then merge, cross-selling capabilities and cross-distribution capabilities with SRS and GMS.
This question has come up before, but in terms of where you are with the complex Pro initiative and strategy, do you feel like you're in a place where you have the right platform now, given these acquisitions?
Yeah. It will always continue to develop, but I think if things were to stay where they are right now, we have a great set of capabilities and a great set of acquired assets and built assets. When we first went on this journey, we said the TAM is about $1 trillion, and it's evenly split between the Pro customer and the DIY customer. Our Home Depot business is equally split about 50-50, the Pro and the consumer. What we always knew was, with the Pro customer, depending on the size and the complexity of their project, we were either getting the vast majority share of their spend. A smaller Pro might be giving 100% of their spend to the home center channel or thankfully Home Depot, but the larger Pro would be spending their principal purchases with wholesale distribution.
While they shopped Home Depot, they might have a $2 million spend, and Home Depot might get $50,000, $75,000. That was for emergency fill-in, pickup. We're obviously open late at night and weekends, but their principal purchases were with distribution. W hat we said is, "W e have the product. We're in your geographies, and you're already shopping with us. Why would you spend more with us?" T hey all love Home Depot, thankfully. T hey're like, "Yeah, we'd love your brand. We'd love your product. We'd love the brands you sell, but y ou need to develop these capabilities to get that share of wallet. W e're not going to pay for a window package on a Visa card three months before it's delivered." T hat's just not how we operate our business.
W e're not going to come and pick up a truckload of shingles. Those have to be delivered to the job site, s o we set about to build the capabilities to capture more share of wallet with that customer. W e're not just getting the share of wallet because we've entered the game. We have to offer value to them. T he value we're offering is, we can simplify their business. Turn times and cycle times is the principal profit engine for our pros, a remodeler, a builder, large builder, small builder. How quickly can I get this project done? That is where they make their money. H ow many projects can I turn? T he value proposition is, "Hey, we have the product. We have the brands you want. You'd like the Home Depot offering as we build out these capabilities.
You can consolidate the number of people that you have to work with on a project. We can bring digital tools, technology, fewer points of contract, and speed up that cycle time of your build. Do we have a right to win more share of your spend?" T hey said, "Absolutely." W e've worked with them on what those capabilities need to be, what they need to look like , put them in place in front of the customer, test them, and modify. T he organic efforts remain the most important. I think it's a $250 billion white space for existing customers' share of wallet as we build out these capabilities. M&A is an accelerator to that effort, but not necessary. C ertainly from where we are today, we're in great shape a nd we'll look at opportunities always on a case-by-case basis.
If I can maybe just pivot a little bit to some of the investments that you've made, and I think what again came across on the second quarter call is, some of the benefits or lifts you're seeing as a result of your investments in speeding up the supply chain. I know it's something the company is excited about.
Yeah.
Is there a way you can quantify what lifts you're seeing from this increased speed, and how important it is to again just taking more share?
Yeah , and Billy, please add. I t's clear that of all the capabilities that the Pro and the consumer is looking for is speed. They certainly want a great product, a great value, b ut delivery and then speed of delivery is increasingly the battleground. S ome time ago, we made a number of investments to improve our digital assets. We rebuilt our entire digital platform and put all that up in the cloud. W e started to build out the supply chain to replenish our stores as well as deliver to customer, even going back to 2018, 2019. T hankfully, we did. We've built out over 20, think of pick, pack, and ship.
These are massive, 500,000- 1 million sq ft distribution centers, pick, pack, and ship, largely parcel, but some big and bulky as well, where we could reach 90% of the population in two days or less. W e've now accomplished that, b ut not everyone necessarily appreciated that. T wo days is great, but next day and even same day is better. A number of months ago, we said, "We've got these terrific sets of assets. We need to be faster. What do we need to do to get even faster?" A number of very conscious decisions. Billy and the merchant teams significantly increased the assortment, and the depth of inventory in those 23 direct fulfillment centers. We increased marketing with very much a speed and delivery message. W e believe and we look at prices daily, w e widened our price gap with key competition.
We, for the first time, partnered with delivery agents and gig economy delivery agents, something we hadn't done, but that was a way to quickly get same-day or few-hour delivery with Instacart and DoorDash, and Roadie and the like. T hose have been great partnerships, so we put all that together and went to market with it and increased our marketing budget significantly. T he proof is in the pudding, and the acceleration of our online business as people realize, "Wow, Home Depot, like, I just ordered that. I t came in the afternoon that I ordered it. "O ur stickiness, our repeat purchases and frequency in that speed message, and capability that we started building out again in the late teens, is what's accelerated that online comp.
Yeah, a nd certainly utilizing our stores. Now our stores have done deliveries for 45 years. A little less of that has been in that kind of consumer parcel space. R eally implementing some technology around ship from best location, with the lens of same-day, next-day, what the customer's really looking for and in some cases demanding. W e put our stores in the middle of that, where we couldn't meet a next-day delivery from our 23 DFCs that we had. P utting them in the middle of that has been really great. We mentioned some of the partnerships we've had. T here's no question that, from a speed standpoint, you have to tell people. I think one of the things we learned is, not everybody saw us for that component.
We've been delivering parcel for some time. T his will be even more of an opportunity for us when you start to say, "Now there's 1,200 more locations on the Pro side to make part of that ecosystem of ship from best location." We'll talk more about that in December of course. That's been a big game changer. We had 12% comps, as we mentioned during the call online. The bigger piece is the stickiness that we're seeing with those customers, that maybe didn't know that we had that kind of speed in the marketplace. Really pleased with the stickiness with those customers, the repeatable ordering that they're doing. Really, we invested. You saw our inventory numbers.
We invested. W e'd say some of our best investments we've made is taking advantage of those assets all over the country, and investing inventory there and getting it ultimately closer to the customer. You couple that with our big and bulky opportunity that we have as the next tranche. A gain, we'll talk more about that in December, b ut we're really excited about the work that's been done there.
Yeah, a nd the speed's never been faster. W e're measuring, as you can imagine, every day, what's our average promise time on parcel, on bulk, on house shipped, on vendor shipped, percentages delivered same-day, next-day, two days? A ll those metrics have had dramatic improvements over the last several months. A gain, all being reflected in that acceleration of the online comp.
Great, t hank you for that. In the last five minutes here, we have five questions we're asking every company that's up here on stage with us today. Just meant to be rapid-fire questions. We've touched on some of them already. T he health of the consumer and the second-half environment, do you expect the environment in the second half of 2025 to be better, worse, or the same than the first half?
I would say better as the $150-odd billion tax cut benefit starts to flow through to our consumer.
On pricing, we also talked about this a little bit as well. You've only started to push through some price. Have you seen any elasticity impact as a result of some of those pricing actions, or do you anticipate that?
Yeah , it's interesting. I think folks that follow us know, we have the widest set of competitive set of anybody, s o we're looking at pricing across the board. I don't know that there's a lot of elasticity in anything that we sell per se. We know, as Bernie Marcus would always say, "Prices go up, units go down." I n any number of time, we have hundreds and hundreds of pricing tests ongoing, up, down, commodities, by market. W e watch that very closely, and know that we'll see about the pressure on the consumer more broadly in the back half. T he continued momentum we saw, we updated our guidance in the Q2 call. We're very comfortable with how we're going to be able to go to market there.
The third question is around inventory, just your expectations for inventory growth in the second half.
Yeah. A s I mentioned, we made some significant investments in our supply chain assets a nd again, thrilled with those. W e haven't made any purchases, pulled forward any purchases as it relates to the back half, both Q3 and Q4. We didn't do that related to tariffs. We didn't think that was a good use of our capital at the time, s o BAU is there. We'll continue to make investments where we see our customers leaning in. A s I mentioned, the DFC and our FDC networks will continue to invest there, b ut we haven't pulled any inventory forward. I wouldn't look for anything different than what you've seen from a normal BAU from us.
Our fourth question is on margins and your expectation for non-tariff margin drivers into 2026, so freight, wages, materials.
I'd say on operating costs, same. Not a big change. When we firmed guidance on the second quarter, we did comp and margin as well. I would say that will largely be the same in the back half, a nd we'll talk about 2026 onwards in December at our investor conference.
The last question is just around the competitive landscape. I think in general, across retail, we have seen a tick up in bankruptcies and store closures, not in the home improvement space necessarily, but more broad retail. Do you think market share consolidation will speed up, slow down, or be about the same in 2026?
Yeah, our space is a little different. I think competitive stance and the players will be largely unchanged for the foreseeable future. There might be some consolidation. There's a long-term trend of consolidation in distribution space. E very distributor, regardless of product category, is doing those small regional acquisitions when family-owned businesses choose to sell. O ther than the normal flow of distribution consolidation, that would be a similar competitive set. A gain, in our retail space, they're the players. I think we're all healthy and sticking around.
Okay. T hank you so much for joining us today. I appreciate the time.
Thank you.
Yeah. Thank you, Kate.
Take care. Thank you all.
Thank you.