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Greetings, and welcome to The Home Depot First Quarter 2026 Earnings Call. [Operator Instructions]

A reminder, this conference is being recorded. It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's First Quarter 2026 Earnings Call. Joining us on our call today are Ted Decker, Chair, President and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, Executive Vice President of Merchandising; and Richard McPhail, Executive Vice President and Chief Financial Officer.

Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. And as a reminder, please limit yourself to one question with one follow-up. If we were unable to get to your question during the call, please call Investor Relations at (770) 384-2387.

Before I turn the call over to Ted, let me remind you that today's press release and the presentations made by our executives include forward-looking statements under the federal securities laws including as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release in our most recent annual report on Form 10-K and in our other filings with the Securities and Exchange Commission.

Today's presentation will also include certain non-GAAP measures, including, but not limited to adjusted operating margin, adjusted diluted earnings per share and return on invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release in our website.

Now let me turn the call over to Ted.

Thank you, Isabel, and good morning, everyone. Sales for the first quarter were $41.8 billion, an increase of 4.8% from the same period last year. Comp sales increased 0.6% from the same period last year and comps in the U.S. increased 0.4%.

Adjusted diluted earnings per share were $3.43 in the first quarter compared to $3.56 in the first quarter of last year. Our results were in line with our expectations. In the U.S., our Northern and Western divisions had positive comps as customers engage in outdoor projects when weather was favorable. In local currency, Mexico had positive comps, while Canada was negative. The underlying demand in our business was relatively similar to what we saw throughout fiscal 2025 despite greater consumer uncertainty and housing affordability pressure. Our teams are operating at a high level, and we remain focused on executing our strategy of driving our core and culture, delivering a frictionless interconnected experience in winning the Pro.

Spring is our biggest season, and we feel great about our store readiness, product assortment and value proposition. As Ann will detail in a moment, our associates are providing excellent customer service. We're also moving more store tasking to our merchandising execution team. So our Orange Apron associates can spend even more time engaged with customers. And as Billy will share, our merchants are providing exceptional value in product innovation through strategic supplier partnerships, which delivered strong event performance.

Last week, we completed the acquisition of Mingledorff's, a leading wholesale distributor of heating, ventilation and air conditioning equipment serving residential and commercial customers through 42 locations in 5 states across the Southeastern United States. Mingledorff's brings an extensive product portfolio, a robust distribution network and established customer relationships that are highly complementary to SRS' existing business.

In addition, Mingledorff's gives us an incredible opportunity to penetrate the national market for HVAC parts and supplies, leveraging the power of our enterprise to create a superior value proposition for the Pro customer. HVAC distribution represents an addressable market of approximately $100 billion, and increases our total addressable market to $1.2 trillion. SRS can now serve more Pros in one greater share of wallet in this highly fragmented market.

As a reminder, Pro represents a $700 billion market opportunity. We know we have the right to win in this space as we continue developing differentiated capabilities to better serve residential Pro customers. In addition to our 2,360 plus store network and 325 customer-facing warehouses, SRS is a best-in-class specialty distribution platform with over 1,300 branches. Combined, we now command a fleet of approximately 16,000 delivery assets and a professional sales force of over 5,000 associates.

What we are building is unique and not easy to replicate. We are confident our comprehensive product offering, capabilities and services will deliver an exceptional experience for Pros leading to sustained growth and outsized market share gains.

As always, I'd like to thank our associates and supplier partners for doing an incredible job serving our customers this quarter.

With that, let me turn the call over to Ann.

Thanks, Ted, and good morning, everyone. We continue to focus on elevating the shopping experience across all stores and online by optimizing fulfillment options. To do this, we are simplifying processes in our stores. We're moving friction from the customer experience, increase in associate engagement and taken actions to drive more loyalty with the Pro.

Late last year, we began to transition more store task into our merchandise and execution team. Today, we have transitioned over 1,000 stores. By creating distinct selling and tasking teams in our stores, we've been able to redistribute tasking in our stores to MET, while our Orange Apron associates focus on driving deeper engagement and better customer service. We expect to complete this transition in all stores by the end of fiscal 2026.

As you know, we have been on a journey to remove friction from the shopping experience, and we are continuously evolving the way we operate to deliver a more seamless experience. When customers place an order online to complete their projects, they expect the right products delivered on time and complete. Over the last several quarters, we've leaned into faster delivery for customers using our proprietary model, which leverages all of our assets to drive speed, what we call ship from best location. This has resulted in tremendous growth in deliveries out of our stores.

In order to enhance our ability to serve this interconnected purchase more effectively, we have focused specifically on ensuring we have the right leadership and technology capabilities in place to simplify the operational demand on our stores and improve the speed and experience for our customers.

Last quarter, we told you about our operations experience manager, whose responsibilities include driving uniform operational processes and enhancing the interconnected fulfillment experience. We are evolving our sourcing logic and have begun to route orders to the optimal store for fulfillment based on distance, inventory availability and speed of delivery, which improves the likelihood of a successful delivery. While early, these efforts are enabling us to drive better outcomes for our customers, and we've seen a reduction in cancellations and improvement in fulfillment time, greater customer satisfaction scores and improvements in likelihood to shop again scores. And to drive loyalty with the Pro, we continue to lean into tools to simplify their day-to-day geared at speed and ease when they stop with us online, in-store and through jobsite delivery.

In previous quarters, we have talked about the product planning tool and other AI-enabled tools for Pros. We now have all of these tools under a single easy-to-use workspace that functions as a product management tool for Pro's day-to-day workflow. Within the workspace, Pros can access the product planning tool to organize and stage delivery for large jobs, build material list more effectively through an AI-powered material list builder, track deliveries real time and view purchase history. They can also share access with their teams, which results in better visibility and collaboration.

Additionally, we have made it easier for Pros to schedule and manage complex deliveries within the Pro Digital Workspace. Through complex order scheduling, Pros can provide us with job site preferences and business hours, enabling us to complete their delivery on time inside the exact window the Pro is looking for. Our on-time and complete performance has never been better, and our customer satisfaction scores for deliveries, both on store and/or supply chain assets are at record highs.

In closing, I'm excited about all that we are doing to drive exceptional shopping experience. Our service continue to go above and beyond serving our customers ourcustomers, and I want to thank them for all that they do. With that, let me turn the call over to Billy.

Thank you, Ann, and good morning, everyone. I want to start by also thanking all of our associates, suppliers and supply chain partners for their ongoing commitment to serving our customers and communities.

As you heard from Ted, our performance during the first quarter was in line with our expectations and where we experienced favorable weather, we had great engagement in spring-related projects. In the first quarter, 9 of our 16 merchandising departments posted positive comps, including storage, power, hardware, plumbing, electrical, bath, indoor garden, paint and kitchens.

During the first quarter, our comp average ticket increased 2.2%, and comp transactions decreased 1.3%. Big ticket comp transactions or those over $1,000 were positive 0.8% compared to the first quarter of last year. We were pleased with the performance we saw in portable power and patio. However, larger discretionary projects remain under pressure.

During the first quarter, Pro posted positive comps and outperformed DIY. We saw strength in DIY across many spring-related categories, including live goods, outdoor power equipment, patio, grills and storage. And for Pro, we saw strength across many Pro-heavy categories like power, pipe and fittings, water heaters, fasteners and paint. The investments we are making are resonating with our Pros as we see increased engagement.

For example, we have made significant progress with the Pro who paints and continue to see share gains with this customer. Our expanded assortment of products and partnerships with Bayer and PPG, as well as enhanced digital capabilities through One Paint combined with improved job site delivery capabilities are helping to remove friction from their experience.

Turning to total company online comp sales. Sales leveraging our digital platforms increased over 10% compared to the first quarter of last year. This is the fourth quarter in a row with double-digit year-over-year growth, driven by our ongoing investments across our interconnected platforms. Delivering the best interconnected experience is a key component of our strategy. We are continuously improving our site and leveraging technology to do that, whether it is better search functionality, more relevant recommendations and easier and faster fulfillment options to name a few.

As Ann mentioned, our faster delivery speeds are resonating with customers and driving greater engagement. And while we are pleased with the progress we are making, we remain relentlessly focused on getting better each and every day because we know that as we remove friction from the experience, we see incremental customer engagement leading to greater sales across all points of interaction.

During the first quarter, we hosted our annual Spring Black Friday and Spring Gift Center events and saw strong performance across both events. Our merchants did a fantastic job curating the best products and we saw strong engagement with our customers throughout the event. We are pleased with the results we saw, particularly in categories like power tools, outdoor power equipment, live goods and patio. In fact, our power categories posted a first quarter record for sales led by portable power and outdoor power equipment.

We know that demand for cordless outdoor power equipment has never been stronger in our lineup of battery-powered tools across RYOBI, Milwaukee, DEWALT and Makita is unmatched. This quarter, I'm excited to announce that [ ram board ] will be exclusive to the Home Depot and the big box retail channel. This product is engineered to withstand the toughest conditions at the job site. And that's why [ ram board ] has been the go-to for Pros for heavy-duty floor protection for over 25 years.

As we look forward to the second quarter, we are ready to continue delivering the best spring assortment across all of our product categories. Our live goods look incredible with everything from shops to a variety of flowers, herbs and vegetables for every type of gardener, and we have all the outdoor essentials for your patio, whether it's a new patio set or grilled to enhance your outdoor living space. We're excited about spring breaking across the country, and we remain ready to help our customers with all of their outdoor projects and outdoor living needs.

With that, let me turn the call over to Richard.

Thank you, Billy, and good morning, everyone. In the first quarter, total sales were $41.8 billion, an increase of $1.9 billion or 4.8% from last year. During the first quarter, our total company comps were positive 0.6% with comps of positive 0.7% in February, positive 2% in March, and negative 0.5% in April. Comps in the U.S. were positive 0.4% for the quarter with comps of positive 0.4% in February, positive 2% in March and negative 0.8% in April.

Additionally, foreign exchange rates positively impacted total company comps by approximately 55 basis points for the quarter. In the first quarter, our gross margin was 33%, a decrease of approximately 75 basis points from the first quarter of last year, which was in line with our expectations and reflects a change in mix as a result of the GMS acquisition.

During the first quarter, operating expense as a percent of sales increased approximately 20 basis points to 21.1% compared to the first quarter of 2025. Our operating expense performance was in line with our expectations. Our operating margin for the first quarter was 11.9% compared to 12.9% in the first quarter of 2025. In the quarter, pretax intangible asset amortization was $171 million. Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the first quarter was 12.3% compared to 13.2% in the first quarter of 2025.

Interest and other expense for the first quarter increased by $13 million to $604 million. In the first quarter, our effective tax rate was 24.9% and compared to 24.4% in the first quarter of fiscal 2025. Our diluted earnings per share for the first quarter were $3.30 compared to $3.45 in the first quarter of 2025. Excluding intangible asset amortization, our adjusted diluted earnings per share for the first quarter were $3.43, a decrease of approximately 3.7% compared to the first quarter of 2025.

During the first quarter, we opened 12 new stores, bringing our total store count to 2,361. At the end of the quarter, merchandise inventories were $27.3 billion, up approximately $1.5 billion compared to the first quarter of 2025, and inventory turns were 4.2x, down from 4.3x last year.

Turning to capital allocation. During the first quarter, we invested approximately $845 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2.3 billion in dividends to our shareholders. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 25.4%, down from 31.3% in the first quarter of fiscal 2025.

Now I will comment on our outlook for fiscal 2026. As you heard from Ted, our performance during the first quarter was in line with our expectations. The underlying demand during the quarter was relatively similar to what we experienced throughout fiscal 2025. As a result, we are reaffirming our fiscal 2026 guidance. We expect to continue to grow our market share and for our comp sales to range between flat to 2% growth with total sales growth of between approximately 2.5% and 4.5%, reflecting the contribution of the GMS acquisition, new stores, branches and tuck-in acquisitions.

For the year, we expect SRS to deliver mid-single-digit percent organic sales growth. We plan to open approximately 15 new stores and 40 to 50 new SRS locations. Our gross margin is expected to be approximately 33.1%. Further, we expect operating margin of approximately 12.4% to 12.6% and adjusted operating margin of approximately 12.8% to 13%. Our effective tax rate is targeted at approximately 24.3%. We expect net interest expense of approximately $2.3 billion. We expect our diluted earnings per share and adjusted diluted earnings per share to both increase approximately flat to 4% compared to fiscal 2025.

We plan to continue investing in our business with capital expenditures of approximately 2.5% of sales for fiscal 2026. We believe that we'll continue to grow market share as a result of our competitive advantages and ongoing investments by delivering the best customer experience in home improvement.

Thank you for your participation in today's call. And Christine, we are now ready for questions.

[Operator Instructions] Our first question comes from the line of Scot Ciccarelli with Truist.

Well, this may not be an exact science. Is there a way to size up how much of your business is typically exposed to these bigger ticket projects? Because it sounds to me like many of your individual categories are posting positive comps with the big ticket project bucket that's a primary drag. But in theory, that bucket continues to shrink over time. So you did start to get a mix benefit. But is there a way to size up the exposure there?

Scot, we don't disclose that. But as you can imagine, we look at all our transactions in sales by ticket size, $0 to $20, $20 to $50, et cetera, up, including over $1,000. And then we also look at items per basket in each of those sales cohorts and then also breadth of departments that are represented in those baskets. And as you can imagine, the larger baskets with more items in that basket also tend to have a broader number of departments represented in that basket, if it's a larger project. So that's where we can see clearly that the large cross-category project is muted. It's a great question on what specifically that represents as a sales dollar. I don't have that.

Our next question comes from the line of Seth Sigman with Barclays.

So if you step back, your business has stabilized in the last couple of quarters, you moved to slightly positive comps, but it does feel like there are a lot of aspects of demand that are still stuck. So when you look at existing home sales, below $4 million, HELOCs seem to have plateaued again. Guidance does imply a slight improvement in comps as we move through the year. And I don't think the shape of the year has changed relative to your initial expectations. But how do you think about that, and what those drivers could be to get you back to a slightly better comp as you move through the year?

Yes, we're not looking at a marked improvement in underlying demand. We are looking at a higher comp in the second half of the year, and that is solely driven by a return to normal store activity.

Okay. Understood. And then if we think about some of the Pro initiatives with the business up just slightly, it can be difficult to see some of the stories underneath that. So specifically on the Pro, can you talk about how are you benchmarking your progress? How are you benchmarking your performance, perhaps across some of the key verticals to give you confidence that the strategy is working? I know it can be difficult just given the backdrop is challenging. So how do you guys think about that?

Well, so maybe it's helpful if I just back up a minute in and articulate what we're doing in Pro and then how we see progress. So we think Pro is an enormous opportunity for us. As we've said, it's an addressable market of about $700 billion. And truly, nobody has the scale or the customer reach like the Home Depot to penetrate that market. We already have, as you know, a large Pro business, and we service most Pro customers in some way or fashion. So our whole objective here is to simply win more Pro business, more products and more purchase occasions.

Our stores for 45-plus years have always serviced that smaller cash and carry Pro, and larger Pros use us for infill and emergency purchases. And we believe we have the right to win more share of wallet with those larger Pros as we build out the capabilities to better service their complex purchase needs. So we're focused more on the residential Pro in our organic efforts to buy across product categories. So think of a large remodeler or small homebuilder. And we are gaining traction with these complex purchase occasions as we build out the necessary capabilities like a field sales force, enhanced delivery options and trade credit.

And I'd say one thing we obviously look at is Pro performance versus consumer in our Pro business outperformed consumer yet again this quarter, and the highest comping part of our Pro business was that complex purchase occasion. So that would be one way that we look at the success we're having as we build out these capabilities and gain more share.

Our next question comes from the line of Christopher Horvers with JPMorgan.

I wanted to follow up on the cadence as well. How do you think about weather as an impact in the first quarter, particularly in April, there was a lot of precipitation in the North on the weekends, which I know that tends to hurt the seasonal business and you typically talk about the bathtub effect. So could you maybe frame that out?

And then also, as you think about the storm headwinds from the back half of last year, to what extent did that have any impact in the first quarter? And would you expect that to go away in the second quarter?

Yes. Thanks, Chris. It's Billy. I'll talk a little bit about what we've seen so far in spring. And as Richard covered in the comp cadence, it's always -- weather is always a variable throughout the first quarter. We saw great engagement, as I mentioned in my prepared remarks, in the West in February and March and certainly in the South in March as well.

As we get into April, we really saw the same type of engagement into April. And then the last 2 weeks, we saw a different weather pattern year-over-year. But we saw great engagement across all of our spring categories. As I mentioned, we had positive comps in 9 categories overall. And then as we turn the corner into May and saw much more favorable weather, if you will, or consistent weather, particularly in the North, we saw that same engagement through the first couple of weeks of May. So really pleased with some of the performance there.

And as for storms, as you mentioned, we did have 56 basis points of impact in Q1, but that will dissipate throughout the balance of the year. And we'll see what that brings for us for the balance of the year, but that will continue to be less of an impact, obviously, as we get through the balance of the year.

Understood. And you're asked to be -- you guys are all asked to be constant economists here. The consumer had stimulus. I was curious if you thought that -- how that impacted your business? And anything in the business that you're looking at today to saying that, well, the consumer looks a bit shakier because of higher oil prices or whatever, some sort of change in project demand.

And then on a related question, how do you think about the symmetry of higher rates, i.e., if we stay at these level of mortgage rates. Do you think it's -- do you think it's actually punitive to demand in your category? Or do you think maybe given that we're at 40-year lows on existing home sales, it's not -- maybe it defers the release in the category, but it doesn't necessarily deteriorate demand going forward?

Yes, Chris, we are probably spending too much time in economics in the home improvement industry these days. But I'd start again by just reiterating, our results were in line with our expectations and the underlying demand was relatively similar to what we saw throughout 2025. So that suggests that our consumer has been remarkably resilient. There's been a lot thrown at them. But if you look at PCE growth year-over-year, that was similar in the first quarter, that was similar to all of last year. Employment is hanging in there. Wage growth has been reasonably strong. And you look at our core customer, they're probably amongst the healthiest of all consumers. So they tend to own their homes. They did have that 50% value pop in the value of their homes over the past several years. And their portfolios of equities have also improved.

So our customer seems to be in a reasonably good shape. They're engaged, as Billy just spoke to, while maybe not the large project, they are engaged across more departments in Q1, strengthening than we had seen previously. And again, the main thing is just this uncertainty that's holding them back for taking on large projects.

And then you add to that, as you said, with the higher rates, housing turnovers remain low, industry is not expecting a lot of growth in housing turnover this year, and new construction starts in sales are also trending down. But we look at a pretty remarkably resilient core customer who's engaging with the values and the great innovation that Billy and his team are delivering. And we're on line with our expectations and took market share. If you look at where others have reported to date from manufacturing sector, other distributors, even other retailers, if you look at the government retail sales data or the PFRI data, each of which were negative. Our being up modestly would point to customers responding to the Home Depot brand and service levels and offering.

But everything you just said is true. If it's higher for longer on rates in a slow housing market, we're just going to have to keep working our way through this period of moderation, keep focusing on controlling what we can control and take share in the marketplace.

Our next question comes from the line of Michael Lasser with UBS.

Have you given any consideration to lowering your guidance in light of the rise in interest rates as well as the rise in energy prices? Should we be thinking about the low end of your outlook for the year? And can you clarify your comments around the performance of the business in May. We're all holding our collective breath to try and to understand real time what's going on with the consumer in light of all these well-documented challenges and whether that's starting to weigh on the overall spending environment?

Billy, why don't you talk about May?

Yes, Michael, thanks. And then Richard will follow back up. Yes, as I mentioned, May through the first 2 weeks is very similar to the beginning of both February and March in terms of engagement. We saw great engagement. Again, so much variability in the weather this time of year that weeks 12 and 13 were a little softer, and we've seen great customer engagement back to the -- what we saw in the first 2 periods of the quarter.

And Michael, we reaffirmed our comp guidance with a range of flat to 2%. And I'd say 2 comments about that. Number one, yes, the environment is different than it was 3 months ago, probably a more volatile external environment to a degree. But really kind of unclear on how that will all shape out for the year.

And so as we saw last year, we've proven the ability to manage and take share through any environment. I mean I'm looking at Billy thinking about how he hit his gross margin rate plan last year on the button despite the fact that we had all tariff headwinds coming at us.

So yes, there's probably a little bit more uncertainty out there. Not sure how that will shake out. We feel great about how we're positioned to manage through the rest of the year. And then the second comment is, it's still very early. We're one quarter in. We have our largest selling weeks still ahead of us in the second quarter. Now we think we're positioned so well with the values the merchants have put in front of the customers and the customer service that our associates are giving. So look, we're heading into the second quarter with the intent to execute and take share.

Super helpful. My follow-up is, Ted, there's this debate in the marketplace given the challenges with housing affordability, the rise in interest rates, maybe we are just in a longer-lasting era where home improvement demand is going to be slower and softer for longer. Obviously, this has already persisted for a longer period than most had anticipated.

So if this continues, is there a point at which you start to change either resource or capital allocation decisions? One of the debates out there is could -- will Home Depot get back to the point at which you can buy back stock in 2027 just to provide some support to shareholders in this period of prolonged softness?

Well, we've always had cycles in this business, Michael, and we're very much looking at this as a cycle. We all know there was a tremendous spike in demand for a few years followed by what we've been calling a period of moderation. And the period of moderation has been extended. I think there have been some shocks in the past couple of years, but quite remarkable, as I said, how the consumer has been pretty darn resilient to all of that.

We're still focused on our long-term strategy. We laid out at the investor conference that we're going to focus on the core business, the interconnected offering to our customers and winning with the Pro. We still very much are bullish on the long term, medium, long-term prospects in U.S. housing, in home ownership, the value of the home and the aging of the home, all the drivers of the long-term benefits, and we're not contemplating changing how we're allocating capital certainly to the core business and our allocation of resources to that three-pronged strategy.

As I said, we're focused on controlling what we can control. All indications are that customers, Pro and consumers are responding and we're taking share. So we feel we're creating shareholder value by investing in the core business and the interconnected business and the Pro strategies. And we certainly pay a healthy dividend at the moment. So there's a nice return to shareholders in that regard.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

Ted, I wanted to ask you what success looks like in the wholesale distribution business. And if I can paraphrase what you said earlier, it's faster Pro growth. So does that mean that if roofing and drywall businesses grow independently, is that success? Or do you need to cross-sell between them? And it sounds like complex purchase occasion, do you care if you're cross-selling across all your platforms?

Yes, Simeon. We certainly do care. So I previously talked more about our organic efforts. But if you look at the Pro distribution side, there's always a customer within that $700 billion TAM that is a more specialized trade participant, and to capture that specialty trade Pro, that's why we acquired SRS. They're a best-in-class distributor, leading positions in roofing pool and landscape and then they made the acquisition of GMS, which has leading position in interior building materials. And then we're super excited about Mingledorff's. We've always liked the HVAC business, and they're a leader in the 5 Southeastern states.

I mentioned again why do we like things like roofing and pool and landscape and HVAC, it is more repair, replace remodel as opposed to heightened exposure to new construction, and that's certainly the case with HVAC. And then don't forget, we're developing construction resources into a leading finished interior platform.

So we put together the organic efforts from what we're doing with Home Depot for the cross-trade Pro and then these specialty platforms, again, no one has more reach into that $700 billion TAM with broader catalogs of product, tremendous engagement with multiple sets of customers. And then I had mentioned the delivery assets and delivery capabilities we have.

So first and foremost, we want these businesses, The Home Depot Pro business, all the SRS Pro businesses, construction resources to perform at an exceptional level in and of their own right within their sectors, within their verticals. And we believe they are. I mean, we look at the publicly traded comparatives to SRS. It's remarkable SRS' performance in Q1. I mean they beat their competition in each sector by hundreds and hundreds of basis points. So we have an incredibly strong, well-performing business platform.

But then over time, we want to absolutely cross-sell and marry our customers through CRM systems. We want to marry and provide exposure of the catalogs and then also leverage our delivery assets and our strategic vendor partners because don't forget, we have to partner with our supplier partners here, we are truly the leading distributor of almost every product that we sell.

So we're early days on the cross-selling. It's largely manual today. It's introductions to customers to our sales forces. It's SRS to Home Depot, it's Home Depot to SRS, it's SRS and GMS. GMS had more exposure to the larger new builder and they're introducing each of SRS and Home Depot to that builder. And we would say this year, we're looking at something like $400 million of cross-sell run rate. So that will come over the course of the year. Most of those are guaranteed contracts, including commercial sales from Home Depot relationships that SRS will now do roofing on a number of our warehouses, and we would look to double that next year. So we want best-in-class platforms that increasingly cross-sell together as we leverage the power of The Home Depot enterprise in what is still a highly fragmented space.

And then Mike, maybe you can provide some detail to what we're doing.

Yes. To your point, Ted, we're really pleased with our sales teams, rhythms working across the enterprise together, together as the Home Depot, SRS, GMS, HD Supply, you mentioned construction resources as well. And that's evident by the success we're seeing with that cross-selling between SRS, GMS and HD Supply, and our teams on the call center, tool. We've talked about this a little bit at the investor conference. We talked about it after Q4 earnings as well. And that's led to a national account structure between our companies. And a great example like that, that you mentioned, Ted, is around just GMS and SRS themselves, and that focus on the builder.

The state of the Pro business remains strong overall, focused on deepening that relationship with the large Pro working on complex projects, and we're seeing some pretty sustained momentum across those key strategic initiatives that you brought up initially, Ted, around order management, around trade credit, around some of the digital advances we're seeing. And so with that sales to those large Pros working on complex projects are showing stronger growth versus our overall Pro growth.

On the digital side of things, that's paying dividends as well. This is another complex Pro, where that gross demand continues to be a powerful engine for us. It's an impressive double-digit year-over-year increase, growing faster than the B2C experience. And then our managed sales force, right, both with our outside sales and our passes in the store are successfully capturing share with those highest value customers as well. Year-to-date, those managed accounts, both from the store and from outside sales have generated, like I said, over and above growth on these planned or complex purchases. And now, to your point, Ted, around getting on with our enterprise CRM efforts, our catalog efforts and using our delivery assets that come up with the most optimal fulfillment.

And if I may ask a follow-up for Richard. If you can comment on the comp spread between your best-performing markets and the weakest, whatever that spread is, has it changed much? And let's say, for example, your best is somewhere in the low single digits positive. Is the narrative weather? Or is it housing or anything else to it?

It is pretty narrow still, Simeon, and it's much -- it's almost completely driven by weather or weather comparison.

Our next question comes from the line of Zach Fadem with Wells Fargo.

So following up on SRS. It looks like the business is still weighing on the comp in the ballpark of about 30 basis points. So as you think through the year for SRS categories, the market share opportunities, pricing levers and the GMS entering the base later this year. Could you talk to your expectation for second half comp impact from SRS as we move through the new year.

Yes, sure. So look, as Ted said, SRS performed in line with our expectations. Just to talk about current performance. They delivered $4 billion in sales in the quarter. They delivered positive total sales growth and positive total organic sales growth. Comps were slightly negative for SRS in total, driven by low single-digit negative comps in roofing.

As Ted said, despite significant pressures in the roofing market by all external measures, SRS took considerable share from other distributors. We do expect, as their compares improved through the year, remember that Q3 -- well, Q2 and Q3 of last year had some of the lowest recorded hail and hurricane storms in history. And so their back half was significantly pressured. For that reason, if we see a normal seasonal curve from SRS, we expect them to deliver mid-single-digit positive organic growth for the year.

That's helpful, Richard. And then I wanted to follow up on the gross margin line. The guidance would imply some improvement in the year-over-year change from here. So the first question is for Q1, could you isolate the GMS impact versus core? And then as you think through the moving parts around the changing operating environment around freight, fuel, you had a 232 tariff change. How would these fold into the gross margin line as you move forward?

Well, so let's just take SRS and GMS for a second. So we expect gross margin for the year to be at 33.1%, which is consistent with our original guide. With the change from last year, largely reflecting the acquisition of GMS. And so if you look at our first quarter performance, 75 basis points below last year, the vast majority of that reflects the acquisition of GMS. There was some pressure, and we called this out in our Q4 call and also called out that we expected some pressure from our footing in the roofing market and price investments at SRS. So recall, the roofing market saw a 28% drop in shipments in Q4 of last year. That's the worst quarter since 2019. And as we anticipated in our earnings guide last quarter, we've maintained our stance on value to keep momentum with our customers.

And so that made up the remainder of the gap. Beyond that, the margin profile of the core was actually very stable. So as we move through the year, you're still going to see pressure on a year-over-year basis in Q2, not quite the degree that you saw in Q1 and then improving significantly more really sort of flattish year-over-year when you get into Q3 and Q4.

Now as to your broader question on cost. Look, obviously, as we stand today, we could say we could see potential cost pressures building in the form of fuel prices and other commodity input costs, new tariffs have been introduced. But the environment is changing almost every day. And so it's hard to see where all of that winds up and where it settles. We will continue, just like we did last year to manage cost and price, to maintain our position as the customer's advocate for value as we move through the year. But yes, the cost on the horizon since we spoke last quarter have at least moved towards a bias towards an increase.

By the way, if I could just clarify one statement. I think I got tongue tied during my remarks. We opened 2 new stores during the quarter, not 12, apologies for that.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

Can you discuss the progress you guys are making with Trade Credit and the adoption of Trade Credit by Pro, understanding it can take time to convert them? And then my follow-up with Ann on the merchandise execution teams. I think you said it's rolled out to 1,000 stores with plans for full adoption by the end of the year. Any change in basket or customer frequency as you roll out the MET teams?

So I'll start on Trade Credit. Look, what we're building is a value prop that has never been built before for a broader customer set than has ever been reached by any kind of conventional distribution company. And so we're taking our time, making sure we understand how to onboard as efficiently as possible, how to underwrite correctly and how to really drive sales.

And the important part of driving adoption is making sure that we set our outside sales reps up for success because they're the ones really driving this adoption. So I think from my perspective, and I'll ask Mike to weigh in on what we actually see. Look, we're rolling this out steadily. We're taking our time. As with most of the capabilities that we're enabling, we're more focused on taking continual steps forward, and that's what we're doing with Trade Credit.

Mike, maybe talk about what the customer tells us.

Yes. I mean, we're very pleased with the trajectory of Pro Trade Credit so far after gaining some pretty strong traction in 2025. We saw continued momentum this past quarter. What's most encouraging is that we're winning exactly where we would expect to with single and multifamily builders and with large remodelers, and we're seeing strong adoption in longer lead time categories like on windows, doors and appliances.

So a major driver for this is that Pros absolutely love the fact that it's 30-day payment terms now [indiscernible] shipment rather than on point of sale, which gives them a distinct competitive advantage around working capital. And looking forward, we've piloted recently the program online with a number of customers, and we're pleased with what we're seeing there and look forward to expanding that further within the second quarter. And as we expand our e-procurement capabilities also with construction management software and integration platforms, we'll be rolling Pro Trade Credit out to those channels also within the second quarter.

Yes. And Chuck, just to follow up on the merchandise and execution team. Let me start with we are maniacally focused on driving or [indiscernible], which is our stores and associates. And a key part of what the Home Depot has always done is driving service and driving sales. And so creating these distinct teams give us the ability for Apron associate to really, really focus on driving engagement and ensuring that we're servicing the customer to the full extent. And absolutely, when we separate tasking from selling, we're seeing productivity on the tasking side, which is excellent for us, but we're also seeing higher levels of engagement.

And you talked about units per basket, that would be the outcome that we're looking for, engaging with the customer, making sure we're servicing the customer to the full extent, making sure that our associates fully understand the capabilities that we have and the brand of The Home Depot and absolutely driving outcomes with sales.

And I will tell you in the first 1,000 stores that we've rolled this out in, and we are continually learning, of course, we're seeing higher likelihood to shop again scores and greater engagement. So we are on an absolutely fabulous path to really, really continue to reenergize our core and culture of this business, and we will never lose focus on that.

Our next question comes from the line of Zhihan Ma with Bernstein.

I want to talk about ticket versus traffic. Given that I think you're going to start to lap the tariff-driven price increases. How do you think the balance of the 2 are going to trend over the course of the year? And what does it take for traffic to turn positive again?

Yes. You're right. We are lapsing some of the early tariff pieces. As Richard said, they're still very volatile to say the least, but there's no question that as those were introduced in late Q1 of last year and into Q2. We made some pivots in our strategy as we go forward.

We talked at our investor conference around some of the pricing into the marketplace, and that's settled into the market. And so we see that as kind of 3% as we've talked about in the past. And then we've had great engagement so far in spring-related projects. We've got our biggest weeks ahead. So we'll see how that plays out for the balance of the year. But certainly, from a year-over-year standpoint, there's obviously, less pressure than we saw certainly a year ago.

Got it. And then a follow-up on the Mingledorff's side of things. You talked about that gives you a great point to start playing in the parts market as well. But on the original HVAC side of things, it is a very distribution rights centric market. Does that mean that there's more acquisitions that you need to make to continue to grow there?

So Mingledorff's is a leading distributor in the Southeast, as I mentioned. They're a carrier-focused distributor. What we like about the parts business is while you have regional exclusives on distribution in certain geographies of a brand of the HVAC equipment, you're actually able to sell parts nationwide. So we look to leverage all the infrastructure, The Home Depot, the stores and our online capabilities and direct fulfillment centers to start building a more robust parts distribution nationally.

As it relates to incremental acquisitions, we would expect to build HVAC into, call it, SRS' fifth vertical, and we would look to add geographies of the key manufacturers with modest -- these would be modest full-time acquisitions to that HVAC vertical platform.

Christine, we have time for one more question.

Our next question comes from the line of Brian Nagel with Oppenheimer.

So I guess I want to -- I apologize, I want to just be an economist for a bit for a second, too. With regard to -- obviously, there's a lot of moving pieces out there, a lot of factors that are impacting Home Depot's business at this point. But if you look at gas prices, I guess the question I want to ask is, historically, how have higher gas prices impacted your consumer? And then also, maybe looking at it in a different way, as you think about just from an input cost into Home Depot and the various ways that gas prices affect your business. I mean how should we be thinking about that dynamic here?

Well, first of all, Brian, I'd say if you look across history and you look at significant fuel price increases and their impact on demand, it's hard to parse out fuel increases from a general degree of pressure on consumer spending. And on -- it also has to be taken in the context of the interest rate environment, which we are more highly sensitive to.

Look, there are a number of potential factors at play here. Yes, we see increased fuel costs, not only hitting us directly. Obviously, we obviously have a considerable amount of transportation expense in our P&L but also in the form of input costs. At the same time, number one, it's still very early in the year. And number two, there are some potential tailwinds here. We've talked in our sector about tariff refunds. We have filed for those tariff refunds. And while we don't disclose the amount and while we have received an immaterial amount to date, we have assumed that, that could provide a significant offset to those costs. So it's very hard to understand exactly how all of this will balance out through the year, and we'll continue to watch it and manage it -- manage through it.

That's very helpful. I appreciate that. And my second question, again, apologies for being nitpicky here. But just the commentary around May, so the early part of fiscal Q2 here. Should we -- I think you used the word, engaged consumer, engagements back to what you saw maybe in February and March. I mean should we basically think about the business right now is running domestically at those comp store sales levels you saw in February, March?

Yes, it's been pretty steady. I mean, we landed right at our expectations. I think Bill, maybe just repeat again what we saw April through the first few weeks of May.

Yes. Again, Brian, we had a very consistent performance, February, March and even into the first part of April, and then the weather just year-over-year in the last couple of weeks of April was a little bit different. And then as we saw -- as we've seen in May, very similar, great engagement in all of our spring-related projects. This is we saw through February, March and really the first half of April. It was literally just the last 2 weeks where we saw significant weather differential. And again, back to the same engagement that we saw through the first 10 weeks and 11 weeks of the year.

I think that feeds finally back into the guidance question. The best thing we have is our observation, and we've observed kind of the demand that we expected to see through the first few weeks of the quarter.

Ms. Janci, I'd like to turn the floor back over to you for closing comments.

Thanks, Christine, and thanks, everybody, for joining us today. We look forward to speaking with you on our second quarter earnings call in August.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

And welcome to day 2 of JPMorgan's 12th Annual Retail Roundup. Again, so happy to have all of you here and everybody that's on the line. And as a reminder, at 4:00 today, I will be interviewing Jamie Dimon in this room with our my coworker, Matt Boss, which is always exciting to hear what he has to say and there's no shortage of content right now for Jamie to respond to. So please come and please ask questions too. He's an open book. So with me today, I'm very pleased to welcome Home Depot's EVP and CFO, Richard McPhail, -- The Home Depot. Thank you for attending.

Thank you, Chris.

It's a pleasure to have you.

Great to be here. We're in an awesome building, too. I mean just great for JPMorgan. Great for Manhattan. Fantastic.

Yes. Yes. Yes. And we're renovating the old Bear Stearns building right next door. So we're going to have a nice corporate campus development.

That's beautiful.

So at a macro level, let's just for a second, put oil prices aside and geopolitics. And what I'd like to set this table with is, can you narrate the demand environment in 2025 to help us think about the starting point, and then we can think about what potentially happens from here.

Well, thanks, Chris, and it's great to see everybody. Thanks for being here. 2025, I think the demand environment softened during the year from how I would perceive the entire market. Now I think we'll get to our performance in a second. But if you look at how our sector -- well, let's -- maybe let's zoom up a little bit and just talk about consumer confidence. At the very highest level, we saw consumer confidence drift lower through the year. We saw increased concerns over uncertainty, over inflation, over obviously events in the broader world and then over concerns over job loss. And so our customers told us through the year that, that uncertainty was the largest factor keeping them back from engaging in larger home improvement projects.

If you look at our sector and you could pick a number of proxies for our sector, but let's just take private fixed residential investment, which is a significant component of GDP. And our sales are -- when we report to the government, our sales sit in a component of PCE and PFRI. But if you look at PFRI through the year, actually over the last 8 quarters, we saw a deceleration in PFRI. In 2024, it was positive every quarter year-over-year, but decelerating. In 2025, we actually saw it turn negative year-over-year and continues to decelerate almost in a straight line.

Despite that, we posted in the fourth quarter of 2025, we posted our fifth consecutive quarter of positive comps in the United States. And so everywhere we look, our market has seen a degree of softening, but we have begun to outperform the market I'd say, in a more measurable fashion as 2025 went on, and we certainly expect to outperform the market in 2026.

And so as you -- as we try to diagnose that, you did have a storm headwind in the back half of the year. If we take that dynamic away and go back to, you've always spoken a share of wallet. Right. And over -- we're now back to sort of pre-COVID levels on share of wallet. Historically, if wages are growing 4%, consumption grows 4%. And this category is performing well below that, obviously, includes -- and you're outperforming that. So why wouldn't, over time, given replacement cycle dynamics, why wouldn't we just continue to -- the category itself continue to migrate towards that albeit with some housing headwind against that. So said another way, why wouldn't '26 be better than '25?

Well, I'm going to separate from the wage conversation. I think I would probably get more towards what's the shape of general economic growth and then how does demand for home improvement vary from that economic growth. In the near term, we know that housing activity is frozen. I'll continue to use that term. We've used that term for 3 years now. If you look at the proxy for housing activity as housing turnover, existing home sales, typically, we're somewhere between 4% to 5% of all homes existing in the U.S. changing hands. We're at 3%. We've been there for 3 years, and now it's kind of going on 4 years.

We have never seen housing activity this slow for this long. It's touched the 3% mark, maybe 4 times in the last 50 years. Every other time it popped pretty quickly. And I think this is a function of housing affordability. So we know that when mortgage rates went from the -- 30-year mortgage rates went from the high 2 percentage area to the low 7 percentage area within the span of about 12 to 18 months, that created a pressure on affordability we haven't seen in decades. And so when I think back to your comment, why can't we see home improvement demand return. I think we can and will absolutely see home improvement demand return, not just to parity with broader economic growth and demand, but beyond it.

Look, housing is a cycle. We're not immune as home improvement -- as the largest home improvement retailer in the world. We are -- we do participate and see the impacts of that cycle. But what goes down at least history has proven out, usually comes back up again. We think that again, if you just look at the affordability point as one of the components of pressure in our market, it's a function of 3 things: home prices, mortgage rates, income and income growth. Income growth remains stable to strong. Home prices, it's interesting. Look, we are now, I think, in the second year of seeing corrections in more markets than we're seeing increases in markets. And then mortgage rates obviously trickle down steadily through the year.

We've seen some volatility in recent months. But to me, look, housing is a market. Markets typically reach equilibrium on their own. And so could we see a period of modest home price corrections as we get to equilibrium, I think we're already seeing it. So I think that's probably the affordability point and then the uncertainty point are the largest things facing our sector disproportionate to other retail. Once we turn the corner and we're not going to call timing on it. But as we said in our December investor conference, we do expect that when this turns, you will see home improvement demand outstrip the broader market. We're looking for in a market recovery case, target comps of 4% to 5%, total sales growth of 5% to 6% top line, which are accelerated by new store growth, new branch growth under SRS and which is exciting for us and then driving bottom line faster than top line.

So look, we've seen this before. We've lived through cycles since 1979 at Home Depot. And I think I would ask just point all of our investors to look at what's going on in the market from an economic data perspective, look at anyone touching housing right now. Anyone touching housing right now, if you looked at a broader landscape of retailers, distributors, homebuilders. You touch housing right now, you're probably deeply negative in Q4. We were positive top line in Q4. And so I think this is just -- it's great evidence that we know how to operate during periods of turmoil. We learned how to engineer agility into our supply chain during COVID. And if you think too, Chris, I just have to trump it measures like our gross margin performance in 2025.

If you adjust for the acquisition of GMS or take that out, we landed our gross margin rate on the button compared to our expectation for the year. And think about that, that was the target that we set at the beginning of 2025, that's before Liberation Day, which, by the way, you remember that happened during our session last year. So through all of that, we delivered the gross margin on the button that we expected with all of the -- all the influences. And so we feel great about being able to manage through any environment and succeed. We're taking share, and we're in control of our destiny.

As you think about the rates versus the uncertainty question because rates drive improved affordability. So that's an obvious unlock. We're not sure when and how that changes.

Right.

I guess to what extent as you think about the flow of last year and into this year, has uncertainty become a greater factor in the consumers' willingness? And is the right interpretation is because you're so more project oriented, the uncertainty is weighing on those bigger projects?

Uncertainty continues to weigh on larger projects, and we see those larger projects still not recovering. I mean we've seen pressure in categories like kitchen and flooring and lighting and -- so there is pressure. Beyond a certain price point, it's -- and it's not reflective of the health of the customer. The customer, particularly the homeowner is extremely -- or their financial position is solid and frankly, better than it's ever been pre-COVID. They saw housing wealth increases of 80% to 90% in home equity values over the last 6 years. So their balance sheets are extremely healthy. We're at full employment, incomes are growing. So the homeowner is healthy, our customer is healthy.

There's just a reluctance based on this uncertainty. And when we survey our customers and we ask our pros, what are your customers telling you? They consistently say, it's not that I don't have the ability to spend. It's that it just doesn't feel like the right time. So.

If you look back to in COVID when the government was nice enough to send checks to consumer, your category benefitted quite a bit. We're also stuck at home. We're in an environment now where it appears tax stimulus is offsetting the -- some of the uncertainty factor, at least like at least in the context of where gas prices have gone. You talked about tax stimulus. Can you talk about tax stimulus, how does that impact consumption in your category? And to what -- in the content as well as how did it play out in the context of your guidance?

Right. Well, so I think we're still watching what the impact of tax stimulus will be. And we don't want to comment on intra-quarter trends. When we set guidance at the beginning of the year, we said we would expect comp sales between flat and 2%. That is ranged because there are a number of factors that could be headwinds and could be tailwinds. Tax stimulus, if you kind of just took this, took the math and put it in a vacuum, we've seen a range of estimates. And if we had our fair share, if every penny of tax stimulus was spent on consumption, and we had our fair share of that consumption, we'd see something like upwards of 0.5 point of comp to the good.

But we know that they're countervailing forces. We've watched private fixed residential investment continued pressure on that. We know there were concerns heading into the year as we set guidance on inflation and job loss. And so when we look at these potential headwinds and tailwinds, that's why we provided a range of outcomes.

Understood. And then as you think about -- just because I know this is a popular question as we think about the recent prices and we come back after. But how do higher energy prices impact your P&L? Obviously, there's an ocean freight concern and then there's a trucking diesel concern.

Well, look, I kind of go back to the agility point. I mean we've seen significant swings in supply chain, transportation expense in the COVID era. And I'd say the dynamic -- look, there's no doubt about it. Fuel is an important input to our operations. But we've proven the ability to protect our P&L. Look, we're not immune if you see significant sharp swings in the cost of fuel, that's going to impact our whole space and probably all of retail. But again, I would bet on us to be able to mitigate the impact to the bottom line. And we'll just -- we'll be watching it. It's obviously a fluid environment right now.

Yes, indeed. Actually, 1 more macro-oriented point, which is tariffs. For anything that's imported, then granted, you do buy a fair amount onshore, but anything that's important -- that's imported from Asia, tariff rates are lower year-over-year in most categories as we sit here today versus the back half of 2025. How do you think about -- how does it -- if we assume it stays here, how does it play out for The Home Depot? Do you think we've obviously seen that peak of pricing, but would you expect potentially deflation in the category? And if not, can you maybe help us think about what the margin potential could be around lapping higher tariff rates?

Right. Well, going to your pricing comment, I do think, as we shared with investors, I think that there was probably anticipation that inflation would begin to cool sooner than it made sense. To me, at least, I think watching costs flow through the P&Ls not only of The Home Depot, but retail in general, I believe that the timing of those costs meant that you saw more retail action at the end of 2025, even heading into the beginning of 2026 than the market might have anticipated.

I do think that as a market, we are through those retail price adjustments. And while you'll see a year-over-year dynamic play out, that will kind of correct itself or rather be completed through kind of the first half of 2026. When it comes to what we should expect where tariff rates are lower, first of all, we warned not to make long-term permanent assumptions and rather to just manage as best we can. But Chris, I think the most -- probably the best way to think about this is we're a market participant. Tariff impacts are felt by the entire market. And so I think the question is how do all market participants react if tariff pressures become lower.

We are not -- no one in the market is able to move outside of the broader market participants action. So that's just a way of saying you just -- I think you have to put yourself in the shoes of all market participants. And when you -- typically, when the market sees broad-based cost pressures or broad-based cost relief, that typically has an impact on price levels. But just kind of remains to be seen. I don't think we've -- we should necessarily count on a fixed set of assumptions for the year.

The only certainty is constant uncertainty.

Probably.

Thinking about -- I want to pivot to the long-term strategy. You've been positioning yourself for market share gains, you've expand the TAM and as you've gone to MRO and now more the large Pro business, we have a lot of questions here. But as you think about that large Pro and the recent acquisitions, fundamentally, can you speak to what drives success in that business versus the traditional retail business? And where do you think you are in terms of building out those core skill sets?

Okay. Well, look, we're -- we've always known that the Pro was essential to The Home Depot's success. The Pro has always been a part of our business. And if you go back to Bernie and Arthur, they created The Home Depot in part to provide a sense to consumers that they could shop like the pros did, right? I mean, come shop in warehouses. And so what we would do for the Pro typically trickle down into success with the consumer, and it was -- it created do-it-yourself. But when we think about the Pro opportunity, for decades, we have known that we underpenetrated our Pro customers' wallet and to penetrate further, would require us to begin providing our pros and simply put the ability to have products received at the job site.

I mean that is kind of a cornerstone of kind of changing our business model to further penetrate Pro wallet. I want to zoom all the way out. So we operate and are the largest player in a $1.2 trillion addressable market. In December, it was $1.1 trillion. With the recent announcement of the acquisition of an HVAC equipment distributor, we expanded that TAM. The world of HVAC equipment and parts distribution was not part of our $1.1 trillion TAM. And so now we've expanded it. Of that $1.2 trillion, $700 billion is the Pro opportunity. And I think I want us all to step back and think about that number because there is no one standing in the way of The Home Depot in terms of attacking a $700 billion opportunity.

What is standing in the way, it's the ability to serve our Pro better than anyone else in the market can. We're not yet at that point. We grew up in a cash and carry world where the elements that we were appealing to the Pro with we value, selection and service in the stores. That's still a product orientation though, cash and carry retail. We learned over time and I'd say we were still learning towards the -- as we moved into the 2020s, that what we actually had to reorient ourselves to was creating a service model. If you're going to get deeper into the Pros wallet, it is not enough to have the best retail locations and the best product assortment and the best in-store service. You have to have an outside sales force capable of assisting the professional with larger projects.

You have to have exceptional delivery to the job site. You have -- and I think those 2 elements are kind of cornerstones. You also have to be able to extend short-term working capital financing, we call it trade credit. And then you have to have kind of second order operational capabilities, order management. As a cash and carry retailer, we had not built up the capability for you as a pro to have some flexibility in your ordering with us. Hey, at my end, you're the pro, your end customer is changing their minds, their change orders. You have delays in the job site. This requires a degree of agility that we just simply didn't have in the ability to modify orders, modify delivery times, this kind of thing. And there are other second order capabilities of importance, preferred pricing.

We want to make sure that we can compete effectively across the entire project for every type of professional. So when I think about what we're building, we are building capability across that entire capability set. We're not yet at parity with a lot of our competition in that $700 billion market, but we are gaining ground every day. When you think about the sales force, we have thousands of outside sales reps in the market now and are still rolling that out through markets in the U.S. They're doing something that's never been done before, which is selling across all product categories. When you think about delivery excellence. So compare us to anyone else out there who you think might have the ability to compete for that $700 billion.

We have 2,350 plus stores in North America and growing every single year. We have with the addition of SRS and GMS, 1,250 wholesale distribution branches. We have over 100 branches of HD Supply that deliver direct to multifamily sites. We have our network of 17 flatbed distribution centers, 20 direct fulfillment centers, 150-odd MDOs, market delivery operations. There will likely never be another supply chain that looks like that, that is oriented towards delivery excellence to the Pro. And so I don't want to go too long, Chris, but I think the point is the market is massive. We are the 800-pound gorilla in the market. We continue to accelerate the -- accelerate our capabilities that allow us to create that service model our Pros tell us with every month, we're gaining ground.

We're consolidating their supply base. For them, if we can save them time and deliver with excellence, they will go to us. They've told us that, and they show us that in their spend. Our trade credit program where we extend working capital, short-term working capital, really just in the form of billing upon delivery rather than billing upon order shows lift every time we offer our pro credit, they lift their sales. So we're gaining ground. And then I want to address again, kind of a big picture point. So we began in earnest leaning into the kind of the Pro opportunity. While we've always done it. We realized the extent of this opportunity really just in the early 2020s, 2021, 2022, it was kind of the first time we talked about this Pro ecosystem.

We had the idea of flatbed distribution centers since 2015. That was a bootstrap model where we said, look, the demand for job site delivery is becoming too great for us to be able to service. We don't know how big that demand pool is. All of our deliveries were originating at a store, the flatbed truck. As we stood that network up, we realized, okay, we can actually broaden the assortment and carry infinite depth and then that led us to understand, okay, there is a way that we can win this world. As we built those organic capabilities out, we came into -- or entered discussions with SRS. SRS called us in 2023 and said, we think we know what you're building, and we can help this.

And look, Ted and I have -- we know every wholesale distributor in the country. We've met with many of them over the last few decades. SRS was the best managed distributor we have ever seen. And so in 2024, we said, look, there is a way to create a platform that is a complement to The Home Depot. It's complementary, and it's also additive to The Home Depot by going after that specialty trade contractor, and we've built on that platform ever since, which I'm sure you want to talk about.

It's a really long-winded answer, Chris, but that's because the opportunity is massive. What it takes to win is complicated. You look across the 9 million Pros in the United States. There aren't very many who are identical to each other. And you have to be able to serve them in the way they want to be served. A specialty roofer is going to need a different service model than a general contractor will for roofing. And that's just one little example of how we want to attack the problem by serving the Pro in the way that they can best be served.

We'll leave a few minutes for audience questions at the end as well. As you think about -- so SRS, largely roofing, landscape, pool, GMS, wallboard, ceilings, Mingledorff's is now HVAC. Where do you think you are in terms of building out like the largest portions of that large Pro wallet? And to what extent does -- how do you think about organic versus an M&A in the remainder of those large categories?

Well, in terms of where we are, I mean, we have the right to win all $700 billion in the Pro market. So I think we're exceptionally early in at least our vision of becoming the most trusted partner to every Pro in the United States. We think we are -- we have the right to win. We don't yet have the ability to win, which is why we're building these capabilities. On the SRS side, so as you mentioned, we just added the -- what is SRS' fifth product vertical. So when we acquired SRS, they have roofing pool and landscape. We added GMS in wallboard, ceiling tiles and associated products and now Mingledorff's is an HVAC equipment distributor.

HVAC is a fantastic vertical. This is a vertical we talked about with SRS since before we acquired SRS. It's actually new for The Home Depot, which is why we expanded our TAM by $100 billion as we acquired them. And there are many reasons, by the way, I'll just do 30 seconds on HVAC. Number one, the cross-sell for SRS across roofing, gypsum, HVAC, you're beginning to see a more complete picture. How do we grow SRS further? Look, there are a number of product verticals that we've built up organically. We've distributed lumber, doors and windows, plumbing, flooring, organically really in earnest since we began standing up these flatbed distribution centers.

We are making great gains, for instance, in the distribution of doors and windows where the retail model probably includes too many product touches as you think about the supply chain, taking out every touch adds profitability to that model. And so we have made gains in that model in our centralized supply chain, our direct fulfillment centers, the ability to deliver doors and windows with excellence is giving us another advantage to selling the entire project. So Chris, I mentioned that because that's an example of organic share capture. And I think if it can be done organically, we're always going to do that.

Acquisitions work when they accelerate the achievement of our strategic vision, but I think it's important for our investors to understand a few things about the acquisitions that we've made. So first, there's a very high bar when it comes to acquisitions that are acceptable to The Home Depot. And I think since our acquisition of HD Supply in 2020, we have maintained the same set of standards that must be met.

Number one, there has to be exceptional strategic fit. There are no acquisitions out there. Look, our strategy is grounded. It is core and culture. It's the delivery of an amazing interconnected experience, and it is winning the Pro. And within that winning the Pro, obviously, we have very targeted strategies when you think about product verticals, we like adjacencies because we like cross-sell. But you've got to have amazing strategic fit. The acquisition has to be an exceptional financial performer. The Home Depot is not in the business of acquiring companies that we then improve the operations of.

We acquire and partner with companies that are best in class at what they do and how they serve their customer. And then there has to be a really strong cultural fit. I think we have perfect cultural fits across SRS, GMS and Mingledorff's. But when you use that as a screen, you actually wind up eliminating frankly, I'd say a majority of companies that you might think are acquisition targets. Even large-scale companies, there are large scale companies out there that just simply don't pass that screen. And so if you look at what we've done to augment our ability to serve the Pro through adding acquisitions, we were the first to go into roofing what the #1 roofing distributor in the country from a quality perspective.

We were first with the Wallboard acquisition, we were first with an HVAC equipment distribution. We will acquire high-quality assets that are best in class at what they do, if they advance our strategic imperative. But we know we can do a ton organically, and we'll keep pushing. And let me -- I'll give you an example of organic. The HVAC acquisition opens up the world of HVAC parts distribution. And so you think about what...

We're not in that.

We're not in that. We do -- look, we absolutely sell HVAC parts and we do distribute those. But opening up an avenue to the HVAC installer because we have the equipment distribution -- it just -- it's a different world of customer access. So now think about what we can do with our direct fulfillment centers with same-day next-day delivery with an extended offering. This is not something we've built out. We haven't even closed the acquisition of Mingledorff's, but we are excited about the value we can bring to the customer. And so that's an example of things that we would do organically.

Excellent. I have some further questions, but I want to see if anyone in the room has any questions. If you do, please just raise your hand and grab the microphones on the table. Great. So as you -- and by the way, you also have a very low cost of capital and incredible technology infrastructure you bring to bear?

Yes, we do. Look, our cost -- our low cost of capital and our low-cost position is a benefit that we -- the flywheel of The Home Depot is taking those benefits and passing them on to our customer. We will always be the sharpest value prop in the market for the entire project and that cost of capital position and our low-cost operating cost position allows us to do that in the market.

So I want to go back to the Analyst Day from December. So as you think about when you embarked on this large Pro effort and then accelerated it, organically accelerated with SRS and other recent acquisitions. It caused CapEx to go up, caused D&A to go up. It sort of created a headwind on your margins where other retailers saw these massive gains during COVID when the business popped. And it dragged sort of ROIC along with it.

Our impression of the Investor Day was that you were at the trough, that you had put the foundation in and yes, we're going to continue to add bricks and layers around the large Pro effort. But we are coming to the bottom on the ROIC cycle in that efficiency, which is the hallmark of Home Depot, and AI was enabling this to start to turn up. We just need the market. Was that the right interpretation?

That's the expectation. Now -- but I think it bears a little bit more explanation just to get everybody on the same page. So first of all, we've outlined our margin expectations moving forward. In a market recovery case, we expect to grow bottom line faster than top line. Market recovery 4% to 5% comp sales, steady gross margin, operating expense leverage driving high, very-high-single-digit EPS growth in that case, 5% to 6% top line growth when you add new stores and branches. But if you think about the history of our margin over the last few years, you have just a few pretty simple components of it.

First, it's just the impact of margin mix of the acquisitions of SRS, which are actually really strong ROIC generators when you think about organically that wholesale distribution world is actually a much more return accretive model than I think most folks expect that gets masked by the fact that there's a lot of acquisition activity in distribution. But let me talk about ROIC in general.

So -- sorry, I'll complete the margin question. We made investments in wage over that period, right? And one of the things that we will always do is take care of our people. And we're proud of -- I think our entire sector faced into wage pressures and retention pressures in 2022. We took some steps to fix that. We're in a great position now. Our associate commitment Index is at really, call it, recent or highs as far as recent history goes. So we made investments that put pressure on our margin profile as we saw top line pressure in the market.

Ultimately, our margin leverage or deleverage reflects top line momentum. So as the market recovers, what do we think about ROIC? Well, ROIC was -- obviously, it has pressure as top line and operating profit does. When you think about what our ROIC expresses, well, we -- from the period 2008 to 2023, we really didn't add any new stores. And so you think about the tailwind that creates an ROIC as you're depreciating a store base, and as your levels of investment in the company are low by historical standards over that period, you generate higher ROIC. In fact, still today, 99% of our stores are over 10 years and so you get that ROIC tailwind.

As we begin to invest, how do we decide to allocate capital to investments. Well, we do it on an internal rate of return basis that I'm sure our investors would want us to do. Can we earn an exceptional margin over our weighted average cost of capital. In other words, do we have a hurdle rate? And does this investment cover the hurdle rate. When we think about store investments, these are some of the most I'd say, predictable investments we can make with a strong IRR. But in the early stages, the ROIC is very low, right? You can think of IRR is the average of ROIC over a long period of time. So as you lean in, you're going to put pressure on ROIC.

As you make acquisitions, again, remember, we're only acquiring market leaders. And so as you pay market multiples for market leaders, you're going to see immediate dilution to ROIC, but I'll come back to the point you've made. Yes. We expect ROIC to expand from here as our market recovers, as we see gains from that investment period you talked about, it's absolutely our intention that ROIC moves up and to the right from this point.

I thought the other important...

There's a question over there.

I'm sorry, go ahead.

So I guess I had a question about that, particularly in distribution. I've always thought that as more of a cost of capital type business. How do you have confidence that it doesn't just go to cost of capital 0 perpetually. I mean it's a dogfight, is it not?

I'd say it's a highly rational market. And I think what -- again, what's interesting to me is if you look at a new branch -- a new SRS branch versus a new store, ROIC of the new SRS branch accelerates significantly faster than the ROIC of a new store, a very capital-light model. And so no, I think wholesale distribution is, number one, it's exceptionally fragmented. And so I think we've seen margin stability over the history. And I expect that margin stability to continue. I also expect us to be able to improve our margins in distribution as we see gains from scale and as we see gains from productivity driven by AI. I -- so look, we're very bullish on the outlook for our investments to drive earnings growth, which then drives ROIC.

We have another question.

Just trying to think about that $700 billion opportunity and just -- I might have some of these things wrong, but framing it versus the other piece of the business that obviously you've executed against well over all these years, and you -- again, this might be wrong by a little bit, but you've gotten kind of like 20-plus percent of that business. And so is that -- like how do I think about that versus that $700 billion in terms of opportunity? You didn't say anybody is really standing in your way, but in your IT stack, I would imagine complexities of delivery and product and all this other stuff probably gives you even a bigger opportunity? Just any thoughts relative to that 20-plus percent on the $700 billion market share versus the other piece of the business.

Well, let me -- so let me just -- let me phrase it maybe a little differently and tell me if I'm hitting your question. But I think our market share with the Pro is much lower in that $700 billion sector. You could divide it roughly to say $400 billion of that is kind of the complex Pro where we have very low market share. Obviously, being the kind of the #1 home improvement retailer in destination for the pros in the form of our stores, our share is higher in the other $300 billion. Let me -- let me talk about the entirety of the $1.2 trillion. So let me bring in consumer because what we're doing in delivery should be a tailwind for both our Pro and our consumer. The gains we've made in the -- in promise times, so shortening promise times.

The amount of deliveries that are now same day, next day, over half our deliveries are same day, next day to the customer. That's not something we ever even imagined when we started building these DCs that, that would be the customer demand. I don't know if I'm hitting your question, but let me just -- let me shift this a little bit to why I believe we win with the Pro and the consumer.

There are gains to scale and because scale provides you with an advantage to invest in AI-enabled customer-facing tools. I'll give you a couple of examples. I think the -- maybe the one that comes to life for me the most is we are moving to a world where the orange apron associate who is the lifeblood of our customer experience, has so much product knowledge at their fingertips enabled by AI that you can be -- what might have taken months to do in terms of on-the-job training in the aisle is now instant.

Every associate has a handheld device that has all of the cumulative knowledge experience through an agentic, an AI agent to help the associate in the aisle with the customer. We are going to kind of areas of -- I'll simplify it. We are pushing an initiative called One Tasking. Prior to this year, our associates not only served customers, but they also moved product around the store. We have always -- or at least for 20 years, we've had some other merchandising execution team. They have also handled certain aspects of bay maintenance and product movement. We're shifting to a model now where we are pushing almost all tasking to that merchandising execution team.

The freight flow in the building is handled by that team and it has been supercharged by AI-enabled tools that allow prioritization of tasking and really kind of optimization of freight flow through the building. What does that allow us to do for our orange apron associates. We just want them to sell. And so tools like the kind of the knowledge all-in-one handheld, I think, put us ahead of anyone in our market. The equivalent online is Magic Apron, everyone should go on to homedepot.com. I know you would have naturally done that today anyway, but Magic Apron provides that same level of Agentic AI assistance to our end customer.

So look, we're going to be front-footed in terms of AI enablement. We just hired a fantastic new Chief Technology Officer. If you haven't, please take a look at her background, we think that this is a huge step forward in leaning into AI and being a true AI leader in the American economy. And we've seen the gains from it, both from a customer experience perspective as well as a productivity perspective within the business, and we'll keep leaning into it. I might have taken a tangent on your question.

Do you think you get 20% share in large Pro?

Look, I think we have the right to win every dollar. I do think we have the right to win every dollar. And I think the question is these Pros, you think about it, they want partners that they can count on. We are steadily gaining share. And I think that that's how we're going to continue to look at it, steady share gains. never retreat, never give up any ground, but don't outrun our ability to execute with excellence. We're not there yet, but we're gaining every single day and month and quarter. And so look, what's the limit? I don't know, but there's nobody standing in our way.

So we're -- we couldn't be more excited about it. Look, we think we're operating the business as well as we ever have. Our in-stock position is right where we want it. Our staffing is right where we want it. We're operating with agility in our supply chain in our current environment, and we feel fantastic about our ability to continue to win in the future.

Awesome. It's a great spot to start. Let's thank Richard McPhail from The Home Depot.

All right. Thanks, Chris.

Greetings, and welcome to The Home Depot Fourth Quarter 2025 Earnings Conference Call.

[Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's Fourth Quarter and Fiscal Year 2025 Earnings Call. Joining us on our call today are Ted Decker, Chair, President and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, Executive Vice President of Merchandising; and Richard McPhail, Executive Vice President and Chief Financial Officer.

Following our prepared remarks, the call will be open for questions. Questions will be limited to analysts and investors. [Operator Instructions] If we are unable to get to your question during the call, please call our Investor Relations department at (770) 384-2387.

Before I turn the call over to Ted, let me remind you that today's press release and the presentations made by our executives include forward-looking statements under the federal securities laws, including as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release in our most recent annual report on Form 10-K and in our other filings with the Securities and Exchange Commission.

Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating margin, adjusted diluted earnings per share and return on invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website.

Now let me turn the call over to Ted.

Thank you, Isabel, and good morning, everyone. Sales for fiscal 2025 were $164.7 billion, an increase of 3.2% from the same period last year. Comp sales increased 0.3% from the same period last year and comps in the U.S. increased 0.5%. Adjusted diluted earnings per share were $14.69 compared to $15.24 in the prior period.

In the fourth quarter, comp sales increased 0.4% from last year and comps in the U.S. were up 0.3%. Adjusted diluted earnings per share were $2.72 compared to $3.13 in the prior year.

In the quarter, our regional performance varied with our Northern and Western division posting positive comps. In local currency, Mexico reported positive comps and Canada reported negative comps. Our fourth quarter results were largely in line with our expectations, reflecting the lack of storm activity in the third quarter and ongoing consumer uncertainty and pressure on housing. Additionally, storm activity in January provided a sales benefit in the quarter. Adjusting for storms, underlying demand was relatively stable throughout the year. As you'll hear from Billy, we are growing market share by delivering the best value proposition in home improvement.

As we shared with you at our Investor and Analyst Conference in December, we are uniquely positioned to grow share of wallet with all our customers. We are investing across the business to drive our core and culture, deliver a frictionless interconnected experience and win the Pro. As Ann will detail, our teams did an incredible job staying engaged, focusing on the customer and elevating the customer experience. In fact, our customers are telling us that our associates continue to deliver exceptional service. In addition, our merchants continue to offer tremendous value as evidenced by record-setting events in the quarter.

We're also encouraged by the traction we see with the Pro. Pros who are utilizing our Pro ecosystem of capabilities are spending more with us, and we remain focused on enhancing our capabilities from sales support to project management to delivery, all to better support Pros throughout the life of their projects.

This year, SRS grew organic sales by a low single-digit percentage and expanded market share despite pressured industry demand and lack of storms in the back half of the year.

This is a testament to their strong value proposition, customer relationships and consistent execution. In addition to the GMS acquisition, they completed several tuck-in acquisitions and opened a number of greenfield locations across their verticals. Going forward, we will continue to support SRS' momentum, and we expect their organic sales to grow mid-single digits in fiscal 2026.

Looking ahead to fiscal 2026, we expect total sales growth of approximately 2.5% to 4.5%, comparable sales growth of approximately flat to 2% and adjusted diluted earnings per share to grow approximately flat to 4%. We remain focused on delivering the best customer experience and value proposition in home improvement. We have a clear growth strategy, and we're investing in our stores, in our interconnected shopping experience and in the Pro to grow share in any market environment.

I want to close by thanking our associates for their hard work and dedication to serving our customers in a dynamic year.

With that, let me turn the call over to Ann.

Thanks, Ted, and good morning, everyone. First, I want to thank our associates who did a great job serving our customers during the recent Winter Storm Fern that impacted many of our communities we serve, particularly in our Northern and Southern divisions. Our priority in situations like these is always the safety of our associates and customers. We activated our emergency response protocols, we're working with our vendors and merchant teams to deliver essential products to the appropriate stores.

This ensured we remained in stock and ready to serve our communities before, during and after the storm. As always, I'm extremely proud of how our team showed up for each other, and our customers, and that commitment continues to be a defining part of who we are as a company.

As you heard from us in December, we are focused on the core and culture of our company. Our associates are the key to delivering an exceptional customer experience. Their passion, knowledge and expertise are critical to solving customers' problems and fulfilling their dreams. Over the last year, we have talked about how we have enabled tools and processes for our associates to better serve our customers. These changes not only increase associate engagement, but also enhances store performance by driving higher sales, productivity and efficiency in our operations.

We are also improving the customer experience by transitioning tasking to our MET team. Our MET team's core competency is servicing our bays and executing merchandising changes in our stores. By transitioning tasking to them, our Orange Apron associates have more time to engage with customers and drive sales. And while this transition is not complete, in our pilot stores, we have already seen a meaningful increase in labor productivity.

Over the years, our business has evolved to meet the needs of our interconnected and Pro customers. As you know, over 50% of our online orders are fulfilled through our stores. Ensuring that our orders are picked, staged and delivered in a reliable and repeatable fashion is critical to providing a frictionless customer experience regardless of the type of fulfillment, whether picked up in store or delivered the same day to a home or job site.

As a result, we have realigned certain positions in our stores to better drive the outcomes we desire. We now have an operations experience manager who is responsible for managing customer service more broadly, including driving uniform operational processes to enhance the interconnected and fulfillment experiences.

And for Pros, our dedicated unified Pro team, including a Pro customer experience manager continues to elevate the Pro experience in our stores by assisting Pros and serving as a main point of contact, ensuring a superior and cohesive shopping and fulfillment experience for our customers inside and outside of our stores. As a result, we've seen increased engagement, higher Pro sales and continued growth in our Pro Xtra loyalty program.

We're excited about all of the progress we have made in our stores this year. Our efforts are paying off. This year, our customer satisfaction score increased every quarter, and our tenure with hourly associates is the highest it's been since 2017. Our associates continue to go above and beyond to serve our customers despite a challenging environment, and I'd like to close by thanking them for all that they do. We are relentlessly focused on delivering the best customer experience in home improvement, and we know that our efforts are positioning us well to grow share in the market.

With that, let me turn the call over to Billy.

Thank you, Ann, and good morning, everyone. I want to start by also thanking all of our associates, supplier and supply chain partners for their ongoing commitment to serving our customers and communities. As you heard from Ted, our performance during the fourth quarter was largely in line with expectations with underlying demand in the quarter similar to what we've seen throughout the year.

Turning to our merchandising department comp performance for the fourth quarter. Eight of our 16 merchandising departments posted positive comps, including power, electrical, storage, indoor garden, hardware, plumbing, bath and kitchen. During the fourth quarter, our comp average ticket increased 2.4% and comp transactions decreased 1.6%. The growth in comp average ticket primarily reflects some price increases, a greater mix of higher ticket items and customers continuing to trade up for new and innovative products. Big ticket comp transactions or those over $1,000 were positive 1.3% compared to the fourth quarter of last year. We were pleased with the performance we saw in categories such as power, plumbing and electrical. However, larger discretionary projects remain under pressure.

During the fourth quarter, Pro posted positive comps and outperformed DIY. We saw strength across Pro-heavy categories like gypsum, wire, concrete and plumbing. In DIY, we saw strength across our Gift Center events, hand tools, storage, portable power and hardscapes.

Turning to total company online comp sales. Sales leveraging our digital platforms increased approximately 11% compared to the fourth quarter of last year. We're excited about the continued success we are seeing across our interconnected platforms. This quarter, we continued to enhance delivery reliability and communication with the rollout of real-time delivery tracking for big and bulky deliveries across all categories. This enhancement gives our customers greater visibility and certainty on the timing of their delivery. We know that as we remove friction from the experience, we see incremental customer engagement, leading to greater sales across all points of interaction.

During the fourth quarter, we hosted our appliance, Gift Center and Black Friday events. We saw strong engagement across all of these events with our Gift Center and Black Friday events posting record sales years.

We are looking forward to the year ahead, particularly with the spring selling season right around the corner, and we have a great lineup of innovative products that provide our customers with tremendous value from outdoor living products, including patio and grills to our lineup of outdoor power equipment, whether it's our RYOBI 40-volt lawn mower with a brushless motor and lithium-ion batteries, which deliver more power and longer run times or our Milwaukee 18-volt string trimmer kit designed to meet the needs of the landscape professional. And our spring Gift Center event continues to lean into cordless technology with a wide assortment of products from RYOBI, Milwaukee, Makita and DEWALT, many of which are exclusive to The Home Depot in the big box retail channel.

We're also excited about our live goods program. Every year, our merchants partner with our national and regional growers to provide our customers with new and improved varieties to enhance the overall garden experience. Investing in our relationships with our growers allows us to continue to drive innovation and value to meet the needs of our customers and improves their shopping experience, while building loyalty to The Home Depot. We remain focused on delivering the best brands, assortments and value to our customers.

With that, I'd like to turn the call over to Richard.

Thank you, Billy, and good morning, everyone. Before I comment on our results, I would like to remind everyone that fiscal 2025 consisted of 52 weeks, while fiscal 2024 consisted of 53 weeks. The extra week added approximately $2.5 billion in sales to the fourth quarter of fiscal 2024. When we report our comparable sales or comps, we report them on a 52-week to 52-week basis by comparing weeks 1 through 52 of fiscal 2025 with weeks 2 through 53 of fiscal 2024.

In the fourth quarter of 2025, total sales were $38.2 billion, a decrease of $1.5 billion or approximately 3.8% from last year. During the fourth quarter, our total company comps were positive 0.4% with comps of negative 0.2% in November, positive 0.1% in December and positive 1.3% in January. Comps in the U.S. were positive 0.3% for the quarter, with comps of negative 0.3% in November, negative 0.2% in December and positive 1.4% in January.

For the year, our sales totaled $164.7 billion, an increase of $5.2 billion or 3.2% versus fiscal 2024. For the year, total company comp sales increased 0.3% and U.S. comp sales increased 0.5%.

In the fourth quarter, our gross margin was approximately 32.6%, a decrease of approximately 20 basis points from the fourth quarter last year primarily reflecting a change in mix as a result of the GMS acquisition, which was in line with our expectations.

For the year, our gross margin was approximately 33.3%, a decrease of 10 basis points from last year, which was in line with our expectations.

During the fourth quarter, operating expense as a percent of sales increased approximately 105 basis points to 22.6% compared to the fourth quarter of 2024. Our operating expense performance reflects natural deleverage from top line results as well as lapping the 53rd week.

For the year, operating expenses were approximately 20.6% of sales, representing an increase of approximately 70 basis points from fiscal 2024.

Our operating margin for the fourth quarter was 10.1% compared to 11.3% in the fourth quarter of 2024. Excluding intangible asset amortization in the quarter, our adjusted operating margin for the fourth quarter was 10.5% compared to 11.7% in the fourth quarter of 2024.

Our operating margin for the year was 12.7% compared to 13.5% in 2024. Excluding intangible asset amortization, our adjusted operating margin for the year was 13.1% compared to 13.8% in 2024.

Interest and other expense for the fourth quarter decreased by $57 million to $551 million. In the fourth quarter, our effective tax rate was 22% and for the year was 23.9%.

Our diluted earnings per share for the fourth quarter were $2.58, a decrease of 14.6% compared to the fourth quarter of 2024. Diluted earnings per share for fiscal 2025 were $14.23, a decrease of 4.6% compared to fiscal 2024. Excluding intangible asset amortization, our adjusted diluted earnings per share for the fourth quarter were $2.72, a decrease of 13.1% compared to the fourth quarter of 2024.

Adjusted diluted earnings per share for fiscal 2025 were $14.69, a decrease of 3.6% compared to fiscal 2024. Recall that fiscal 2024 included a 53rd week, which added approximately $0.30 to diluted earnings per share and adjusted diluted earnings per share for the fourth quarter and the year.

During the year, we opened 12 new stores, bringing our store count to 2,359 at the end of fiscal 2025. At the end of the quarter, merchandise inventories were $25.8 billion, up approximately $2.4 billion versus last year, reflecting higher inventory costs and the acquisition of GMS. Inventory turns were 4.4x, down from 4.7x last year.

Turning to capital allocation. During the fourth quarter, we invested approximately $1.1 billion back into our business in the form of capital expenditures. This brings total capital expenditures for fiscal 2025 to approximately $3.7 billion. And during the year, we paid approximately $9.2 billion in dividends to our shareholders. Today, we announced our Board of Directors increased our quarterly dividend by 1.3% to $2.33 per share, which equates to an annual dividend of $9.32 per share.

Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was approximately 25.7%, down from 31.3% in the fourth quarter of fiscal 2024.

Now I will comment on our outlook for 2026. As we shared at our Investor and Analyst Conference in December, there are a number of dynamics we are observing that are pressuring housing and home improvement demand. The current mortgage rate environment and significant increase in home prices since 2019 have impacted housing affordability. Housing turnover has remained at historical lows since 2023, which has significantly reduced demand for projects and other purchases associated with buying and selling a home. Our customers also tell us they have concerns over general economic uncertainty, including inflation, growing job concerns and higher financing costs.

As we look ahead to fiscal 2026, we anticipate these pressures will persist as we have not yet seen a catalyst for an inflection in housing activity. As a result, we affirm the preliminary fiscal 2026 guidance we provided at our investor conference. We expect to continue to grow our market share and for our comp sales to range between flat to 2% growth with total sales growth of between approximately 2.5% and 4.5%, reflecting the contribution of the GMS acquisition, new stores, branches and tuck-in acquisitions. For the year, we expect SRS to deliver mid-single-digit percent organic sales growth. We plan to open approximately 15 new stores and 40 to 50 new SRS locations. Our gross margin is expected to be approximately 33.1%.

Further, we expect operating margin of approximately 12.4% to 12.6% and adjusted operating margin of approximately 12.8% to 13%. Our effective tax rate is targeted at approximately 24.3%. We expect net interest expense of approximately $2.3 billion. We expect our diluted earnings per share and adjusted diluted earnings per share to both increase approximately flat to 4% compared to fiscal 2025.

We plan to continue investing in our business with capital expenditures of approximately 2.5% of sales for fiscal 2026. We believe that we will grow market share in any environment by strengthening our competitive position with our customers and delivering the best customer experience in home improvement.

Thank you for your participation in today's call. And Christine, we are now ready for questions.

[Operator Instructions] Our first question comes from the line of Steven Forbes with Guggenheim.

Ted, I was down at IBS, and I was talking to Chip down there about some of the digital planning tools and some of the initiatives you guys have to improve delivery. So I don't know if maybe you could just explore the topics on some of the initiatives you're trying to lean into here, digital planning tools being one of them. You mentioned product management. But what are some of the bigger initiatives that you guys are leaning into in 2026 to improve the overall value proposition for your Pro?

Sure. And Mike is here, and he can go into some more detail, but we know we talked about the capabilities, we need to deliver for the Pro experience. We continue to mature our sales force, order management, as you say, our trade credit platform, delivery has gotten better and better. We've been looking for 2 Sigma on time and complete for our delivery to our Pros, and we achieved that this past year.

And also now with the advent of AI tools, we're introducing a number of project management and list builders for our Pros, including things like an AI takeoff scheme, letting Pros build projects, just typing in the type of project they're working on in a pre-populated list of the project in the app for the Pros, so they don't have to go through and put the hundreds of items that pre-populates and then they can edit that list, they can save that, repeat it for future jobs. So there's a tremendous set of activities.

Yes. I mean you captured a lot of it, Ted. Hence, the performance that we had in the fourth quarter, pleased overall with the investment in the capabilities, both when it comes to in-store investments as well as outside sales. We've improved in-store tools and processes that drive greater engagement with our Pros that have resulted in higher sales there, record levels of delivery reliability from our order management investments, and we're continuing to take that to another level with job site preferences that we're including in our order management tools as well as business hours of our customers.

We've taken customer communications to a whole new level. We used to only be able to communicate to one person on the job. Now we can communicate to many, including the owner and those that are kind of on the job site when it comes to those deliveries.

As Ted spoke to, our online B2B sales outpaced our overall online sales growth driven by the features that we've added, such as the projects tool where we're seeing tens of thousands of projects each week being started, and those result in higher conversion and greater engagement around transactions for complex sales. And we saw continued growth in our trade credit efforts, along with strong early days from our AI blueprint takeoffs. So with all of that in mind, just pleased with the continued momentum in Pro.

I appreciate the color there. And maybe just a quick follow-up...

Jordan and Michael, you can hit the handheld delivery.

Yes. One of the other capabilities that we've recently rolled out that allows our drivers to stay connected with our customers' needs is our delivery handheld device. This is a tool that we use to track the status of all of our deliveries and the progress that we're making as well as all of the other request that we get from our customers to make sure that we're fulfilling the exact needs of the service that they require on their particular job sites.

Yes. And then -- this is Jordan. As we said in our prepared remarks as well, as Billy called out, that also enables our live tracking on big and bulky, which customers have come to expect on small items, but to be able to track live of bulky delivery, whether that's a flatbed rolling down with lumber to a job site or an appliance showing up at the home, that's been a really big win for our customers, and they are loving that feature that we've rolled out, which was enabled by our new handheld.

Appreciate all that. And just a quick follow-up, maybe for Richard. If you could maybe set the base for SRS sales in 2025 and then comment on how GMS performed in the fourth quarter relative to that $1.1 billion framework or guidance framework that you had?

Sure. So look, we were really pleased, continue to be really pleased with SRS' performance. I think it's important to provide some context. So SRS was down low single-digit comps year-over-year for the fourth quarter. But if you look at the industry, in the fourth quarter, according to ARMA data, total industry shipments of shingle squares were down 28% year-over-year. That's the lowest industry volume since 2019. And so that fourth quarter literally pulled the whole year of 2025 shipments down to the lowest annual volume since 2019. So it was a remarkably bad quarter for the roofing industry. With that, SRS performed exceptionally and by all external measures, took share in the quarter.

With respect to GMS, we've owned them for 5 months of the year, and we're pleased with their performance. And very happy to welcome them to The Home Depot family. And I'll turn to Mike in a second just to talk about the power of SRS and GMS with Home Depot.

But let's talk about SRS a bit more. So look, that lack of demand in the market did put significant pressure on the pricing environment for SRS in the fourth quarter. We expected that when we reset our guidance at the end of Q3, we knew that given the absence of storms in Q3, the industry was likely to see pricing performance. So they did invest in price to maintain share gains that will bleed over into our margin expectations for the first quarter. But as Ted said, we anticipate and expect them to grow organic sales mid-single digit for 2026 and are really excited about what we're seeing.

And Steve, you'd mentioned the IBS, hopefully, that came to life. The ties between SRS and GMS and Home Depot. Mike, maybe you can just talk a little bit about how we're working together.

Yes. I mean that's the opportunity for us to focus further on revenue synergies. We've had a number of examples where we've approached our customers in a combined fashion, but also a number of customers, frankly, asking for that from us. One particular example at the moment amongst many is the ability to turn a multifamily construction and property management company from a significant customer of one of our companies to be that way for all of Home Depot, HD Supply, SRS and GMS. And this, as our national account structure continues to grow take an opportunity to support our customers better.

Beyond that, we're pleased also with what we're seeing in some pilot markets with Home Depot and SRS with our Pro Referral project on roofing leads. We've also done the mapping of our common customers for HD reps to be able to contact HD Supply reps to be able to contact SRS or GMS sales rep to have that common approach. So very much focused on driving these revenue synergies.

Our next question comes from the line of Zach Fadem with Wells Fargo.

So as you look back through 2025, could you talk about the performance of markets like Florida and Texas that saw a more challenging housing turnover and home price appreciation environment compared to those markets with perhaps a more favorable or normalized outlook for turnover, and whether you saw any change or bifurcation between these two types of markets through the year into early '26?

Sure, Zach. I would say that first and perhaps most important throughout the year, we don't have perfect adjustments for storms and the like. But as best as we can adjust, our comp performance was relatively stable across the 4 quarters of the year, and something under 1% consistent underlying demand comp across the country.

Now obviously, the geographies that we're lapping, the significant storms from last year and didn't have any storm activity. It was quite remarkable that 2025, really from hail to wind to hurricane, there were literally no storm activity in 2025. So those are the most pronounced geographies where you have tough comp compares of '25 over '24.

We're also seeing geographies where you are starting to see some housing price declines and you're seeing some markets with lower turnover rates than others. And as we've always said, if you look over time, the highest correlation to home improvement activity is probably home prices and secondly, turnover.

I think because we're sort of bouncing -- hopefully, we're bouncing along the bottom of turnover, and we're not seeing meaningful price declines. We haven't seen a lot of difference in regional geographical performance just based on price alone. We have some markets that you'd look at and say, yes, price is still going up. Sales are a little stronger. We look at other markets that price is more challenged and you can see a weaker comp. But then we have things in between. We have markets where prices are adjusting down but actually had quite strong comps. So we always talked about prices being certainly very important, but a lag, and I think the price declines that have happened are still within that window that we're not seeing statistical relevance.

And on turnover, while there are some markets that have weaker turnover, we're at, what, 30-, 40-year lows across the country. So again, with everyone sort of bouncing along decade lows, we're not seeing a big differential.

Got it. And then thinking through some of the moving pieces for '26, I'm looking out the window, and I'm seeing 2 feet of snow on the ground from last night. We've got larger tax refunds coming, perhaps also a more manageable tariff environment. Could you talk through these dynamics, particularly as you think through first half versus second half within your flat to 2% comp outlook?

Sure. I'll do a higher level, and then Billy can talk a little more specifically about tariffs. I mean, we very purposely obviously have a range, and we maintain that range from December of flat to 2%. We think the overall market is likely down 1% to up 1%. So in each instance, we believe within our range that we would be outperforming the market. The things that could point to a little stronger market performance would be improved affordability, and that would be -- we have incomes rising. We have some nice improvement in mortgage rates. I think this morning, we came just under 6% on the 30-year. And in the longer -- medium, longer term, modest price adjustments after the 50% increase from the end of 2019 would be helpful from an affordability perspective.

Tax stimulus, you mentioned, we're actually not counting on a lot of support from tax stimulus. We've seen very large ranges of what will show up in household pocket books. And we've seen as low as $70 billion and as high as $200 billion in terms of refunds and adjusted rates for 2026.

If you take the midpoint of that, $135-odd billion, and you look at our share, Home Depot's share of PCE, which is about 60 basis points, you would get at the midpoint, maybe 0.5 point of comp support at that high level analysis of tax relief. But we're hearing that it's just as likely that, that's either going to be used for debt paydown for lower income deciles or saved by higher income deciles. So we're not planning on a lot. We're thrilled to get some tax stimulus benefit, but we're not planning on a lot of it.

And then tariffs, I mean, this news is breaking by the moment. And Billy, why don't -- you and your team have been at it for almost a year now.

Yes, Zach, thanks for the question. I just -- from a high level, just a reminder, we've talked about this in the past. But it's important to remember that more than 50% of our projects are sourced domestically and haven't been subject to tariffs. Obviously, the announcement on Friday and then the administration over the weekend, we're still analyzing the impacts of those decisions. I can tell you that we're going to continue to be the customers' advocate for value. I can't say enough about how pleased I am with the merchants, our finance teams, our supply chain and logistics folks are sourcing offices all over the world, have done an incredible job and spent the better part of almost a year now working through that.

And just to give you some context, we're mostly done with tariff-related pricing actions as it relates to the impacts back to April. And to give some, again, context around that. If you think about -- our exposure was kind of mid-single digits. And then if you think of like SKU price, that's right about 3% just in terms of the impact. So we feel great about our position. Our teams, along with our merchants, our suppliers have done an incredible job continuing to advocate on low prices and being the customers' advocate there. So we look forward to spring, as I mentioned in my prepared remarks. And as I said, we're mostly done with the related pricing actions around what we've seen so far.

And Zach, what may drive us to the lower end of the range would be if the market is not performing as well. And the #1 driver of that would be continued consumer uncertainty. That's still the #1 reason. Our people are telling us, our customers are telling us that they're not investing certainly in large projects. And that has everything to do with consumer confidence and sentiment, jobs picture, overall price levels and affordability in the economy.

Home prices, if we do start to see some wider spread home price decrease that may have a negative psychological impact, turnover stays low and that there's a little more price elasticity. As Billy said, while we have a modest year-over-year price outlook for the year, we could see higher responses of elasticity. So that could be on the macro why we would have a more challenged year as an industry. And then we have a little unique profile of the year by quarter going into '26, which Richard will take us through.

Sure. Yes. So you mentioned the shape of the year, and we thought that it would be helpful to give a little more color than typical on the shape of the year. First, we expect our comps in the second half to be slightly higher than our comps in the first half. This is a reflection of compares to 2025 storm activity and the absence thereof. That is, in essence, what is shaping our comp expectation for the year.

Second, we expect gross margin to be down by about 24 basis points year-over-year, reflecting the annualization of GMS. So recall that the pro forma impact of GMS to gross margin is about 40 basis points per year. And so that 24 basis points reflects about 7 non-comp months of ownership. This annualization means that we expect our first half gross margin to be down about 50 basis points versus last year, and our second half gross margin to be right around flat to last year. And so you're going to see the largest year-over-year impact to gross margin in the first quarter, and then that will gradually improve through the year.

In addition, due to the timing of expense comparisons versus last year. And this is also driven by the addition of the GMS expense base compared to the first half of last year. So the addition of that expense base along with some other timing means that we expect operating expense as a percentage of sales to be at their highest level of the year in Q1. So as a result of all this, our expectations are that our year-over-year EPS performance will be mid-single-digit percentage negative in Q1, improving through the year, and this is solely due to acquisition, annualization and a few timing comparisons.

Our next question comes from the line of Michael Lasser with UBS.

You mentioned that SRS was a little bit more aggressive on the pricing side in the fourth quarter in order to maintain market share, and you expect some of that to persist in the first quarter. So do you think that's going to linger beyond the first quarter? And are you seeing signals of that behavior happening in anywhere beyond just the roofing category such that it could lead to more volatility in The Home Depot's gross margin rate over time?

Thanks, Michael. I don't think it would lead to significantly more volatility over time. I think with the dramatic fall in roofing shipments in 2024, again, as Richard said, down 28%. SRS just took an opportunity, which we fully supported to take share. And remember, not having storms in the back half of '24, stronger impact in the back half of '25, but some of that will bleed into Q1 as well. So we're not expecting a robust building materials environment in Q1, and we're happy to make the investments and take share.

And that's all embedded in our guidance for the year.

Okay. If you had perfect insight that housing turnover was going to remain muted through 2027, would that change any of your capital allocation priorities, especially now that The Home Depot has made a lot of foundational investments, both organically as well as through acquisitions. How are you going to approach balancing returning capital to shareholders with continuing to build out the capabilities that are necessary to capitalize on the Pro ecosystem that you've built?

Well, Michael, if turnover in starts and all housing activity is more or less flat through '26, then we'll have the absence of further declines. And in '25, as the market continued to drop off, we took share and we'd look to take share in '26 as well.

At this point in the level of potential downs, we said minus 1, potentially to plus 1, that would not be a significant enough drop in the overall macro of our space to come off our investment profile. We're extremely happy with the strategy that we laid out in December that we are focused on our core and our culture, and we continue to invest in our stores, in the maintenance of the stores and in the shopping environment and also building new stores. Interconnected penetration continues to grow, delivery continues to grow. So we never come off all the investments we're making and the strong results on our interconnected portfolio. And Pros represents in any market environment, still that $200 billion of white space for us, that is the share we're capturing, and we would continue to invest in that to take share.

And again from a capital allocation perspective, our principles haven't changed. As Ted said, we reinvest in the business first. And look, we have a high bar for what we are willing to invest in. Every project has to provide an exceptional return on investment, and we feel like that is our profile. And after that, we return our capital to shareholders in the form of dividends. And once we return to an excess cash position, which we anticipate will be sometime in the first half of 2027, we would expect to return to share repurchases.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

I want to follow up on consumer health. Can you talk about if the consumer is behaving a little more value conscious? And then there's always this higher spending you're going to get from a turning home versus a non-turning home. Is there anything that you're seeing in that multiplier that's changing? Is the consumer not spending as much when they are turning a home over?

Simeon, it's Billy. Thanks for the question. I'll take the first part just around what we're seeing from a customer standpoint. We haven't seen -- it's really been balanced throughout the entire year. Obviously, you have different points in time. I mentioned the record sales we had in our Black Friday events, in our Gift Center, so great interaction across our entire interconnected experience. We haven't seen a lot of trade down, but we've seen some, as we've talked about, countertops and things of those nature. We saw a little bit in our appliance business as well but haven't seen that more broadly, but just very consistent across every single quarter.

Outside of the dynamics we've talked about, whether those are storms or other things, we continue to see strong customer engagement, don't really see a decline or trade down, if you will, from what customers are engaging in. And as I mentioned, we had a record Q4 across our events. So where we've continued to create great value for customers, we're seeing just great interaction across the board.

Yes. I think, Simeon, a dynamic we're seeing in others in our space who have reported on the supplier side and have said some similar things that with turnover down and people still wanting to move, they're not spending as much in their home if they anticipate moving in the next year or 2. So there's maybe a bit more repair than replace. And you've heard us talk before about the cumulative underspend in home improvement, which we use some third-party consulting folks who put that at $22 billion today that people have underspent in the aging home.

So turnover obviously helps people fix things up before they sell, and the new owner modifies the house to how they want it, but it also has an impact to the people who think they're going to move and just waiting in more of a repair than a replacement cycle. I don't necessarily think that's going to get any worse, but we're certainly bouncing along with what we hope would be a bottom in things like turnover.

Okay. And just a follow-up to the earlier question on the Pro, when you bought SRS, we talked a lot about order management and trade credit as capabilities that needed to be implemented for The Home Depot. It sounds like the rollout of that is done, or is '26 continued rollout of those capabilities across the rest of the enterprise? It's not clear how much of that is in place versus how much of that needs to get done versus now you can execute and drive the business?

Yes, it's Mike here. I mean I would say a good high percentage depending on the capability is done. On Pro trade credit, there's continued investments this year to bring it online, to bring it down to a store level throughout the year versus a bit more focused on our outside sales right now. So those capabilities will come out this year.

On the pricing side, we are into a number of pilots right now that we're looking to expand later this year to bring it across the country. And from an order management standpoint, we're pleased with the improvements that we've seen in delivery, reliability year after year after year from John's team and beyond. But there are still opportunities for some order consolidation work to go on. And those will happen kind of throughout the year using our One Supply Chain system versus having to rely on our stores that we do in some cases when it comes to some of our non-stock deliveries out to our customers.

And then further on the B2B side, the opportunity to invest there further in areas such as E-Procurement integration for spend management tools that a number of our customers use along with construction management software integration when it comes to job management software that customers use. So there is a continued healthy build-out in 2026 to be done, although a significant portion has been completed already.

But Simeon, on the vision of SRS and now GMS, ultimately cross-sell opportunity and further penetration with large remodelers and builders. We're super excited about that and starting to see some really nice wins in cross-selling, where either The Home Depot, the GMS or the SRS sales rep who have a line of business with a particular customer have done the introductions, and we're winning, frankly tens of thousands of incremental homes through a warm handoff with the other product categories that -- of the team that was introduced.

And also on commercial roofing, SRS does some commercial roofing. So when you think of our stores, and our warehouses, and our larger suppliers and builders of those commercial properties are also happy to use SRS' commercial roofing capabilities. So the vision of being a point of contact for that Pro and cross-selling is really gaining momentum, which we're really, really happy about.

Next question comes from the line of Steven Zaccone with Citi.

I wanted to follow up on the same-store sales outlook. First question just on how to think about ticket versus transactions within the outlook? Any cadence to be mindful of there? And then big ticket saw an inflection in '25. How do you see that performing in 2026? Just curious on the balance between replacement cycles and innovation versus large private project activity still being a drag.

Great. So thank you for the question. As Billy said, for 2026, you're likely to see ticket reflect that 3 percentage point increase in retail as we end our -- or really are essentially done with our price actions. You'll see that on average through the year. It will be a little higher at the beginning of the year, a little lower at the end of the year than that 3%. And right now, our guidance assumes negative transactions offsetting that ticket.

And Billy, maybe talk about big ticket.

Yes. We were pleased with our big-ticket comp transactions, as I mentioned, transactions over $1,000, up 1.3% for the quarter, that's now multiple quarters where we've seen positive impact. The dynamic of that was a little bit different as Ted alluded to around kind of the maintenance and repair. So you think of plumbing and electrical and certainly our power business in the quarter, all drove significant gains as it relates to that performance. And that's a little bit of a change as we've seen in some of the areas around appliances where it's a little more duress related at this point in time. But a similar composition, as I mentioned for the last quarter, and we look to see a very similar performance in 2026.

Okay, great. Then the follow-up I had is just I'm also looking at 2 feet of snow out my window, as Zach mentioned. Should we expect any differences like first quarter comps versus second quarter? Just being mindful of the fact has snow caused any sort of disruption? And then also, where we've had this prolonged winter, can that sometimes lead to a later start to spring in certain markets?

All of the above, Steven. I would say, again, as Richard said, we're looking for back half comps to be stronger than the first half, and that's really more of a normalized -- we don't plan for storms, but in the normal case, there are storms in your base.

The timing of spring, you're right, when you have a really rough winter in the north, you get a lot of landscape damage and roofing and gutters and all those things will be -- need to be repaired, and that will be helpful for Q1. But then if you, obviously, get a cold late spring, and then that pushes -- we've talked about the bathtub effect for years, and that pushes the core spring business into Q2 and don't have a crystal ball at this point on how spring is going to play out. But there will be -- there will definitely be some damage repair from all this ice and snow in the north.

Our final question comes from the line of Zhihan Ma with Bernstein.

I'll ask my one and follow up in one go. So just one quick clarification on the big ticket side of things, can you talk about the big ticket discretionary projects? How sales trends are trending there? And are you seeing any improvement?

And secondly, just quickly on inventory, up about 10% year-over-year. Can you talk about how much of that is driven by GMS versus the cost going up? Is there any underlying increase in the inventory buildup as well?

I'll take the big ticket question. That's really the telltale for us of when we think the demand profile is going to change for the upside. And we still have not seen that. That's -- you've heard us consistently now saying things are improving. Our comp clearly improved, a positive comp in 2025. But we have not seen the increase in big ticket. And that will be a telltale for a turn in the market.

And then Richard, you can cover inventory.

Sure. Inventory is more of a year-over-year dynamic rather than a sequential quarter dynamic. The increase in inventory year-over-year primarily reflects the addition of GMS' inventory onto our balance sheet. It also reflects higher cost of inventory, reflecting tariffs and then some year-over-year increase in inventory levels as we leaned into our accelerated delivery speed through the year. We think our in-stocks and our inventory position are in great shape, and we feel fantastic about how we're positioned for 2026.

Ms. Janci, I'd like to turn the floor back over to you for closing comments.

Thank you, Christine, and thank you, everybody, for joining us today. We look forward to speaking with you on our first quarter earnings call in May.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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Ann-Marie Campbell, our Senior Executive Vice President; Billy Bastek, our Executive Vice President of Merchandising; Jordan Broggi, our Executive Vice President of Customer Experience and President Online; Mike Rowe, our Executive Vice President of Pro; Dan Tinker our President and CEO of SRS; and Richard McPhail, our Executive Vice President and Chief Financial Officer.

Following their presentations, all of our presenters will be available for a question-and-answer session. Before I turn it over to Ted, I would like to remind everyone that today's presentations made by our executives include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified on the slide and in our filings with the Securities and Exchange Commission. Today's presentations also include certain non-GAAP measures. Reconciliation of these measures can be found on our website. It is now my pleasure to introduce our Chair, President and CEO, Ted Decker.

Good morning, everyone. Welcome to the Sears Investor and Analyst Conference. Thank you for joining us today whether in person or virtually. Before I begin, I would like to give an extra special warm welcome to [ Ken Langone ] who is with us here today. [ Ken]. [ Ken ] is a legendary investor longtime board member of the New York Stock Exchange and of course, one of the founders of The Home Depot. Thanks for being with us here, Ken. Appreciate it.

So over the course of today, you'll hear from the team how The Home Depot is uniquely positioned to grow and create shareholder value. While our market is under some pressure today, there's a lot to be excited about. We operate in one of the largest sectors in retail. It supports an enormous asset class, the $50 trillion U.S. housing market. We serve a strong customer. The addressable market is highly fragmented, and we have distinct competitive advantages to grow our share of it. Our growth strategy is straightforward and powerful, drive our core in culture, deliver a frictionless interconnected experience and win the pro. Everything we do is rooted in our enduring set of values in empowering culture.

Let's start with the market. It's huge, highly fragmented and full of opportunity. We now estimate our TAM to be approximately $1.1 trillion. We estimate the consumer TAM at $500 billion in the Pro [ TAM ] at $600 billion. These figures reflect the opportunity we see across all of North America including the end markets served by our SRS and HD Supply platforms. And even though we are already the market leader in the U.S., Canada and Mexico, our market share is only around 15%. So we have tremendous opportunity to grow.

Over the last 45-plus years, we've built one of the most powerful business models in the world. We are building upon a distinct set of competitive advantages. The Home Depot is an iconic brand, universally recognized for a special culture, strong values in passionate associates. Our scale is unmatched. We have the premier real estate portfolio in home improvement, and it simply cannot be replicated. And we have an unrivaled distribution network of over 2,350 stores, 1,200 branches, 325 customer-facing warehouses in a fleet of 16,000 delivery assets.

We are the #1 destination for the top brands in home improvement. We have one of the largest e-commerce businesses in retail. We have built a leading supply chain network, including an efficient and flexible store replenishment model in the fastest, most reliable delivery in home improvement. And we are building on our already strong relationship with the Pro through our new Pro capabilities and through SRS, one of the largest multi-platform distributors in North America.

All of these competitive advantages advance our growth strategy, drive our core and culture by supporting our associates so they can deliver The Home Depot customer experience, deliver a frictionless interconnected experience regardless of how our customers choose to engage and shop with us, in-store through our digital properties and win the pro, almost all pros shop at The Home Depot and our differentiated value proposition is earning more share of wallet.

With some $1.5 billion transactions, our stores remain the core of our business. Our customers come to our stores every day to solve their problems and fulfill their dreams. That's why we're investing in our store experience and our associates to keep delivering the value proposition our customers expect. Helpful service, a broad assortment of quality products, all at a great value.

In terms of service, Ann will walk you through more details in a moment, but we are empowering our associates to drive sales by enhancing our training and product knowledge, optimizing process and simplifying tasks and leveraging technology to drive on-shelf availability and productivity. In terms of product, Billy will give you the details, but I think you'll see that product remains king. Our best-in-class merchandising teams partner with leading suppliers to deliver innovation, exclusivity and everyday value.

All that said, nothing speaks to the vitality of our core strategy more than our commitment to open new stores. As Richard will detail, they are performing above our expectations, and we plan to open roughly 15 to 20 new stores per year for the foreseeable future. As for our culture, it is what guided us as we revolutionized home improvement, and it will continue to guide us as our business evolves. Our values wheel is our North Star, and our inverted pyramid reminds us who matters most, our customers and our associates.

Next is interconnected. Today, we have the sixth largest e-commerce site in the country generating over $25 billion in sales. As Jordan will outline, we are always improving our site and leveraging technology to make an online purchase as efficient as possible. But what makes us different is that we are a project retailer as customers work on home improvement projects, they engage with us

multiple times across multiple touch points, weaving in and out of the physical and digital worlds.

In other words, this is a journey across channels, so we are investing to remove friction from the interconnected journey, whether that is presale, at point of sale or after sale. A great example is delivery speed. We know that speed is key to customer satisfaction. So we've made a step function change to reduce lead times and improve service. Customers are noticing the difference and conversion and satisfaction scores are increasing with our best-in-class delivery in home improvement.

Turning to the Pro. We have an enormous opportunity to grow our Pro business. As we've said, both the market and our business is about 50-50 Pro and consumer. Almost every type of Pro shops at The Home Depot, and we are building differentiated capabilities to better serve them. Our organic efforts will leverage our stores, digital properties and supply chain assets to capture more share with small to large residential Pro who shop across multiple categories. Our SRS platform services specialty trades who tend to focus on a narrow set of product categories. And our HD Supply platform services MRO Pros who focus on maintaining, repairing and renovating multifamily housing and hospitality units.

Smaller Pros get most of what they need from our stores. Our key value proposition here is helping that Pro get in and out as quickly as possible. As Ann will discuss, we are relentlessly focused on this customer. We are making investments in the store experience, brands that matter, inventory and fulfillment options to elevate customer service.

Larger Pros utilize us for fill-in or emergency purchases. Mike and team are building the necessary capabilities to a greater share of wallet, including a sales force, delivery capabilities, trade credit and order management to deliver the same type of service these customers get today from wholesale suppliers. Our value proposition for these larger Pros is unique. As they consolidate more of their spend with Home Depot, we can make their life simpler and ultimately speed up the cycle time of their jobs.

Pros get more jobs done at a lower cost. SRS serves specialty trades. These are Pros who focus on installing one type of product like roofing or gypsum or pool equipment and need very deep assortments in their specific categories. For example, whereas Home Depot may carry up to 10 different roofing SKUs from one supplier in a store, SRS will carry up to 100 SKUs from different suppliers, several different suppliers.

SRS is an extraordinary specialty platform as it has strong market positions and growth opportunities in roofing, landscape, pool and now gypsum with its recent acquisition of GMS. And to grow our share among multifamily housing managers, hotels and extended living facilities, we have the leading national MRO supplier in HD Supply. Think of HD Supply as servicing any housing unit outside of a traditional single-family home.

Together, these represent a universal set of Pro assets and capabilities. This is an unrivaled set of capabilities. And as we continue to coordinate these businesses, we drive growth. By coordinating sales teams and customer lists, product categories, catalogs and inventory and supply chains and delivery assets, we are able to cross-sell larger Pros with broader product offerings and service capabilities all across the country. Mike and Dan will share some of our early wins, and we are just getting started.

Technology underpins nearly every initiative and investment we make. Today, more than ever, our technology investments are not just enabling growth, they are redefining the customer experience and driving operational excellence. For years, we've levered technology across our stores, supply chain and digital assets to elevate the customer experience and drive productivity across the business. And we are increasingly leveraging data science, machine learning models in generative AI.

Today, we have hundreds of AI applications in use across our business from our stores and digital assets to marketing and our supply chain, to name a few. Throughout the morning, you'll hear more about these applications from the team. Ann will discuss how computer vision in sidekick have helped us achieve a record on-shelf availability. Jordan will discuss our new capabilities such as [ Magic Apron ] and AI-driven search, which have significantly boosted online conversion. We're also applying AI to optimize delivery algorithms, both at Home Depot and SRS, resulting in more on-time and complete deliveries for our customers.

Technology is a foundational capability that will enhance today. We serve a strong customer in a highly fragmented $1.1 trillion addressable market. We are well positioned to grow share through our distinct competitive advantages in operational excellence. We have a clear growth strategy and we are investing to enhance our unique value proposition in our stores, in our interconnected shopping experience and with the Pro. As a result, we will grow our market share and drive shareholder value. Again, thank you for joining us today. I'll now turn it over to our incredible leadership team. Ann-Marie, please take it away.

Good morning. I'm thrilled to be with you. Today, you'll hear a lot about our competitive advantages, our unique positioning in the market and the investments we have made and are making to strengthen our competitive advantages and drive growth. But first, I want to talk about the fundamentals of The Home Depot success; our stores, our culture and our associates. Our stores are at the heart of our business and are the vital to drive an overall company success. We have over 2,350 stores with over 470,000 associates who manage over 1.6 billion transactions every year. They serve millions of customers every single day from do-it-yourselfers to every type of pro customer.

Over 80% of our sales are transacted through our stores, including purchases that are transacted online, but fulfilled through our stores and all stores manage nearly all of our returns. Our stores are at the center of our ecosystem and its orange-blooded associates and culture that brings them to life every day. That is the buzz in our stores.

I've been here for over 40 years and during that time, our business and our customers' expectations have evolved drastically. But the thing that can't change is a passion for selling. Our co-founder [ Bernie ] left a legacy for us based on the culture of selling. He taught us to never lose a sale. Consumers and pro coming to our stores looking for help.

Our core mission is to deliver the best customer experience through associates that have the passion knowledge and expertise to solve customers' problems and fulfill their dreams. This is The Home Depot. This is our brand. This is what differentiates us. This is who we are. This culture, this passion is why we are different.

There are several critical elements to a successful store experience, including having highly tenured, passionate, knowledgeable and engaged associates. Having the brands and the products that our customers want on shelf and available for sale and having a strong fulfillment experience. We know that our knowledgeable associates differentiates us in retail. It is our goal to make work in at The Home Depot an enjoyable and rewarding experience and to create an environment where associates are engaged, continuously learning and have the tools to make their job easier and come to work excited to help customers solve their problems and fulfill their dreams.

Over the last several years, we have changed the way our associates learn on the job. Training has moved from hours of sitting in the back room watching videos to a more dynamic experience through HD phones. Now through applications like pocket guide, demos on demand and certain product certifications, associates are able to access training and product knowledge quickly and easily in [ our ] driving higher associated engagement and a differentiated development experience.

Over the last few years, we have invested billions of dollars in wages and benefits to ensure that we attract and retain the best talent in retail. And this year, we made a significant higher retention rates and tenure for store leadership. I am incredibly proud of this team, and we know that if we take care of our associates, they will take care of our customers and everything else will take care of itself and our investments are paying off.

This year, our tenure with hourly associate is the highest it's been since 2017. We know that tenured, engaged associates deliver superior customer service, which drives better conversion rates, higher transaction values and most importantly, loyalty. One of our key benchmarks is our voice of the customer survey. Our customers tell us that our associates are more engaged and helpful than ever. And we've seen our service levels increase across all divisions and regions compared to last year.

Our associates drive the most value when they're directly engaged with our consumers and pros and reinforcing our culture of selling as well as equipping them with the time, tools and training to focus on selling and helping customers lead to greater customer satisfaction. To reinforce this selling and customer service culture with our in-house associates, we are transitioning more of our store testing to a merchandising execution team or [ MET ]. This team was established almost 20 years ago and is staffed with highly tenured associates. Originally, MET's primary focus was servicing [ our days]. However, over the years, their responsibilities have grown to include executing price changes, merchandising new products, driving in stock along with [ resets ] and setting events.

Their ability to execute at the highest level is best-in-class with a speed that is unmatched. In fact, this team set our holiday assortment across more than 2,350 stores in just 4 days. They are our secret weapon that leads to a better overall customer experience. We know that another critical part of delivering the best customer service and experience in the store is having the right brands in the right quantities, in-stock and on-shelf available for sale.

As you know, we have been on a journey to improve our on-shelf availability for years, and we have leaned into technology investments to drive a higher OSA. We started with our overhead management tool, which gave us better visibility into palletized products in our overheads. And then a few years ago, we rolled out [ SiteKick ] and [ computer vision], which gives us greater visibility into the [ unpalletized ] product on the shelf. Together, these tools enable us to have quick and accurate visibility into our inventory position. And through these investments, we have driven better product availability.

And today, our in-stock and on-shelf availability are at all-time highs. Our in-stock levels are up 60 basis points since 2023, and our on-shelf availability is up 140 basis points over the same time frame. The beauty of these initiatives is that they also drive productivity. They make it easier for associates to restock product, have greater depth of high-velocity products and maintain high on-shelf availability. As a result, we enable our associates to deliver a better shopping experience.

Our stores have been a destination for Pros since 1979. And or bad proposition was simple. We have the brands, categories of our sales with the vast majority of those sales transacted through our stores. Our customer expectations, including our Pros have evolved over the years, and we have continued to invest, to enhance the store experience. We are focused on ensuring we have the [ branch ] or Pros want available for sale in the right quantities and we are developing incremental capabilities to serve them better. Later today, you'll hear from Billy about how we are the product authority in home improvement with the brands, the Pros know and trust. And Mike will update you on the capabilities that we are building outside of the store to better serve large cross-category pros.

But first, I'm going to take a minute to share with you some of the exciting enhancements we're making in our stores to better serve or small to medium pros. We continue to invest in our dedicated pro team, including a Pro customer experience manager, Pro ambassador, [ lot loaders ] and other Pro sales associates to better meet the needs of our Pro while building deeper relationships.

This unified pro team assist pros with their needs and serves as the main point of contact ensuring a superior and cohesive shopping and fulfillment experience for our customers. As a result, we've seen increased engagement, higher Pro sales, growth in our Pro Extra loyalty program and higher customer satisfaction scores. The beauty of these investments in our stores is that they not only enhance the shopping experience for Pros that primarily shop our stores for all their product needs but they also significantly improved the experience for our stores and large pros when they shop our store. Today, I've shared with you how we continue to invest in our stores. We have dramatically changed our customers' experience in our stores, on our website and in the various ways we fulfill product.

Let me bring this to life for you with an example of one of our largest interconnected and associated assisted categories paint. A few years ago, shopping stores for paint was not as easy as it is today. While we had the brand, we didn't have the full depth and breadth of assortment that we do today. For paint, in particular, we had limited fulfillment options and we were missing key digital capabilities needed for all customers, like the ability to look at private jobs, buying paint colors previously used, determine optimal fulfillment options, whether that's buy online, pick up in store, buy online, deliver from store, vendor delivery, et cetera.

Our merchants, operators and IT teams work together with incredible -- with our incredible vendor and being significant investment to evolve or paint shopping experience. We enhanced our paint desk with better in-store fulfillment capabilities expanded our assortment of best-in-class products and simplify the ordering process for our associates and pros with the introduction of [ One paint]. [ One paint ] digitally captures and save all orders, making it easy for Pro to find previous jobs, paint colors and quantities, allowing them to easily reorder regardless of where they are in the country. And because all customers in this categories are Pros who need delivery directly to the job site, we added more fulfillment options. Today, our Pros are out of the paint on the job can easily place an order with a click of a button on The Home Depot app.

And because their order history is stored in a one paint system, we can quickly mix the correct color of paint and then prepare it for in-store pickup, have it delivered directly to their job site or for really large orders deliver through a [ bend ] of partners. These efforts have enabled us to drive tremendous share gain in this category, particularly with the Pro customer, and since 2019, propane sales have more than doubled, and we have examples just like this throughout the store. We know that our customer expectations will change, and we will continue to evolve our store operations and interconnected experience to deliver what our customers want, when and how they want it.

The foundation of this company is anchored by our associates, but it also extends out to our local communities. One of the ways we engage with our local community is through a [ kids ] workshop, which has been a staple in our stores since 1997. These workshops create lifetime memories for customers at a level of unique loyalty to a brand that cannot be replicated. Additionally, The Home Depot Foundation works to improve the homes and lives of U.S. veteran, train new [indiscernible] people to fill the labor gap and support communities impacted by natural disasters.

Since 2011, the foundation has invested more than $600 million in veterans houses and improved more than 65,000 veteran homes and facilities. The foundation has pledged to invest $750 million in veterans' causes by 2030 and $50 million in training the next generation of skilled [ trades ] people through the path to Pro program. And together with The Home Depot Foundation, tens of thousands of our associates volunteer each year through [ Team Depot ] invest in their time and sweat equity into strengthening our local communities.

We know that in order to win, we must not only run a successful business but also serve our associates and customers while fostering growth in the communities where we do business. This is the power of The Home Depot. Now let me turn it over to Billy.

Good morning for being here, and thank you all for being here. Listen, I'm super excited to be here this morning and talk a little bit about how we'll maintain our position as the #1 retailer for home improvement and product authority. Being the product authority, home improvement retailer is our secret sauce. Having the right brands, quality, innovation and value are critical so we can help our customers with all of their projects. Whether it's a small home improvement project or a large-scale renovation and I can assure you that no one delivers better than us.

Merchandising organization remains focused on 3 main objectives: maintaining our product authority having the best vendors with the best brands with the best innovation to drive growth and leading the retail industry in merchandising excellence. These objectives have been successfully guiding our strategies, and we remain committed to them. We are a sales-driven organization that is winning in the marketplace. Product is king, and our merchants are worldwide authorities in their categories.

They are the customers' advocate for value as they select the best products and curate the right assortments in our stores and online. Those in our space may sell the same categories, but not the same products across all channels, and we have outstanding vendor relationships that help bring the best products to market. We are winning together with our vendors through a collaborative and end-to-end process that brings innovation to the market while also enhancing the customer experience. These exclusive relationships and enhanced capabilities drive growth through share gains, bringing first-to-market innovation and creating loyalty programs through product offerings that cannot be replicated.

To bring this to life, let me dive into a few examples and why they matter. Earlier this year, we announced an expanded relationship with Behr to exclusively offer KILZ branded primate products in the United States. With our exclusive agreement, The Home Depot is the only home improvement big-box retailer to offer KILZ branded primer products including, KILZ original, all purpose, premium, restoration and more problem-solving primate products and aerosols.

This is the primer that pros use. They'll drive past other retailers to get kills at The Home Depot. And while at our stores, they'll pick up other items for their project. This, together with all the investments we've made around the paint experience what has driven our success with the Pro that paints. Let's take a closer look.

[Presentation]

We know that our customers' time is extremely valuable. So we continue to partner with our vendors on products that will save them time and offer them great value and added functionality. A great example of this is our universal select light bulb. Everyone in here has had that moment when they're trying to match a light bulb in their home, and it's a challenge to know exactly which bulb to choose. We partnered with [ Universal Select ] to develop a bulb that allows you to buy 1 light bulb and easily select wattage and color with a simple switch of the button. It has 5 settings so you can't go wrong with this 1 bulb. This innovation delivers tremendous value and makes the experience so much easier for all of our customers, and it is only available at The Home Depot. But words do not do this action, do this justice. Let's look at this in action.

[Presentation]

Fantastic. We know that brands matter to our customers, particularly our access to the hundreds of tools that are connected within that ecosystem, you remain loyal to that brand. Let's take a look at hand tools and power tools. We have the brands that are customers are looking for with [ Milwaukee], Makita, DEWALT, RIDGID and RYOBI. We estimate that there are [ over 600 million ] batteries in the market today.

Our assortment covers the vast majority of these batteries. In fact, more than [ 450 ] million batteries are with brands that are exclusive to The Home Depot in the big box retail channel. This structural advantage has created one of the best loyalty programs that keeps customers coming back to add to their existing battery platforms. Let's take a look.

[Presentation]

These products, many of which are exclusive to The Home Depot because of our vendor relationships. And our vendors choose to be exclusive with The Home Depot because of our distinct competitive advantages allowing them to sell more products to more customers every day. But it's not just the products I highlighted a moment ago, it's across the store and across all our departments. Whether it's our unmatched deco holiday innovation, providing tremendous value with many unique or exclusive products, including our viral grand [ detest ] and our popular 12-foot [ scale ] or the [ Diablo Demon Sawblade ] with a carbide blade that has a useful life of 25x the standard blade or our extensive lineup of Pro-leading cleaning chemicals from [ Ecolab ] or our click ready cabinets providing easier and faster installation or the [ Feather River ] smart door with unique proprietary technology that instantly frosts the glass with a flip of switch to provide privacy in seconds.

Our [ Den Shield Backerboard], which is a substrate for ceramic tile installation offering easier handling, which saves time and installation effort versus more traditional cement board and the list goes on and on. And the innovation we bring to the market in partnership with our vendors is unmatched. The results in Home Depot having the best differentiated product with the best features and functionality and the best value for our customers.

Product remains king, and we bring this to life every day, whether it's the approximately 40,000 SKUs in our stores or the millions of additional product that can be found online with our extended aisle. We have a relentless focus to bring the most relevant product to our customers every day, and it is our unique and highly collaborative vendor partnerships that create a differentiated and over the years, the way our supply chain teams connect and the way we fulfill to our customers has changed quite a bit.

The average store might stock 25 different green water heaters. For those water heaters, customers can get a very quick delivery from the store. But that's only if they live a certain distance from the store, they're selecting from 1 of those 25 and of course, we're in stock. And while 25 [indiscernible] sounds like a lot, it's really not. You've got tank size, fuel type insulation level, warranty coverages, et cetera.

[ Ream ] has another 100-plus water heaters that are really important for the customer. So we get to work with [ Rem], expanding our assortment and adding more of their best products regionally in our [ DFCs], allowing for next-day delivery through our [ MDO ] last mile distribution points.

Importantly, this increased our delivery coverage and speed dramatically even compared to a year ago. Historically, if we stopped it in our stores, you can get it really fast. But if we didn't, it would take anywhere between 5 and 9 days. Now with our enhanced coverage, over half of our extended aisle deliveries are now 1 or 2 days. Not only did these actions improve delivery speeds, but the wider assortment that our customers differing needs. So the combination of speed and vendors assortment meaningfully enhanced the customer experience, which also led to incremental sales. In fact, we've seen over 500 basis points of lift in sales with [ greenwater ] heaters since making these changes. This is just one example of our end-to-end collaboration with vendors, enhances the customer experience and drive sales growth across our organization.

And our vendors are taking notice of how we're winning a greater share of the Pros wallet, and they want to be part of this exciting opportunity. They no longer view Home Depot as just a retailer. They see us as a strategic partner who helped them win across all channels. This shift is resulting in vendors adjusting how they do business with us.

For example, in our building material categories, where there's a limited amount of inventory available, vendors are giving us a greater amount of their best product allocations because they see our growth and the investments we're making across the business and trust that we are the partner that will win. This elevated partnership is also opening new doors with new vendors and creating opportunities to sell product we haven't sold before including both Pro-specific lines and new incremental opportunities across all of retail.

Whether it's building on relationships for exclusive access to products, or extending incremental opportunities via quote center that we previously have not done, all of which are benefiting our customers. And while we're a brand house and continue to be a brand destination for all of our customers, we also leverage private brands in our business where it makes sense. We strategically use private brands in categories where there's minimal brand affinity to fill gaps in our line structure and introduce innovation and we are proud of the private brand portfolio that we have built.

We built billion-dollar brands, whether that's through the partnership of our global vendor partners or through brands we develop in-house. And we have consistently received high ratings across all these brands, as we strive to deliver the best product offerings in every category we sell. You've heard us talk about the art and science of merchandising for some time. What we discussed regarding our product authority and the partnerships we have with our vendors to bring first-to-market innovation for our customers, that's the art.

Now let me take a moment to talk to you about what we mean when we say science. Over the last decade, we have built capabilities and invested in people, process and technology to leverage our data and develop tools to optimize our business. The investments and progress we have made empower us to win, while also accelerating our speed to market and decision-making. Our assortment and space planning processes allow us to match the right product to the right store while driving macro and micro space productivity.

We are using prescriptive analytics and integrated AI tools to drive high-impact changes with greater confidence and reduced errors helping to maximize assortment and inventory productivity. That's the science. Balancing the art and science in merchandising, working with world-class vendors and ensuring we fill gaps with private label products are all critical aspects of running an exceptional merchandising team.

But just as important is ensuring we have the right products on the shelf and available for sale that we have strong coordination across our stores, online and other fulfillment channels. and that our field and met merchandising teams are executing at a high level each and every day. As you heard from Ann, our in-stocks are at record levels, and we have significantly improved OSA by increasing holding capacity for our top SKUs. This ensures that we have the right product our customers are looking for and drive greater sales each and every day.

You'll hear from Jordan later today about our online business, but the work our teams have done across all our channels and utilizing all of our assets, has created greater connectivity with our merchandising organizations and our stores. The [indiscernible] connectivity and emphasis on speed has allowed us to more quickly get products to our customers how and when they want the products. And our teams, including our merchants, field merchandising and MET are world-class.

Our merchants are experts in the categories they own and are focused on bringing the most exciting and compelling products to our customers. This is brought to life across all our channels and in our stores through our field merchandising and MET teams. You've heard from Ann what an incredible asset our MET team is. They ensure [ Bay ] Integrity, provide seamless execution across events as well as help drive localized merchandising.

And our field merchants with an average tenure of over 25 years, have deep knowledge about what's relevant for our customers in every market. These teams working together help create a consistent and frictionless shopping experience for our customers. Our vendor relationships, our product leadership position and the power of The Home Depot brand is unmatched. The Home Depot leads home improvement. We are the most trusted name in the business. We lead in home improvement knowledge, and we are a place to bring dreams and feel the power of possibility. And we're bringing this all to life for our customers through our marketing assets, whether it's [indiscernible], March Madness or this upcoming year is FIFA World Cup. Our brand will be on display like no other. Let's take a look.

[Presentation]

To close, I'd like to leave you with 3 thoughts today. We are the authority in innovation. We are the authority in collaboration, and we are the overall authority in home improvement. Thank you so much. Have a great holiday, and let me now introduce Jordan.

Good morning, everyone. I'm excited to be with you today and share our progress on our interconnected experience. We built the best interconnected experience in home improvement. What's unique to The Home Depot is the combination of having the best products, store locations, associates, delivery assets and digital capabilities that come together to deliver a best-in-class interconnected experience. What you're going to hear from me today are 3 things.

First, we have a powerful e-commerce site. In fact, our online business generates sales of approximately $25 billion, making us one of the largest e-commerce players across any segment of retail. Second, we have built an unmatched set of delivery assets that are woven together to get products to our customers when, where and how they want to receive them. And third, we're delivering on a frictionless, interconnected experience.

Let me take a minute and define what we mean when we say interconnected. As you've heard us say many times, Home Depot is primarily a project retailer, and our customers come to us to help us -- to help them solve their project needs. And for the customer, there's not a single linear journey, but rather millions of pads across our physical and digital assets.

Today, we have over 6 billion visits annually to our stores and across our digital platforms. The interconnected experience includes the entire shopping journey, everything from opening the app to checking product information, to in-store experiences, digital orders, modification, scheduling, returns across channels and customer service. Our focus is to deliver the best personalized experience every time where we understand intent, offer relevant recommendations enable assistance, deliver useful information to the buyer and simplify post-purchase interactions online and in store.

The point is that our multiple channels, online, in-store fulfillment, work in a seamless way to serve customers however they choose to be served across purchase occasions. To do this effectively and consistently each time has required investment across hundreds of customer touch points, geared at improving the interconnected experience, all of which are supporting our growth. And while we don't have time to detail out all of them, they encompass everything from search to presentation of product and features to related products to understanding intent, showing more relevant recommendations to clearly showing all fulfillment options, to allowing the customer to choose how and where they want to receive the product.

Today, I'll touch on a more recent area of focus that's driving engagement and sales across our business faster and more reliable delivery. Eight years ago, at our 2017 investor conference, we spoke to you about investing in our downstream supply chain assets to get product closer to the customer and increase speed of delivery. At that time, we'd envisioned a 2-day parcel delivery network.

Over the last 8 years, we've added nearly 200 new facilities. Today, we have approximately 20 DFCs, which put some of our most popular SKUs close to our customers and handles parcel as well as big and bulky fulfillment. 160 [ MDOs], which are cross-dock facilities and enable us to consolidate and sort big and bulky products, such as appliances, and to extend the reach of our [ DCs]. And 17 [ FTCs], which specialize in big and bulky building materials to better serve our Pro customers while also replenishing our stores.

These assets are unique in our industry and play a specific role within our supply chain. But it's the power of these assets working together in combination with our stores that leads to a supply chain network that's unmatched in our industry. Our distribution assets, combined with inventory investments and technology enhancements have significantly increased the speed of our delivery.

In fact, on product that we stock, over half of our deliveries or same day or next day. That is more than a 3x increase from 2022. So whether it's a pallet of concrete, 40-gallon water heater, tape measure or a box of electrical breakers, we've gone all in on speed and our customers are responding with greater engagement.

One of the big unlocks here is something we call ship from best location, which is a proprietary algorithm that looks across all of our distribution assets to optimize speed determining when, where and how to most effectively ship products to our customers. Our delivered sales have increased significantly and today, they represent approximately 30% of our overall sales. Speed of delivery is important, but there are many other factors that go into successful delivery for our customers, including product availability, reliability, communication and tracking.

For example, with our Pro customers, reliability of delivery is one of the most critical factors. If a Pro does not have the product at the site complete when they need it, then their costs increase and it puts pressure on their ability to complete the project on time for their customer. At Home Depot, we can be their cross-category partner. This is why so many of them want to do more business with us and why we're building out our Pro capabilities.

But perfect on-time delivery, 100% of the time is very difficult, especially in a cross-category business. There are many opportunities for failure. We've got multiple inventory pools, changes in inventory positions, inclement weather, traffic, difficult job site conditions and more. But we are laser-focused on perfect delivery for our Pro customers. In fact, instead of looking at it on time, we focus on the failures or the misses and how we eliminate them. We don't celebrate that the vast majority of our deliveries are perfect. We obsess over the misses and use each failure as an opportunity to improve our processes.

By leveraging all of our assets, reengineering our fulfillment technology and processes, we have dramatically reduced our mis-delivery rate. And during a time when our delivery volumes are growing rapidly, in 2025, we will post the highest customer satisfaction for delivery in our history, and we plan to break that record again in 2026.

Another area where we're seeing significant improvement in the delivery experience is in our appliance business. Greater visibility throughout the experience, real-time tracking of deliveries and improved communication have all led to greater customer satisfaction. Our nearly 160 [ MDOs ] in conjunction with the acquisition of [ TEMCO ] in 2023, a leading appliance delivery and installation company provides us greater ownership of the appliance delivery experience end to end.

In addition to the progress we've made around delivery, we've also made similar strides in the customer experience across our digital assets through leveraging technology. These investments span from search, recommendations, compatibility, car building, catalog data, sourcing logic, delivery route intelligence, post-purchase support and more and whether it's from better models to faster decisioning or new interactive experiences or a combination of these, AI is accelerating our work.

Let me highlight a few examples. One of the first use cases that we leveraged generative AI for was to enrich our catalog data with attributes and images that were previously too costly or cumbersome to enhance, but now can be populated through the use of various AI tools.

When we created these tools in 2023, they not only helped our catalog presentation to customers, but also started a flywheel of ideas for where we could apply generative AI across the digital experience. Speaking of which, [ Magic Apron ] is a suite of proprietary generative AI products that help our customers during their online shopping journeys. We were one of the very first retailers across any segment of retail to offer an on-site generative AI experience when we release [ Magic Apron ] in October of 2024.

While we knew adoption would take some time, we wanted to be front-footed on the experiential changes that we expect to happen across the shopping journey. In just 14 months, [ Magic Apron ] has since expanded its functionality, usefulness and coverage and has seen consistent growth in customer adoption. Customers use [ Magic Apron ] for that same type of [ Apron ] in-store experience but online. Whether it's for product or project inquiries, looking at customer feedback or as a shopping assistant, the customer experience has improved due to [ Magic Apron], which is translating into higher levels of conversion.

Magic Apron has a tremendous amount of opportunity to continue to develop, in particular, with alternative methods for item filtering, selection and speed to transact. We're also leveraging the latest generate AI capabilities to interpret customer needs to determine intent to deliver better search results for our customers. Now AI has been used in our search and recommendation algorithms for many years. But the more recent advancement of large language models has improved our ability to understand intent as well as to contextualized recommendations and related products.

These enhancements have improved our search and recommendation conversion rates and elevated the customer experience by delivering personalized and relevant content. We've also begun to use AI to assist the customer in building the project card. While Magic Apron helps describe what is needed for a full project and our recommendations have greatly improved, in particular, with compatibility. Our ambitions for assisting with a project are much greater than just front-end information.

Not only have we extended Magic Apron to begin [ cart ] building, we've also made investments to build more complex baskets for our Pro customers. Last month, we announced our [ AI Blueprint ] takeoff tool, which can take a [ PDF ] set of blueprints and turn it into a quote for materials. This is a very complex use case, and the first addition of the tool has already reduced the cycle time dramatically. We're also building a simpler version into our website that will have a cycle time of just minutes or seconds.

We've also dramatically improved our sourcing and delivery systems as we use AI in our algorithms to better select inventory locations and proactively identify and address high-risk orders. In this use case, AI enables much more complex decisioning that leverages not just traditional catalog and assortment data, but our own history of customer and job site complexities so that we can proactively address them and deliver an exceptional customer experience. These technologies have helped us improve the Pro delivery experience, which I mentioned earlier.

We've also completely refreshed our customer chat and SMS experiences to use the latest generative AI technologies. This change replaced a deterministic bot experience with a true conversational one. Customers are now able to simply describe what they need and receive instantaneous help. So whether inquiring about a return policy or asking for a price adjustment or checking and delivery status, these experiences have become fundamentally more intuitive and the ability for our customers to self-service their needs has tripled, resulting in a better experience at a lower cost.

The enhancements we're making, in particular, the ones I've highlighted today around delivery and our digital site are contributing to the growth we've seen in our online business. We're seeing the highest conversion rates in company history and an increase in customer satisfaction. All of our initiatives are leading to more habitual spending and growth in our online business. In fact, not only are we seeing accelerated online comps, we're also seeing incremental spend across channels when those customers who -- with those customers who are more frequently engaging across our capabilities.

Now as you've heard today, we've made a lot of progress, but we're not done. Our goal is to be the best interconnected experience in all of retail. And we will invest to drive growth across the business, focusing on the site experience, the delivery experience and everything interconnected.

Let me give you a few examples across a number of areas that we are focused on going forward. We will continue to lean into opportunities that are enabled by AI, whether that's enhancing Magic Apron for both customer and associate use cases or completely replatforming our contact center associate technology into an intelligent workflow model to rolling out a series of customer service AI agents that will take action on behalf of customers, we will continue to improve customer and associate experiences using AI. We'll also lean into our leading product authority position online.

Customers trust The Home Depot more than any other retailer when it comes to our core tenets of product authority which include things like quality, innovation and relevance. This year, we're making an investment to improve the management of our extended aisle through better tooling and vendor connection so that our catalog remains the best in home improvement.

We're also extending our leading catalog on a variety of agentic shopping platforms to meet the customer where they are. We're also making a significant investment in refreshing The Home Depot app, which now has approximately 20 million active users and is increasingly the tool of choice on the job site and in our stores. This refresh will make the app faster, more dependable, more intuitive, more personalized and most importantly, move it from an e-commerce application to an interconnected shopping tool built for the end-to-end customer journey. From inspiration to planning, to building projects, interaction with our stores to transacting and fulfilling to getting support. The new app will help solve our customers' problems and fulfill their dreams.

We're also not done with delivery speed, delivery reliability or delivery communications. We will continue to raise the bar on speed, including more same-day and next-day availability for both parcel and big and bulky items. I previously referenced our ambitions for improved delivery reliability, particularly for those most challenging shipments, such as large complex cross-category orders. And with respect to enhanced delivery communications, we are excited to announce that this quarter, we've begun the rollout of real-time delivery tracking for bulky delivery across all categories.

This enhancement will give our customers unparalleled visibility and certainty on the timing of their delivery. So whether our customer is a busy parent wanting to know how far away the appliance truck is for that new refrigerator or Pro working multiple job sites and checking to see if his lumber order is getting held up in traffic. This feature will bring a level of clarity and certainty that is completely unique cross-category bulky delivery.

There's so much that we're doing that will help improve the customer experience, and we're so excited about the opportunities that are in front of us to continue building on our position as a leading interconnected retailer. Thank you.

Right. Ladies and gentlemen, we're going to take a 10-minute break. Our conference will resume promptly at 9:50. Enjoy your break.

[Break]

All right. Ladies and gentlemen, we're going to get started back in 5 minutes. If you don't mind, start making your way back to your seats, and we'll get started back with our next session.

[Break]

Welcome back to Home Depot's 2025 Investor Conference. We will continue our discussion with our Executive Vice President of Pro, Mike Rowe.

Be with you here today to share an update on our Pro business. And I'll discuss who our Pro customer is, the size of the market opportunity, how we're planning to win and where we're ultimately going, which is to be the destination for all residential Pro customers. Since we opened our first 2 stores in 1979, we've aspired to be the destination for Pros, having their preferred brands in job lot quantities with knowledgeable associates all under one roof. And as a result of our continued investments geared at improving their experience with us, today, over $90 billion of our annual sales come from the roughly 9 million Pro customers that we serve.

To serve these Pros, we have an unmatched footprint. We have over 2,350 stores and 1,200 branches. Traditionally, Pros came to our stores for simple purchase occasions like small repairs or renovations or urgent or fill-in needs and are able to easily find the product and brands they want while getting in and out of stores quickly to get back to their job site. Most of our Pro sales today come from these transactions. And while we serve these customers well, we will continue investing to deepen our relationship with them and increase their spend with us. They are the heart of our business.

Now we're going to discuss the significant growth opportunity ahead of us with the medium to large Pro that shops across categories and works on complex projects. These Pros require a different level of service than what we have offered in the past. And while the store is an important touch point, they typically require larger job lot quantities with purchases staged and delivered over time, and they benefit from a singular point of contact as well as other capabilities. And while these Pros are typically in our stores for urgent or fill-in occasions, the majority of their spend comes through planned purchase occasions over time. This customer generally falls into 1 of 3 groups: a medium to large renovator or remodeler, single-family custom homebuilder and single-family track builder.

As you heard from Ted, we have an approximately $600 billion Pro total addressable market and an enormous opportunity to grow our share of wallet. We estimate that around 50% of this TAM or roughly $300 billion serves a complex purchase occasion. And while we have relatively little share today, our Pros tell us we have the right to win. In 2019, we started testing the fulfillment of large complex Pro orders from [ 1 FDC ] in Dallas to remove complex orders from our stores and improve our on-time and complete delivery performance in a more efficient operating model.

As we tested this, built more FDCs and took on more complex deliveries, we started to see traction with the larger Pros working on complex projects. Well, this led us to better understand what it would really take to win, offering a unique and compelling value proposition that would make their jobs easier to manage and quicker to complete. If we could meaningfully reduce the number of suppliers they have to work with and become their partner of choice, we knew we could grow market share with these Pros. And today, many of these Pros are currently working with 30 or more suppliers to source product and to complete their projects.

They have multiple salespeople to interact with. They have multiple websites to navigate, multiple deliveries to coordinate and several invoices to reconcile and their suppliers aren't open on the evenings and the weekends for emergency needs. With this process, it adds time, it adds complexity and slows down their ability to complete jobs.

At The Home Depot, we have the right products, the brands and quantities required by these Pros. We can consolidate their purchases and deliveries across multiple categories with one easy-to-use website, fewer points of contact and less invoices to manage and reconcile. And there is a store conveniently located within 10 miles of most job sites in North America that carries the most critical products for Pros that is open early, late and on weekends.

So we can simplify the experience for our Pros by reducing complexity, including the number of suppliers they need to transact with, saving them time and money. We've shown you a similar chart in the past. Pros working on large complex projects need an ecosystem of capabilities and services to complete their jobs. They benefit from a single point of contact, the right brands, assortment, depth and breadth, preferred pricing, order management, trade credit and interconnected and B2B experience to name a few. And all of these capabilities work in concert with our stores and distribution facilities to deliver the unique and compelling value proposition that we just described.

And while we are investing across our entire ecosystem, there are 6 capabilities that are expected in wholesale distribution that we have not typically offered. We've primarily been a cash and carry business for over 45 years to better serve the cross-category Pro working on complex projects, we've invested in 6 incremental capabilities. a professional sales force, which is a sales infrastructure that includes both inside and outside salespeople. With sophisticated tools, including a customer relationship management platform that leverages AI and machine learning to give our sales teams and store associates a holistic view of the Pro, their projects and upcoming opportunities.

Delivery of product directly to the job site staged over the life of the project with consistent communication between our sales associates, our drivers and Pros working on the job site, the ability to finance their project through trade credit and the ability to bill upon the delivery of goods. Preferred pricing programs that are more transparent and curated for Pro-specific needs to simplify the value proposition for our customers. The ability to modify order delivery times because jobs don't always stay on track, but also to understand customer and job site preferences once the truck arrives to the job site to improve customer satisfaction and a best-in-class digital and B2B experience that provides tools for complex project planning, advanced order tracking online and seamless integration of [ trade credit ] online and more.

Today, we have many of these capabilities in some of our

top Pro markets, which are all in different stages of maturity. And it's the combination of when these capabilities come together with our large multi-category assortment that we deliver on the unique and differentiated value proposition for our Pros.

I'm going to introduce you to a few of our Pros who are utilizing our new capabilities so that you can hear firsthand how our ecosystem is revolutionizing the way that they complete projects. A few years ago, they were primarily shopping our stores for emergency or fill-in needs. And today, they're spending significantly more with us than they did a year ago. Why don't we roll the video and you can hear directly from them.

[Presentation]

And this is just a sample of Pros. As you heard, we are offering a unique and I'm hearing more and more stories like this. And what's exciting is that we're just getting started and we are continuing to evolve our ecosystem. Now for our customers, delivery is a key capability needed. We currently have 17 flatbed distribution centers or through the utilization of these invest in delivery more broadly, we've increased job delivery.

As we've optimized utilization and delivery from the FTC, we've unlocked more capacity. Earlier this year, we began deploying a new type of delivery method called [ Relay]. [ Relay ] leverages our existing FDCs to enhance our performance in our current FDC markets and broadens our reach across a greater number of markets. Here's an example of how this works in one of our top markets.

Delivery drivers from our Atlanta FDCs are now able to drop off flatbed trailers overnight in certain local store parking lots, which are then delivered to the job site the following morning. This allows us to get greater coverage in our Atlanta market while also extending our reach into adjacent markets like Chattanooga, Tennessee. And we've done this in several FDCs, which has allowed us to expand into an incremental 18 markets.

So we're excited to enhance our reach and serve these markets more holistically. When we first started building additional capabilities in the Pro ecosystem in 2022, we had approximately 300 sales resources. And today, we have over 1,500 across the country and are continuing to build out our teams. We've also made significant strides with our order management system. And today, we are able to reserve inventory for Pros, effectively capture delivery preferences, modify delivery times and build upon the delivery of goods. And this has enabled us to more easily manage Pro product deliveries throughout the life of their project.

In fact, with our over 2,500 delivery fulfillment locations, including our stores and distribution centers, we've seen an increase in delivered sales of greater than 40% over the last 2 years. We are also leveraging SRS as we roll out our trade credit program. Pro customers tell us that it is imperative for them to have access to credit and that they are built upon the delivery of goods.

Today, we have over 7,000 Pros on Trade Credit. And while early, those Pros are engaging with Trade credit are spending 30% more with us. Going forward, we will continue to roll out Trade Credit, while at the same time, working on creating greater connectivity with our stores and online, allowing our Pros to use Trade credit in an interconnected way. What is important to know is that it is not one capability, but rather the entire ecosystem working together.

These are great proof points that the capabilities we are building are working. But what really drives our conviction for what this may become is the feedback we are receiving from our Pros. They aren't just engaging in capabilities. They are telling us we have the right to win in this market. And as they experience the new capabilities firsthand, their spend with us doesn't just increase, it accelerates. And while this journey takes time and we are making progress, let me be absolutely clear that the opportunity in front of us is a double-digit billion dollar opportunity.

We have the strategy, we have the capabilities, we have the customers, and we will win more of their business. And we are winning in partnership with SRS. We are capturing opportunities we otherwise couldn't and have identified a multitude of cross-selling revenue synergies. This partnership exemplifies the enterprise effect where combined capabilities create greater value. And let me give you an example of an SRS roofing customer that evolved into an enterprise customer.

Several months ago, SRS won a bid to supply roofing to reroof 20 homes in a subdivision. As SRS was on the job site, it became evident that the general contractor managing the large-scale renovation of these 20 homes was also in need of windows of doors and molding packages. So SRS took this opportunity to introduce its roofing customer to the full Home Depot ecosystem of capabilities, which allows us to serve as a one-stop shop for these product categories.

Well, this handoff or easy introduction to the general contractor allowed us to meet the contractor, visit the site, build a quote and close a much larger sale. This is a great example of a general contractor that we have not worked with in the past on large-scale projects that has now become a regular customer of both Home Depot and SRS. And as a result, this contractor has spent hundreds of thousands across multiple categories with us today.

This is one contractor and one example. And there are hundreds more across the network. In fact, over 500 of our outside salespeople have already sold jobs through SRS. Our efforts are working. Our Pros are telling us that we have the right to win. We are building a one-stop shop for our Pros, transforming wholesale just as we transformed home improvement over 45 years ago. We could not be more excited about the capabilities that we are building, and we know that we will win and grow share. And with that, I will turn it over to Dan.

It's a privilege to be here today to speak to you about SRS distribution. I've spent almost 30 years in building products distribution and what we are building here is nothing short of transformational. Today, I plan to provide an overview of SRS, how we win how we grow and how we are now stronger as part of Home Depot. So let me start by bringing you up to speed on SRS. SRS today is already on a stand-alone basis, one of the largest building material distributors servicing North America. We have over 1,200 branch locations, over 8,000 trucks capable of servicing tens of thousands of deliveries per day and a team of 18,000 dedicated associates.

Part of our secret sauce is that similar to Home Depot, we have a people-first culture. We attract and retain the industry's top talent, fostering a culture of entrepreneurship that leads to hyper engaged and passionate associates, focused on delivering exceptional service to our customers. We also benefit from a very experienced management team, collectively having hundreds of years of industry experience. Our entrepreneurial spirit allows SRS to adapt quickly to local market opportunities and bring solutions to a large inside and outside sales force of thousands nationwide.

Unlike Mike's team that focuses more on the cross-category Pro, we are laser-focused on specialty trade contractors like roofers, landscapers, pool builders and drywall installers. Another competitive advantage we feel we have is a leadership position in technology. We operate largely on one ERP, and we integrate acquisitions to our ERP on day 1, which most just cannot do in our industry. Our advanced digital tools from fully integrated CRM platforms to e-commerce to AI solutions result in a superior customer experience and operational efficiencies.

In addition, the scale we have built affords us several advantages. First, we work with the industry's best suppliers, and our long-term partnerships ensure access to market-leading products and consistent supply. We stock these suppliers entire catalog, including every color or feature readily available for our customers. Our inventory breadth and depth is something our B2B customers rely on every day from us to earn the right to be their primary supplier partner. We also support our customers with trade credit. The extension of trade credit and homeowner financing options help fuel our customers' growth and enable them to offer homeowner solutions to facilitate larger ticket transactions.

Lastly, we control the last mile logistics to deliver to tens of thousands of job sites per day with very specialized equipment that can get the contractors a complete order to them on time and boom to where they need those bulky and heavy products to be installed. Let's take a quick look at a video that will show you these delivery capabilities in action, along with some footage of a few of our distribution locations.

[Presentation]

All right. As you saw in the video, we deliver building materials exactly where they are needed on the job site. We generally deliver these products to the specialty trade contractors like roofers, drywall installers, pool builders and landscapers that in turn, install them for property owners, homebuilders and general contractors. As a result, [ SRS ] enjoys a diverse customer base spanning residential and commercial markets.

We have several core verticals, the largest of which is the original SRS platform that started in roofing and now has expanded to include a full line of exterior building materials, including residential and commercial roofing, siding and specialty windows and doors. In outdoor living, [ Heritage Pool Supply and Heritage landscape ] supply focus on pool supplies, hardscapes, irrigation and outdoor lighting.

Basically, everything for the yard or outside the home. And our most recent addition through the acquisition of GMS is our interior building products vertical, which includes gypsum acoustical tile, steel studs, stucco, insulation, drywall tools and other complementary residential and commercial products. So on to our growth strategy.

Ever since our inception, we have been maniacal about growth. We have a 4-pronged growth strategy that has served us well for the last 17 years. Our growth has been a combination of same-store sales, greenfields or new branch locations, tuck-in acquisitions and digital sales growth. First, we remain laser-focused on driving organic growth through superior service, expanding product lines, fleet and facility investments, geographic territory expansion and sales force expansion.

To boost this organic growth, we also opened new branches in high-growth markets. These greenfield locations take minimal investment and generally become EBITDA positive very quickly. We do plan to open 40 to 50 new locations per year to both enter new markets and enhance our footprint in existing markets. We have also established ourselves as the acquirer of choice in our core verticals. Attractive tuck-in acquisitions will remain part of our playbook as they strengthen our geographic footprint and add complementary products to our offering.

We currently have a robust pipeline of opportunities that are active within each of our existing verticals. And the fourth prong is our customer-facing digital tools that are a differentiator in the market and are delivering double-digit growth year-over-year. We plan to continue investing heavily in technology to improve customer engagement, drive sales and continue to streamline operations. As a result of this 4-pronged growth strategy, we expect to deliver above-market growth going forward.

So we've been part of the Home Depot family now for 18 months. In that time, we have realized that the combination of Home Depot and SRS could not be a better fit. It's our shared vision, our people-centric approach, our similar cultures and our collective excitement around creating a unique value proposition for the Pros we serve. SRS' partnership with Home Depot exemplifies the enterprise effect where combined capabilities create greater value. Together sharing each other's respective product catalogs, leveraging each other's logistics and supply chain and each other's competitive advantages, we have been able to unlock a myriad of new cross-sell opportunities.

As you heard from Mike, we've already seen success working more closely together. SRS contractors are spending more at Home Depot than ever before. They are doing this through the Pro desk and often using their SRS trade credit. And by exposing SRS' catalog through Home Depot's marketplace for bidding projects, which is called Quote Center, SSRS has been able to win more jobs across more markets. In fact, SRS' sales in Quote Center have tripled over the last 18 months. While GMS just closed in September, SRS and GMS are also already finding ways to better serve their customers and grow sales together.

By bundling GMS' interior products with SRS' exterior offerings, we can now provide customers more solutions, increasing wallet share and customer retention. In addition, we are standing up a national account team to serve homebuilders, property owners and multiregional contractors. These customers had previously only been buying from HD, SRS or GMS separately. They're now choosing to bundle all 3 platforms, concentrate their spend and become enterprise-wide accounts.

For example, GMS recently introduced SRS to a large national homebuilder that provided SRS the opportunity to be awarded the roofing and siding for tens of thousands of homes in 2026 alone. And we are leaning into many, many other opportunities as well. Using Home Depot's existing Pro referral program, we have created a homeowner referral program for our specialty Pro contractors. While early, we are seeing meaningful traction with those customers in the program.

Lastly, as you heard from Billy, our vendor partners have recognized our strong position in the market and want to be part of our growth and success. This has created greater opportunities for us with access to new and incremental product lines all across the country. SRS is focused on becoming the leader in building products distribution in North America.

Our competitive advantages, our commitment to people, our culture and customer relationships underpin our strategy for balanced growth, both organically and through targeted acquisitions. And by harnessing the enterprise effect with GMS and HD, we will deliver unmatched value to our customers and partners. Going forward, we plan to deliver mid-single-digit organic sales growth and even higher total sales growth. With a relentless focus on innovation, operational excellence and strategic expansion, we remain dedicated to consistent earnings growth and returns.

SRS' unique value proposition, rooted in our people, our partnerships and our performance, make us the distributor of choice for today and for tomorrow. Thank you all. And I'll now turn it over to Richard.

Right. Morning. How you all doing? Good. Good. So thanks for being with The Home Depot team today. The Home Depot is the largest home improvement retailer in North America, and we've built a track record of leveraging our scale and competitive advantages to grow share with our consumer and our Pro customers in all markets. Today, I'll discuss current market conditions and our short-term financial outlook, the long-term drivers of home improvement demand, our plans to invest for growth and drive productivity and our recovery case.

I'll start by reviewing our 2025 guidance. Today, we are reaffirming our fiscal 2025 guidance. We expect total sales growth of approximately 3% and comp sales growth to be slightly positive compared to fiscal 2024. Our gross margin is expected to be approximately 33.2%. We expect operating margin of approximately 12.6% and adjusted operating margin of approximately 13%. Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $2.3 billion. We expect diluted earnings per share to decline approximately 6% and adjusted diluted earnings per share to decline approximately 5% compared to fiscal 2024 when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024.

Now let's turn to current market conditions. We are observing several dynamics that are pressuring housing and home improvement demand at the moment. First, the elevated interest rate and mortgage rate environment since 2023 has stifled housing turnover as a result of the mortgage lock-in effect. Approximately 80% of outstanding mortgages carry rates below today's current 30-year rate of approximately 6.3% and over 70% of outstanding mortgages carry rates below 5% with an average effective mortgage rate of 4.3%. Simply put, at today's mortgage rate levels, homeowners have a significant financial disincentive to move.

As a result, housing turnover has remained at historical lows since 2023, which has significantly reduced demand for projects associated with buying and selling a home. The current mortgage rate environment and the significant increases in home prices since 2019 have also impacted housing affordability. We believe affordability concerns are pushing the housing market towards equilibrium as home prices are trending towards flat on a national level and are now declining in a significant number of markets.

We know that home price appreciation influences home improvement demand. And while we see these price corrections as a short-term healthy step on the way to market equilibrium, we know that pressure in home prices has an impact on our customers' intent to spend on large projects. Our customers also tell us that concerns over general economic uncertainty, including inflation, growing job concerns and higher financing costs are causing them to defer larger expenditures, including home improvement projects.

Looking forward to 2026, we anticipate these pressures will persist as we have not yet seen a catalyst or an inflection in housing activity and this view is captured in our 2026 preliminary outlook. For 2026, we expect the home improvement market could see outcomes between a contraction of negative 1% to growth of positive 1%.

We expect to continue to grow our market share. And so our preliminary outlook is for comp sales to range between flat to 2% growth with total sales growth of between 2.5 -- sorry, approximately 2.5% and 4.5%, reflecting the contribution of the [ GMS ] acquisition, new stores branches and tuck-in acquisitions.

In the 2% comp scenario, we would expect to see deleverage and acquisition mix impact of approximately 20 basis points offset by productivity of 20 basis points, resulting in an adjusted operating margin of approximately 13% and adjusted EPS growth of approximately 4%. We will provide further detail on 2026 guidance on our fourth quarter earnings call in February.

While housing is currently pressured, we believe the fundamental support for long-term home improvement demand are strong and are in a much stronger position than they were at the beginning of the last housing recovery. First, homeowners hold an unprecedented amount of equity value in their homes. Since 2019, the value of the U.S. housing stock has grown over 60% and home equity values have increased $16 trillion or approximately 80%.

The housing stock is now only levered at around 27%, which was 54% at the beginning of the last recovery in 2011. Households are sitting on more dry powder to use for home improvement projects than ever before. And in the past several years, have tapped this equity at lower levels than usual during this period of high interest rates. The aging of the housing stock will be a long-term persistent tailwind for home improvement.

As homes age, they require higher levels of maintenance, repair and renovation spend. The U.S. housing stock is getting older every year. In 2011, only 42% of homes were older than 40 years. Today, 55% of homes are older than 40 years. In addition, a large cohort of existing homes built in the great buildup of the early 2000s are now hitting prime years of significant repair and maintenance spending.

This trend of aging shows no signs of reversing. We faced the most chronic housing shortage in modern U.S. history, with estimates of up to 5 million homes required to meet the current shortfall. This shortage will require years, if not decades at the current pace of homebuilding to catch up. And in the meantime, this shortage should support long-term home price stability and appreciation, while a catch-up wave of building would support further growth in our market.

And finally, there is a tremendous amount of pent-up demand for larger remodeling and renovation projects that continues to build. We believe our industry has largely worked through the pull-forward demand we saw during the pandemic. And our customers tell us that their pent-up demand for home improvement projects has been building since 2023. This pent-up demand could be greater than $20 billion and at some point will be a significant tailwind for home improvement. As a result of these factors, we are bullish on the long-term fundamentals of home improvement demand and have consistently invested for future growth.

While the capital investments we've made in our business are strategically significant, we've made these investments in a disciplined manner with CapEx remaining steady at a 2% to 2.5% rate of sale since 2017, and we intend to maintain capital expenditures of approximately 2.5% of sales moving forward. This discipline requires us to focus on only those investments that will generate the highest return among all our opportunities.

I'd like to provide a little more color on where we've invested to date and where we're leaning in moving forward. Our investment program supports our strategy of driving the core, delivering a frictionless interconnected experience and winning the pro. Our strategy of driving the core is centered on our 2,359 Home Depot stores of which we own and are the hub of our customer experience. We will always take care of our stores and ensure that they reflect our brand and support a great customer experience.

From 2023 to 2025, we ramped up capital significantly to support maintenance and brand standards in our existing stores, many of which were built between 20 and 25 years ago and are at an age where infrastructure refreshes are needed. Capital investment in our existing stores is now at a level we expect to sustain for the foreseeable future. Another component of driving the core and a growth vehicle for us are our new stores.

In 2023, we announced plans to build 80 new stores over a 5-year period and are pleased to report that we have built 37 new stores in the past 3 years and our new portfolio of new stores is exceeding our expectations. We intend to complete our 80 store program in 2027, and we'll continue to build 15 to 20 stores per year for the foreseeable future thereafter. And now that we are on a regular cadence, we expect the capital expenditures required for this expansion to remain steady from this point forward.

Turning to our interconnected experience. Our online business is an engine for growth, and we will invest in our site experience, our app and our emerging AI capabilities on an evergreen basis. And as you heard today, we've built tremendous advantages in our ability to deliver product to the home and to the job site, a cornerstone of the evolution of our customer experience.

Through our investment program, we have essentially completed our [ FDC, DFC and MDO ] networks. We have sufficient capacity for years of growth and we'll now turn our attention towards unleashing the capabilities of these assets to gain share with consumers and pros. And we will continue to invest to win the Pro. You can think of our investment to win the Pro as being at the intersection of investments in our stores, our supply chain our digital experience and our technology investments.

All that we do actually goes to support our entire Pro business from small pros in our stores every day to the larger Pros interacting with the elements of our entire Pro ecosystem. This investment extends to SRS. SRS now with the addition of GMS is an engine for significant growth with the Pro, and we will support their organic expansion model through the addition of 40 to 50 branches per year.

Finally, technology enables everything we do, and we will continue to lean into technology and AI to drive growth, support our interconnected experience and drive productivity and operational excellence. We will make these investments to power growth while also leaning in to driving productivity to enhance our earnings power.

Productivity has always been a hallmark of The Home Depot. We have continuously driven productivity across our business. Moving forward, we intend to drive higher levels of productivity in our model faster than ever before, enabled by automation and AI. We will continue to create productivity in our stores through enhanced freight flow management and more efficient tasking in our supply chain by optimizing the flow of product within our facilities across our network and in our delivery operations. And we will also continue to streamline central processes. Over the next few years, we intend to drive billions of dollars in productivity and will strike an appropriate balance between flowing that improvement through to earnings and reinvesting in the business.

Now let's talk about our expectations once we see recovery in the housing market. Our market recovery case reflects our performance expectations. Once we see momentum in housing activity and increased spend on larger projects driven by pent-up demand. We believe that pressures in housing will correct and provide the home improvement market with support for growth faster than the general economy, and we expect to continue to grow faster than our market.

We also believe we could see pent-up demand unlock as homeowners choose to improve in place regardless of the interest rate environment. We expect to grow faster than our market as a result of our competitive advantages and our investments. We drove similar performance for many years after the great financial crisis, and we are an even stronger competitor today than we were at that point with significant opportunities for growth through our investments in the core, in our interconnected experience, and through our Pro strategy leveraging organic investments and the acquisitions of SRS and [ GMS].

This supports a target of 4% to 5% total company comp sales growth. In addition to comp sales, we expect noncomp sales growth of approximately 100 basis points annually from new stores, new branches and tuck-in acquisitions, resulting in a target of 5% to 6% growth in total sales. Once we see recovery, we expect to drive operating profit dollars faster than sales balancing benefits from productivity and leverage between reinvestment in the business and operating profit dollar growth. We will target mid- to high single-digit adjusted EPS growth. In an accelerated recovery case, a sharper recovery in housing would drive sales and EPS growth faster than our market recovery case.

Now let's talk about capital allocation. Our business generates exceptional cash flow and our capital allocation approach remains unchanged. We will use our strong cash flow generation to invest in the business first, pay the dividend; and finally, return excess cash to shareholders in the form of share repurchases.

As discussed, we will reinvest in the business at the rate of approximately 2.5% of sales for the foreseeable future. This includes our new stores and our -- and SRS' greenfield expansion. In addition to our CapEx target, we will support SRS' historical strategy of making tuck-in acquisitions in their current verticals, and we expect those acquisitions to be completed at significantly lower earnings multiples than that of The Home Depot. We will continue our disciplined approach to capital allocation and expect our ROIC to grow as we grow earnings.

In closing, I'd like to leave you with 4 points that reinforce why we are uniquely positioned to grow share and drive shareholder value. First, we serve a strong customer in a highly fragmented $1.1 trillion addressable market. Second, we are well positioned to grow share through our distinct competitive advantages and operational excellence. Third, we are investing to enhance our unique value proposition in our stores, in our interconnected shopping experience and with the Pro. And finally, we intend to create shareholder value through our disciplined approach to capital allocation. Thank you.

Ladies and gentlemen, we're going to take our final break of the morning. This is a 15-minute break. We're going to start back with our question-and-answer session at 11:00 promptly.

[Break]

Ladies and gentlemen, we're going to get started with our question-and-answer session in just about 5 minutes. So if we'll start making our way back to our seats, we'd like to get started right at 11:00.

[Break]

Ladies and gentlemen, please welcome back Isabel Janci.

We will now be moving to our question-and-answer session with the broader team. We have 3 of my colleagues from the Investor Relations team, [ John, Michael and Stuart], they will have microphones. If you have a question, please raise your hand and wait until the microphone gets to you. We want those joining us on the web to be able to hear your question. Also, please limit yourself to 1 question and 1 follow-up. And before asking a question, please state your name and the firm that you're with. Thank you. Let's get started.

Let's start with Steve.

Steve Forbes, Guggenheim Securities. [indiscernible], the 4 greenfield locations [indiscernible] even here, if you could maybe help frame the bigger picture of [ our ] opportunity as we look out over the next couple of years? I guess, one, is there a way to think about growth by vertical sort of thinking are [indiscernible] today in specialty trade space? And then you think about like the end, how many [indiscernible] state growth you see for the brand count? And what is sort of end-state centration as you look at national coverage across [indiscernible]?

Yes, it's a great question. So I would say we are basically #2 in most of the industries we serve in those core verticals we talked about. And to finish the network to have a complete coverage map, we still need hundreds of additional locations in each of the verticals, so there's significant white space. That's not just new markets. It's also expanding existing markets.

It will be certainly in all 3 and has been all 3, consistently in our growth for 17 years, and in GMS' growth since they started their company. Every year in and year out, we are adding new greenfields to the -- and they're very low capital investment and they're very quick to turn to profitability. But there's not a set branch count. But if you look at some of our bigger peers in each category, you can kind of do the forward look and see how big each vision, if you will, a vertical could become.

And some of that will come through M&A as we continue to acquire, like I mentioned, tuck-in and bolt-on great low family companies that give us more share or new products in a market. But also think about each vertical can grow significantly through product adjacencies like outdoor is pool and landscape heavy it is eventually going to have nursery and decking and fencing.

So you start thinking about how organically can do that, and you don't need a completely different branch network to do that. Exterior same thing. We started as roofing. Now we're into siding. We're adding 100 new locations in the SRS side are adding heavy siding board just in the next 12 months alone. So again, huge organic even without the greenfields on top of products even more broad.

And then maybe a follow-up for Ted or Mike. Winning with the Pro, one of the assets up there that was highlighted was construction resources. Curious if we could maybe just take a step back and talk about how you envision that asset benefiting HD ecosystem and sort of what the outlook is for that showroom concept.

We'd love construction resources as we were preparing this material, I felt bad that we didn't highlight construction resources more and got a mention on that win the Pro slide. But that is really interior decor. And it's the same concept of simplifying the Pros points of contact to do a project. So construction resources for you that don't know that business are about 10 interior categories, so countertops and cabinets and lighting, in flooring, fashion plumbing, et cetera. And custom small builder, remodeler, an architect designer, is taking their customer to a construction resource showroom.

It's almost all by appointment, and you do your product selection at construction resources and then later, that is delivered and installed. So it's the same concept of helping the Pro increase their turn time, simplify their business. It's a terrific business. It's based in Atlanta. They've opened up and done some tuck-in acquisitions as well into South Carolina, Florida, up the coast into the Northeast. And we are super, super happy with the growth prospects and growth that they've actually achieved in 2025. And that will also continue to build out and complement everything you heard about Pro. It's very much a building material focus today, but construction resources is doing the exact same thing for the interior decor-oriented space.

Yes, like you said, very pleased with what we've seen in 2025. We've had a build-out of studio in sort of Central Atlanta and Buckhead and then a larger showroom over on the West side. The intent is to expand that further into other markets is what [ Mitch ] hires the CEO of the company is seen there's just tremendous growth with that awareness. We're saying the other day that felt was known by everyone around Atlanta and -- but what the Westside showroom has done has really made them very well known and there are certain contractors that have discovered them in that period of time. And so we're looking forward to expanding it further.

Let's go to Greg in the front, please.

Greg Melich with Evercore ISI. My question was on the CapEx spending, that 2.5% of sales and then the discussion of M&A. So now that that's an important part of the growth, and we talk about it there. I think, Richard, you may have mentioned that we'll continue to do it, but it will be at prices less than we've seen in the past or multiples lower. Can you sort of frame how much a percentage of sales? Or how should we think about what would be allocated located to M&A over the next 5 years?

Sure. Pretty straightforward over SRS' history they've done, call it, low to mid hundreds of billions of dollars -- sorry, hundreds of millions -- millions. Sorry, we have been talking billion -- hundreds of millions of dollars in acquisitions. So I'd say normal [indiscernible], [ 400, 500 ] and top line that we cover [ 1 million ] in top line revenue and also in consideration. You're talking about single digit cash flow multiples, right?

Yes. Historically, most of the deal flow is in that mid- to high single digit, and that's all pre-synergy. We don't see that changing. Our capability to acquire 10 to 20 great small regional tuck-in or bolt-on acquisitions per year is certainly there. We've been doing that steadily. And again, like I mentioned, our integration capabilities are outstanding, putting everybody on our ERP literally if we close, a company on Friday on closes for inventory and opens back up on Monday on our ERP system.

They don't operate on single day on their old legacy system. So we can harness synergies immediately and start putting in and installing our growth playbook. And what we're really proud of is on average, after we've owned the company for 5 years, we've more than doubled its revenue. And that's on average, of course, but that's throwing like no bad deal out over a cohort of 150 examples.

Great. And then my follow-up is just on tariffs. It didn't come up in the presentations, but obviously, we've had a lot this year on that. I'd just love to -- if you could just walk us through how you guys have mitigated it, how you've gotten through it and what you think we are now going forward? How much have we seen in inventory? How much has had to flow through or pass through in AUR or anything along those lines?

Yes, Greg, thanks for the question. We did not have any prepared materials for tariffs today. We talked a lot about it. And I would just -- I would anchor back to what won't be new for many of you. But if you think about over 50% of our goods are manufactured in the U.S. So if you start with that, our position as it relates to just the sheer percentages of that is very strong.

We have a really diversified supply chain, which is not something new. We didn't start doing that in light of recent tariffs. We've been working on that for several, several years. As we mentioned on a couple of our calls now, we have passed on some modest price increases as inventory. Your question is inventory is flowed into the stores with the balance of what comes outside of the domestic product. What I would say is this, I mean, we have taken a portfolio approach, and I give a lot of credit to the merchants and the teams talked about them today.

They've done an incredible job. And we are going to protect the project, no question about it. So while we passed on some modest price increases, we've done a great job when you go across our store and look everywhere in flooring and bath and so forth, we're very project-oriented businesses. We've really been laser-focused on continuing to ensure that we can keep that project at the lowest cost possible. And we've got many examples where we've been able to do that across those specific businesses.

We'll go to Simeon next.

Simeon Gutman, Morgan Stanley. My first question is on sales. If you can share what or how you informed the minus 1 market scenario. I realize it's been a few years since we've been waiting for housing to recover. It took a step back, and yet we talk about all this pent-up demand. At the same time, that 5% to 6% case in a market recovery given all of the assets that you've invested in, I would think that could be a little bit higher. We came for the Supercharge bull case here. So to think about what that looks like.

Well, so with respect to 2026, first of all, it's early. We typically love to have a full year of information before we set guidance for the following year. So we're trying to set some ranges to be as helpful as possible with the information we have today. You can look at our expectation for market performance of a contraction of negative 1 to a growth of positive 1, really just to reflect the fact that currently, the home improvement economy is more pressured than the general economy.

And at the moment, we don't see a catalyst yet and haven't seen a catalyst that would change the inflection of home improvement demand. We know that there's a level of uncertainty out there in our customers' minds. We've seen the consumer confidence scores through the year. We know that there are concerns over jobs, as we talked about in the prepared remarks.

And so it's really -- that range is, call it, an early point of view on the fact that our market will see more pressure on it than the general economy. And then our assumption that we will continue to grow market share regardless of the market environment is what our comp estimate for next year is based on.

But Simeon, on the bull case, I mean, we're trying to be very responsible here. When does this turn? As Richard just said, we don't know what the catalyst is near term. We use [ John Burns ] a lot, publicly available, you get his information. This time last year, he had [ 25 ] at a plus and he has [ 25 ] probably minus 1 now at this point. And that's who we use in an expectation for 26 sort of the flattish, call it, could be slightly down.

But Richard used the term bullish the long-term fundamentals are still just so strong. I mean it all starts with fundamental shortage in housing, which has led to the dramatic increase in price. It's not a speculative price move in housing, like we saw right before the great financial crisis, we have up to 10 million units over the next 10 years. That will be short, that's what's supporting the price.

The home is aging. Of course, homes always age. Why are we disproportionately aging? Because we're underbuilding. So your curve on age keeps getting pushed out. So there's just tremendous support for the long term in housing. The pent-up demand number, that's a function of how much is spent on an annual basis on housing in how much was spent during the COVID period.

So that was the pull forward, that's why on that graph, we saw above the curve, a lot of pull forward. But now we've not only worked our way through that, but because of the underspend the last few years, again, [ John Burns ] number, $20-plus billion, which will continue to mount as homes age. So there is a great bull case that we're super and super confident in and that supports that recovery case. But when to call it in how bullish.

Do we want to be on the number? If you look the recovery from the great financial crisis, we had about an 8-, 9-year run of an annual CAGR of about 5, but it started at 3 and guidance by -- so a CAGR of 5-ish over multiple years, we would see a similar extended recovery case. It's just a matter of when that starts.

And the core business used to do incremental margins in the low to mid-20s. The building product distribution looks like it's low to mid-teens. Maybe that's not the right number. Is it not right to mix those out as we think how the margin progression of the entire entity can perform when we get to that mid-single-digit sales growth scenario?

Well, first of all, the margin structures are intact. The way to think about fixed variable and contribution of marginal profit is -- has held in our business and held in wholesale distribution. I wouldn't think so much, though, when we're talking about the other assumptions in the margin recovery. I wouldn't think about it as there's a mix shift.

As much as it is, like we know that our business generates leverage at a certain point of comp sales right now, it's at 3%. After that point, what we've said and said this for a few years is we're going to make sure that, number one, we take that leverage and generate productivity in our business. And then we balance that benefit between investment in the business and driving profitability faster.

And so there's not -- I wouldn't say there's a strict algorithm or a reset in an algorithm now that we own SRS and GMS. I think what they've done for us in the market recovery case is they have increased our expectations of comp sales and noncomp, by the way, right? So they are -- they have historically grown faster than the Home Depot organically over the last 15 years pretty consistently. And so we see them as a tailwind to comp and they're a platform to make bolt-on acquisitions. It's how they grow and to grow through greenfield. And so a noncomp contribution that we didn't really even call out in 2023 is now a point when you think about new stores, new branches and tuck-in acquisitions.

Let's go to Michael Lasser.

It's Michael Lasser from UBS. You outlined the factors that you are thinking about that are going to either hold back or drive a home improvement recovery over the next few years. How does the elevated indirect cost of owning a home through factors like insurance, property taxes, utilities? How does -- how do those factors influence your thinking about the timing and magnitude of a recovery from here? And then I have a follow-up.

Well, that -- so I gave to Simeon's question kind of the bullish side of the ledger of what supports housing right now, what's the issue is affordability, the fact that turnover is essentially frozen and then add general uncertainty and some of the uncertainty is for the reasons you said, broader inflation increases in property taxes and the like so in insurance.

So you've got a great side of the ledger for the bull case. You have to unlock housing turnover get economic uncertainty to normalize and then people will either move and you'll get housing activity to increase or people will improve in place. The improve in place is a much bigger piece of the market. We love turnover but at the end of the day, you have 3-odd percent of the housing stock turning, you have 97% being repaired or remodeled.

With the massive amount of equity in the housing, again, which is very different than when we came out of the great financial crisis. There's all the powders Richard said is dry to do that in proven place. We need to get through this general economic uncertainty, which I think we're seeing some decent signs. I mean inflation is coming down interest rates and mortgage rates have come down, tariff-driven, the fear of real spike of inflation never really materialized. I mean, inflation is now under 3%.

So there are things working through that. It's just a confluence of when is there enough positive on that side of the ledger to unfreeze activity as well as get people to be confident enough to tap that equity and do larger projects. And that's what we can't call.

My follow-up question is, we, as outsiders in the past throughout the 2010s, had been accustomed to The Home Depot generating mid-single-digit comp growth, leading to more than double-digit earnings growth, in part by deploying technology to improve the productivity of the business.

Today, the message is mid-single-digit same-store sales growth should lead to mid- to high single-digit EPS growth. So why is the model different than it has been in the past? And what needs to happen in order to get back to the double-digit EPS growth that we've become accustomed to?

Well, first of all, you have to look at the scale of our business. We're a very different business than we were at the earlier part of the decade. I would also say that, that part of our business' history was a great repairing of The Home Depot. We had a lot to learn about our cost position, a lot to learn about operating cost of goods sold position, cost of goods sold, evolution, operating expense leverage.

That had as much to do, just sort of the point at which we were coming from than it did what we were actually doing. I'd also say that spend investment spending growth if you think about what the market environment was from 2 -- really more like 2013 to 2018, kind of the highest comp years, you had significant sustained home price appreciation and sustained elevated turnover.

So the tailwinds in the housing economy were tremendous and unprecedented. And so I think when you combine those 2 things, unprecedented macro tailwind with a business that was -- I mean many of us were there learning how to generate earnings productivity. Those were the early years of that. Now today, what we see is the competitive environment hasn't gotten any easier. We're a lot bigger. We are also set with a much bigger opportunity than I think we had back in the middle of the decade. And when you look at the white space in Pro, we were not set for that and we are today. We are so much stronger than we were a decade ago.

And so the point now about the earnings algorithm is, we have to make sure that we continuously invest for the future success of the company, and that really begins with top line velocity. If we don't create the best customer value prop in the market, then we're not going to win. And that value prop is selection, value. It's -- now it's delivery speed. It's site experience. It's so many things where we've got to make sure we're investing to win. So you'd say there's a combination.

Number 1 of -- there's less low-hanging fruit. We run a very lean business with really some of the highest operating margins in retail history. And we're proud of that. And we also are intent on investing to win. And so that's what drives our algorithm now.

But ultimately, higher sales.

Yes. Higher sales, higher earnings -- I mean earnings. Yes.

Let's go to Chris Horvers.

Chris Horvers for JPMorgan. A follow-up question to that. Made a lot of very positive comments, investment cycles caught up. The beachhead has been built for large Pro. The store is in a great spot, it grows now at a consistent level. And you took up the sales outlook in the longer term. But the earnings growth rate is still mid- to high single digits. So that does beg the question, is the cost to do business, the cost of share just simply higher?

Well, first, in '23, we did say expectation of mid- to high single-digit growth. I think our bias is now towards the higher end of that range, but we're still setting that range. So if you can allow for some movement in those words, we do expect that the case that we've laid out today in the market recovery case has higher EPS growth than our base case assumed in 2023. And then there's just a measure of flexibility we want to make sure we maintain to invest to win in the future.

Got it. And then Dan, we get a lot of questions on what's going on in the roofing market right now. You have a competitor out there that talks a lot. And there's this view that given storms last year, no storms this year and whatever else that we have this sort of extended downturn going on in the roofing market. Can you talk about what you're seeing is? And as you think about cycles like this that you've seen in the past, how long does this typically last?

Yes, I think the biggest difference between this year and the previous few years, it is a below-average storm year. And remember, storm demand over a long period, so I'll say over the last 25 years. And again, these are large storms. And not every time it hails on 4 houses do we call out a storm, right? So big hail events, hurricanes traditionally drive only about 7% on an average year. It could be less than that, which it is this year. It can be higher than that. It usually is never more than mid-teens.

So just keep that in mind for perspective. But we certainly have had some favorable years back to back ahead of this year. But even the projections that I'm hearing early from the manufacturers for next year, there's no carryover -- there could be storms that have a carryover benefit to the following year, but there's no carryover drag because as soon as storm season comes next year, we could right away in April be in an above store market environment right away.

So that really -- the only near-term optics we have on demand is kind of that cycle to the end of calendar Q1 right now, which -- and that's why everybody is just kind of, I think, being pessimistic. And then you have some manufacturers just out there because there's some channel destocking that would make the [ ARMOR ] report maybe feel a little less than really out the door on our end. But certainly, we were at a really high elevated level even if it comes down low double digits, it's still producing demand above like a 20-year normal average.

Let's go to Scot Ciccarelli.

Scot Ciccarelli with Truist. I think we can generally understand the complex Pro initiatives. But are there any data points or numbers you guys can point to so we can better understand how the complex Pro efforts are working?

Well, I mean, I'd say just a couple of very high-level numbers to kind of keep in mind. First of all, if you just look at market share at the highest level since 2019, and this kind of takes all the COVID noise out of it, we've gained 120 basis points or so in [ N41]. And then we obviously keep track of companies who are competitors in the complex space. And Mike, maybe you want to talk about that.

Yes. The series of competitors that provide public information on a quarterly basis that we're able to compare to and -- if you look back over the last couple of years, you can see that they have often generated negative single-digit comps and in some quarters, negative double-digit comps. And in that period of time, our Pro sales have positively comp.

And it's looking at it from an apples-to-apples standpoint, as to what are the products that they are selling compared to exactly the products that we're selling, feel that the investment that we've made around the complex Pro is one of the elements that's helping us to be stronger against that tide and have the positive comps that we've got.

If I take it back to the remarks that I would have shared earlier, around trade credit has been strong for us in terms of the sales that we've generated and the lift that we've generated. We still have some work to do in order to make that a more interconnected experience, and we'll do that in 2026. It's not available online today. It's not available at the front end of our stores today. So we're looking forward to bringing that out in 2026, so that it can be seamless for the Pro in order to be able to engage.

We've got some plus customers that are on that capability today, we expect that soon to be in the tens of thousands and to grow from there. We talked a little bit about delivery in my prepared remarks earlier as well and 40% growth over the course of the last couple of years for pro box and flat sales out of our FTCs and yes, out of our stores as well.

Jordan touched on this before, what we've seen is some of the highest levels of customer satisfaction than we've ever seen before. And that has to do with the input metric going into that around our delivery reliability and the ability to be on time and complete. And then further, as we've learned more about the complex Pro, we want to be able to address their pricing needs better and more around transparency around our preferred pricing program.

We're a little bit opaque today in terms of how the customer sees it, happy with the value that they're getting, but may not understand it completely. And so we've got a market where we've been testing changes to that, which increases the transparency. Not just for the customer itself but for the associate as well, which is great because they can get behind it within our culture of selling.

And what's really important about it is the engagement that they are creating. You think about in the airline industry or in the banking industry and the ability for customers to engage more fully in terms of the rewards that they're getting. And that's the kind of capabilities that we're bringing out in 2026, far beyond this one market that we've got. So there's just kind of 3 elements of light that we're really pleased with, with the growth that we're seeing and expect more in 2026.

And then quick related hopefully. Historically, you guys are giving us some data around kind of small, medium, large pros. Can you provide any updates regarding whether it's sentiment or activity from those different customer segments?

I'll start just on [ the from ] a small properties. We talked about of our sales is from these growth they're inside our stores and they're shopping every single day, and in some cases, every single week, and we continue to invest in or small to medium Pro. And what's critical to talk about here and why we continue to invest in the resources and see the benefits of that is that over time, we save 50%, but they may be stores that are at 70%. So it's that are at 40%. And we have been very dynamic using tools behind the scenes to better understand the complexity per store and align resources.

So when I speak about the Customer Experience Manager, or Pro account sales associate or the pro pain specialists or delivery specialists. We have a better understanding of what's happening in each store and making sure that we deploy the right amount of resources to really deepen the engagement. And so we have been extremely pleased with this evolution that we've had.

And to Mike's point, as we build the CRM tools and we talk about pro ambassadors, those ambassadors know a lot more deeply about what's happening on the outside sales business, and they all shop our stores, so we continue to engage. So inside of our stores, that's mall to medium pro like 50% and continue to drive high levels of interactions and engagement with our stores.

Yes. And on medium to large. I mean, I gave some examples before that we're showing the benefits of the capabilities, and we're taking that further as well. And Jordan talked about this in his prepared remarks around Blueprint takeoffs that we now have using an AI tool in order to be able to do that, just launched over the course of the last number of weeks. And that's not about the Pro having to engage in AI to see how does that experience happen. It's a matter of speed.

And where it was often taking us a week or more in order to be able to get those blueprints back with the quotes back to the customer, we can do that now in a day. We've invested further for the medium-sized Pro and large-size Pro in terms of our B2B experience as well with a tool called projects online, where they're able to now phase out their project over time versus they had to independently come up with separate orders in the past.

Well, now that can be all under the umbrella of 1 order and depending on how that's going according to schedule with weather issues that are favorable or unfavorable, can more easily change the schedule of those deliveries. And you saw it from [ Ruben]. I think in the video, he's 1 of the biggest proponents of the digital tools that we've got. And we're seeing great take-up with our customers, engaging more and more digitally online.

Okay. Let's go to Steve from Citi.

Steve Zaccone from Citi. I had a question on cross-selling between SRS and the core kind of Home Depot business. Obviously, it's early innings, but can you talk about the opportunity there over the longer term, right, even with GMS now being a part of the platform? Like where is the opportunity to kind of combine those 2 businesses?

Maybe I'll start. I mean from a relationship management standpoint, I touched on -- and Dan touched on it both earlier some great examples of identifying where there is opportunity at the job site to do cross-selling. And that works both ways.

And I mentioned, we've got 0 of our outside sales reps who have already recommended relationships that have resulted in greater sales with them. And I gave one example and there's many more that have ended up working the other way. You heard both Billy and Dan talked about quote center, which is a great application that we've had in our stores for a number of years now that often a pro is certainly where I want to be served.

And then certainly for the cross-category Pro, who may not be engaging in large-scale roofing projects or large-scale drywall products, but they may need 3 bunks of drywall or 6 bunks of lumber for what they're working on versus a lot of Dan's customers because of the velocity that they've got, they will take half truckloads, full truckloads and more of that product, but the quote center application is one where these customers, these cross-category pros can come inside the stores, and they can get to a sale that's serviced through SRS because of the added services that they offer, and we saw that in Dan's video in terms of boom and scatter and kind of up to the third floor and up to the fourth floor and beyond.

So both from a relationship management standpoint, working, I think, quite effectively today, happy with the application that we've got in store. And I think there is the opportunity from a CRM standpoint, to have more understanding of leads that can go back and forth between the companies, and that's what we're starting to do a little bit of discovery work today. I don't know, Dan, if you wanted to add?

Yes. The other thing I'll say is, keep in mind, a lot of our customers are getting bigger, significantly bigger. Private equity investment in contracting. Home Services is exploding the pool industry, the landscape industry, the roofing industry are now full of 30, 40, 50 different private equity firms rolling up that space. We win in that environment because they may have been just buying. They bought 3 companies, 1 in Dallas, 1 in Florida and 1 in Charlotte and they all bought from 3 different distributors. And now that they're all owned by 1 private equity, they're saying, now I need a supplier that is in all 3 markets, so I can lever that spend.

So I'd say with the growth of the high-end Pro and the ability to cross-sell multiple categories, yes, [indiscernible] by roofing, a lot of gypsum installers by gypsum, but they're Keep in mind the end customer, we do see a movement from homebuilders, property management companies and large multiregional contractors to want to start moving more direct into the purchase decision-making, but also consolidate their spend in a much bigger way.

Our job is to make sure we coordinate that well between Mike's team, our team and GMS' team, and that's why we're building that not only strategic account team, so we don't have confusion with the customer. They know who their relationship manager is -- and in that person, whether they started in roofing, started and gypsum or started, maybe a Mike's team with lumber now knows how to extend that offering and whatever they might want for any project. Whether it be a single-family home or remodeling project, a commercial project, a multifamily project.

So we have to -- we've already stitched together all of the against the customer visibility to where we make sure we're stripping over each other on specific projects or quotes or customer relationships.

Okay. Follow-up question. The preliminary '26 outlook. Maybe help us understand, you referenced to a weaker home improvement economy. How does that factor for your outlook for DIY versus Pro? And then how does SRS growth kind of fit into that preliminary '26 outlook?

We've seen DIY and Pro behave pretty similarly, at least in our results. I think some of that is because we're taking share in Pro right, and perhaps offsetting some of the weaker market force in large project with our share capture. So there's -- I'm not going to put too fine a point on our expectation on how that splits next year. We're trying to grow both. And as you heard today, we're making investments across every single customer.

With respect to SRS, maybe you want to talk a little bit, Dan, I think there's probably a misconception of -- and I heard it from several people on okay, we had some storm absence of storm pressure at Home Depot in the fall that, that impact SRS will that impact SRS next year. I don't know if that's behind your question, but I have heard it a lot. So maybe talk about the nature of what next year looks like and how [ resin ] works.

It's kind of what I mentioned earlier, the storm demand that we enjoyed at the end of last year from a smaller type size hurricane probably had a more bigger profound effect on the stores than it did us. and it was largely worked and completed pretty quickly. Now if you have a big category 5 hurricane that hits across the entire state of Florida or hits the Texas Coast, some of that demand could be elevated for us on the roofing side for 3, 4, 5 quarters.

But generally speaking, if it's not a massive event like that, the contractors come in quickly, the insurance companies activate and the storms get worked pretty quickly. And think of the roof is the first thing that has to get done to protect the rest of the investment. So they're coming in there right away to get those risks done. And there's a huge cohort of roofing contractors called [ storm chasers ] that go wherever they're needed. Whether a hail what we call [ Ice Diamond's ] fall from the sky or heavy wind or hurricane [indiscernible] market, there's a lot of mobile contracts that will come in and work it quickly.

So you see a quick elevation, but then it's not a -- like it's going to -- it's not like it's a pull forward a minute because it's -- again, it's mostly an insurance claim driven. And it doesn't matter if that roof was 1 year old or 20 years old when it got a storm, it's getting replaced.

And one higher level comment I would make about just the success of SRS and one of the reasons that we wanted to combine forces is the consistent track record of share capture with SRS. I just want to kind of point you toward what [ Mike Rowan ] was mentioning. Go out and look at the building products distribution companies' results this year. SRS is going to be positive comp growth. and positive total growth as well. Compare that to everything else you see out there in the space, and you'll see why we're confident that regardless of the market environment, we're going to take share at Pro.

Let's go to Peter Benedict.

Peter Benedict, Baird. Ted, curious what your Washington contacts are kind of sending you signals on in terms of potential, maybe unconventional ways to address housing affordability, housing turnover, if anything? That's my first question.

Well, I think that the government has certainly taken note that housing is in a stagnant position right now. And there are a lot of initiatives being worked and we're actively in conversations in the input phase of that. I mean, there have been things flow to like a 50-year mortgage, but there's a general understanding that we have a shortage of housing that turnover is almost frozen at the moment and there's affordability issue.

So you see a lot of focus on how do we get interest rates down, which I think is tracking in the right direction. So first inflation comes down. We've lowered the Fed funds rates. We've seen mortgage rates. I think they peaked almost as high as 8%. Now we're down toward low 6s. So there are a lot of policy issues being generated, how do we build more homes, how do we build more affordable homes? How do we get interest rates down?

We're engaged with a number of parties, both government and private on the idea generation of how we come together as an industry and drive more activity in housing.

No silver bullet, which again is why we don't point to '26 and say, "Oh, we've come up with the silver bullet that's going to kick this thing off in the first part of '26".

And then maybe one for George. On the -- I think you mentioned that you're going to refresh the app this coming year? Can you put the fine or tune the [indiscernible] timing there? Is that going to be out before the spring selling season? And just give us a sense of how that's going to influence kind of the DIY side of the business versus the Pro. Like what are we going to see different with the new app?

Sure. Well, it will be a phased rollout. And there's so many technical components in the app itself. Don't think of it as like a big bang on a certain date. Think of pieces kind of under the hood getting rebuilt and reworked and sort of over the course of the year coming out. On the usage of it, it is -- we have the app for both the pro and the consumer and there's a different experience for our Pro customer when they log in as a pro customer.

It serves both on a relative basis, the pro over-indexes towards our app pretty significantly, as you'd imagine, with any app, the more frequent you work with that company, the more likely you are to be engaged with their app, we see that with our Pro customer, very, very heavy user and the enhancements that we have planned are going to be for both.

Let's go to Eric Bosshard.

Richard, I think you commented that the, call it, the legacy FTC, DFC MDO, those assets are built out now for where you are I'm curious on the complex Pro, which is the incremental growth emphasis of the business. You spent $25 billion to put these assets together do you now just lever all of this or to get this outsized gross on the complex Pro? Is there a need to add more investments, add more capabilities? Dan's got ambitions about categories to add? Do you need to add other assets not necessarily businesses but even distribution assets or service points.

We -- thank you. We are, in essence, built out you think about that FTC network, and that was bootstrapped and built on the backs of a new bulk distribution network. So actually, the main function of those FTCs is to replenish building materials to the stores. we added extra space to them in order to enable job site delivery. We're happy with the footprint now and we'll add -- we'll probably add 1 to 2 more over the next year or so.

But any addition now of space is going to be purely volume-driven and it's going to be more market specific. Is there a specific market where this is going to work now better than delivering from the store? So the blunt answer is no. We do not feel that we need to build out further distribution assets. Obviously, greenfields will continue with SRS. But we're heads down working on how to leverage the power of these 2 businesses together.

There's a little bit more IT work left on the Pro capabilities. I think people have kind of overestimated the amount of actual investment in organic Pro, The Home Depot. Call it a few hundred million has been invested in that IT base and it's largely complete. But now, yes, it's time to phase into sweating the assets, leveraging the assets.

When we talk to [ John Deaton ] all the time, the Head of Supply Chain, what is the capacity of this building? We don't know because we haven't pushed our limits and pushed ourselves to solve. And you're talking about a group that figured out how to ingest $47 billion of growth in 3 years. So anyway, the answer is we do not see a build-out of physical assets required in the near future to begin to lever the power of this company.

And as I talked about earlier, what the -- relay that John's team pioneered this year that's allowing us to get into 18 more markets. Some of which are more significant markets, some of which are more adjacent markets. That's just the start of that. There will be more markets to come over time. But there's further efforts we've got to in terms of taking some congestion away from the stores.

So when it comes to windows and door deliveries, they often have to go through the store that adds friction to our network and adds time and cost. And so we're going to be bringing those through our supply chain network in 2026, either through the FTCs or through the MDOs to get out to the customer. And now with GMS on board together with SRS, with the multitude of assets that they've got is the opportunity for a little bit more enterprise level ship from best location versus simply at the brand level.

Yes, I'll give you an example, too. Like one of -- since the GMS acquisition, they had a national builder buying exclusively from them other than one city because they didn't have a physical location or a DC there. And quickly, we mobilize with the supplier partner, and we put actually those gypsum assets in that market and a roofing or exterior building products location to immediately service the business and take that up.

Now once that grows enough that can sustain its own standalone [ Gypsum ] location, it will eventually graduate up to that. So those are -- I know a lot of people like to think. I think sometimes don't understand like every single product doesn't have to be isolated in its own warehouse and our side of the house. So again, we can get a much broader on product assortment at the physical distribution yards we already have.

So there is a lot of untapped potential in the existing network. We expect every single branch in our company to grow and outpace the market every single year regardless of what's going on. Then you add the greenfields on top, and then you add bolt-on M&A. So on our side, we do need more assets to finish the footprint. We do need -- it will be not surprising to see us add over 100 locations per year going forward just from greenfields and [indiscernible] and bolt-on in the existing group.

Yes. This is an important distinction, greenfield branches versus kind of the platforms as we thought about them at Home Depot. One of the things we should clarify is actually the return characteristics of wholesale distribution. And so if you -- I want [ Dan ] to elaborate on this, but if you take a Home Depot store in an SRS branch, the SRS branches return on invested capital is going to grow much faster, much higher than the ROIC of a Home Depot store, and we love the ROIC generation of our [indiscernible]. Maybe just talk about what a branch looks like, Dan.

Yes, I mean, a branch -- they're different in size is based on the verticals. Our Building Products group and our pool group are much larger branches, the landscape divisions a little bit smaller, and the GMS is kind of more on the upper end as well. But when we do a greenfield, it's a limited investment, but it could do several million dollars in year 1. It could be approaching double-digit millions in revenue by year 2 or year 3.

And then it continues to significantly grow and mature over almost like a 10-year period to where it's getting to its full potential. So it's not like retail where you open the store and you're in that proximity and the revenue is coming in right away. You're building it slowly but significantly stronger.

On the initial outlay of an initial branch.

It's only a couple of million dollars because we're not buying our real estate. We're traditionally leasing, so the outlay and that includes working capital. Obviously, the inventory, the receivables offset somewhat by vendor trade payables that give us float. So our net working capital is very efficient. And so that allows us to, again, grow significantly tailwind markets, but even as Richard just mentioned, we're in this tough market across all of our verticals, we are significantly outpacing the competition.

Let's go to David Bellinger.

Thank you, David Bellinger from Mizuho. A question on trade credit. So you've got more than 9 million Pro customers, less than $10,000 using trade credit today. So how does that get more fully rolled out? Is that a 2026 thing? Or does that bleed out into '27 or after? And then just regarding the 30% sales uplift, what exactly is that? Is that more a project velocity going into other categories? And maybe, [ Dan], you could chime in on the importance of trade credit for SRS over the last several years?

Yes. The -- like you saw just over 7,000 customers that we've got today, there is a little bit more build out in 2026 to happen, but largely is when we expect the more accelerated growth to move from under 10,000 that we've got today to some tens of thousands throughout 2026. So I mentioned that it's not an interconnected capability today. So a Pro that is shopping online can't transact that way. They've got be in touch with their outside sales rep or their inside sales rep in order to be able to do that or go buy the Pro desk through some things that they end up buying in the store.

So we're going to be providing those capabilities online. Jordan talked about the things that we're bringing online, both for the Pro and the consumer a very significant one for the Pro is to bring that online. Then as well, if there's a significant purchase that they're making in the store, to be able to go through the front end of the store as well. So we'll make it very 360 in terms of how they use that.

There's some other sort of edge cases around the inability to do will calls with trade credit. And so we'll have that taken care of very soon as well. But the key is -- right now, our awareness level around trade credit is here and it needs to be here. And so together with our marketing efforts, together our pro desk in communicating the amount of those customers that you see that are on trade credit today are largely outside sales accounts managed by our outside sales force, not entirely.

There are some unmanaged accounts that are done within the store. But we'll fill out those use cases. We will drive awareness, which can then lead to greater adoption by those Pros. And yes, they are largely cross-category Pros that we're serving. And it's products that we weren't getting their full share before what they were buying. You think about windows and doors, it's probably one of the best examples. In the past, they would buy from us or if they were to buy from us and often that they didn't because they would have to pay if they were using, say, their Home Depot commercial credit card or any other form of nontrade credit they would have to pay 30 days later after they bought it.

But windows and doors can take 6, 8, 10, 12 weeks in order to arrive. And so therefore, they were paying us long before the product arrived to them. Now with the coordination with our order management systems and to be able to build upon the shipment of those goods or the delivery of those goods, helping them manage their cash flow better than upon arrival of those windows 10 weeks out then the 30 days ends up kicking in. And so it's those kind of products that the cross-category pro weren't -- were shying away from us because essentially they had to lend us money. And in this case, now we're getting those kind of sales, and that's a product category when we look at trade credit has sort --

Yes. And we have hundreds of thousands of contractors obviously on trade credit. So we're much more mature. Wholesale distribution companies have had trade credit for all the way back. So it's a very vital part of the business. And the larger the contractor, the obviously, the more appetite, the more consumption they need to have working capital to help fund their business.

So we're very good at it, and it is an accelerant to grow. We're about 75% trade credit revenue, about 25%, what I call cash sales. We do have a tranche of customers that do not want trade credit for various distress, and that's okay, and we're fine with that. And then the other thing I'll bring out a lot of people don't realize, it isn't just giving them a credit line for [ Triple X ] contracting or [ AAA ] roofing and saying, okay, you've got a $100,000 credit line to tap into monthly to buy all your projects from us. It can also be incremental project credit line.

So they are doing a stadium and they need a $0.5 million credit line just for that project. And so we would stand up a job credit that has lean rights and has protections, we make sure the general contractors license spotted all that to protect the company. So if we're extending something beyond just, I'll call it, a revolving line of credit, we have protections on that. So we're really protecting that receivable out there. But those are things that it's not as applicable to [ Mike ] side yet, but as we mature some of those cross trade pros as they get bigger and bigger, they'll eventually start wanting job credit as well, not just a --

And the last thing I'll add because you see 7,000-plus customers there. And yes, we expect it to be tens of thousands over time. But these are our most significant customers in terms of what they buy. You talk about the millions of customers that we have, but the average spend by a pro customer proctor customers better than a non-pro extra customer, but you're still dealing in around say, $10,000 for an average Pro. These are pros that are buying hundreds of thousands of dollars worth from us and enjoyed the opening up of [ Trade Credit ] and therefore, we're seeing the wallet share gain.

Great. One more on the Pro. You mentioned earlier that certain suppliers are not open on the evenings or the weekends for these emergency type needs. Is that something that we could see as a competitive edge for the Pro desk? Have you tested longer hours, weekend hours for the Pro desk and sort of an easy win for Home Depot to pick up that share?

Oh, absolutely. We are relentlessly focused on the Pro and have -- when we think about order open Monday through Sunday. And in certain markets, based on this penetration, as I said, we ensure that we look at data sets to kind of say when should we be available? So you'll go into some stores on Saturday, the pro desk is open from 6 a.m. to 6:00 p.m., right? And on Sundays, they may be open as well.

And one of the things that I think is super, super important, as I mentioned in my prepared remarks, is that we have been relentlessly focus on this customer and our evolution is making sure that we understand what their needs are and that we respond to their needs. Across to 2,300 stores, you're going to have operating hours that meet the needs of the small Pro and the medium-sized Pro, and I want to lean into one more thing because Mike brought up the customer relationship management tool. And some of those Pros as we say, all pro shop for stores.

And what's key about what Mike is doing and piping in to our stores, the data set, along with the capabilities like Pro trade credit. We don't want those customers to come in on a Sunday and they want to speak to someone at the desk and we're not there. So we are responding as needed, and there will be different hours based on location but we have stores that are 70% Pro penetration.

They're going to operate with different hours to make sure we meet the needs of that customer. But all of our stores are always open from a.m. anyway to 9:00 p.m. and 8 to 8 on Sunday. And if we don't serve them at the Pro desk with our pro team, we'll serve them service test, and we are always there to serve our Pros.

Let's go to Kate McShane.

Kate McShane from Goldman Sachs. My first question was just back to the macro. I think in addition to well, I mean, housing turnover is the biggest driver. But there have been other macro drivers that I think you've highlighted before with regard to HELOCs coming down and the upcoming tax cuts for the middle income consumer in 2026, which could act as a stimulus. Just curious what's being assumed for those couple of items and the 2 scenarios are presented today if there can be any upside as a result.

Those are upsides for sure. So while mortgage rates haven't come down as much as the Fed funds rate, the HELOC rates have tracked the decreases in the short-term rate. And we have started to see a little more HELOC activity, $75-odd billion in the quarter but that's still way below when what was tapped back in the recovery from the -- you mentioned the tax bill.

I mean we haven't put a lot of that into our assumptions. I mean you could say that somewhere probably in the minus 1 plus 1 or the flat to plus 2, but there should definitely be a boost to the consumer from the tax bill. But again, all those things are known and we're still seeing pressure on overall consumer sentiment, whether it's more in consult or University of Michigan tracking that the consumer are each down still from the start of the year. But those would be 2 positives for sure.

And then our second question was with regards to automation and how it's helping to speed your capability to delivering to the Pro site within the supply chain. Do you have a penetration level of automation or a goal of where you want to be when it comes to that over the longer term?

So there's automation, there's a lot in that. There's process improvement and I wouldn't call it automation so much, but technology-driven process improvement in the store that Ann talked about and whether it's the handhelds, directed tasking. We talked about our machine vision, our met team, which is our principal tasking team in the store. They have tremendous technology in their handhelds and how they direct and do their workflows.

If you look at our supply chain, we're doing a lot of automation in supply chain and robotics. So a number of our big DFCs now have robotics that bring the product to the packing station. We're also now in pilot in one of our larger DFCs, I was just down last week where we're putting in a next level of automation in robotics to take human workflow out of the building, unloading trucks as well. with robotic arms. And then we talked a lot about delivery and the opportunity, again, not with robotics, but with technology to continue this concept of ship from best location.

And this would be -- that's why we think that scale picture is so important because nobody has the set of assets that The Home Depot has between our stores our distribution facilities, our sales forces and our delivery assets. Over time, with the use of advanced technology we will be able to leverage ship from best locations.

So if there is a big order, we look at that customer, the customer profile, the geography, the assets and inventory positions we have in place real-time decisioning on where that should be fulfilled. Real-time optimization, are you optimizing for customer service because you know this is one of your best pros. And it is absolutely key to get that product delivered are you optimizing for inventory level.

You might take a little extra delivery cost you want to bleed some inventory down in this location? Or do you look at routing and what is going to be the quickest drive time and therefore, the lowest delivery cost. So all of that, again, not robotic, but certainly automation and machine learning and data science to how do you ship from best location satisfying the customer at the lowest cost, given all those assets.

Let's go to Max from TD Cowen.

Maksim Rakhlenko, TD Cowen. So it sounds like the expectation is maybe more trade credit and order management to be pretty scaled by the end of 2026. And then with that, I'm guessing that the outside sales force will get built out pretty quickly. So in the past, Ted, you gave, I think, a $1 billion revenue out of the flat beds. How should we think about the scaling of that $1 billion? Where do you think it can go over time? Just any parameters for us to think about.

So that was the number that Mike gave? I mean, clearly, we think this is a multibillion-dollar opportunity, $600 million pro space, $300 billion white space of those larger customers in their complex purchase occasions where they need these capabilities, right?

They want to point of contact with the sales force. They want to be built upon delivery et cetera. So it's a multibillion-dollar opportunity to get the share of that $300 billion. One thing is building the capabilities and building out the supply chain as Richard said, is largely complete. I mean that big build, you see the number of facilities we have. That's largely complete.

It's really a matter of awareness and adoption in repeat. And don't forget everyone now all these customers, that $600 billion space, it is being fulfilled by others right now. So as people become aware of our capabilities, give us trial in adoption, and we become the principal product supplier in that larger purchase occasion. That will take time.

So as Richard said, about sweating the assets, it's largely built out, it's go-to-market get people aware, get trial win that business. And over time, this will just continue to build and allow us to get the multiple billions out of that $300 million in a platform like SRS and GMS we briefly mentioned construction resources, those are great assets because that customer truly is using us on those platforms as a wholesale supplier. So as they know that's part of the Home Depot ecosystem, that's where you get the cross-sell opportunities and the acceleration of our organic efforts.

Got it. And then, Richard, on the cost side, what do you view to be the biggest gross margin efficiencies as you look to offset some of the mix pressures?

I missed -- would you just repeat that question?

We're out gross margin efficiencies, where do you see opportunities for cost outs just as you work to offset some of the pressure?

Well, I think a lot of it comes from the supply chain automation that Ted was talking about. I mean we have a track record of decades of -- I didn't mention that when I was talking about the previous decade, but [ John and Stephanie Smith ] over there were part of building the RDC network out, right? So we have a history of driving our supply chain cost down.

That's both upstream, meaning product to stores and downstream product to the job side of the home. So I think that's probably the largest area where you'll see productivity. And we -- at the same time, we've taken the stance of reinvesting that, right? I mean we are -- we want to be the customer's advocate for value. And so when you think about efficiencies and gross margin.

For the most part, we've held our assumption of relatively steady gross margin. We've had a little bit of a mix shift from SRS and GMS, but when you account for that, I think you'd say the expectation is steady. We let the customer benefit from productivity that we've generated. But really, we're generating productivity across the business. And Ann's team has done just a tremendous job.

If you think about where our major cost pools are they all have to do with moving product, right? I mean, it's either moving product upstream of the stores or moving product once they're in the stores to the Bay. And the level of enablement by AI in the stores has provided tremendous productivity. Again, a lot of which we've reinvested in the customer experience. But under all of it, under our expectation for operating profit growing faster than sales, there's a tremendous amount of productivity and reinvestment of that productivity.

Yes. Richard, you mentioned in your prepared remarks, the freight management tool which is a significant component as we think about go forward, how we drive productivity in the back end of our stores. We look at this productivity map what is the set of opportunities? What can we simplify, what can we eliminate and what can we automate? And in the simplification process, one of the things I spoke about is the fact that we've simplified so much of the core tasking that the MEG team can now absorb that task in from an efficiency standpoint.

There is so many other opportunities within our uses of labor that we say to ourselves, these are not customer-facing activities. And as we can continue to drive the levels of efficiency, whether it be in the back end of our stores, in what we call the old book, where we used to cut money, right, or in areas that we don't see benefit or value in the customer -- direct customer engagement that's what we continue to work through.

So still a ton of opportunity, especially on the back end from a point management standpoint, that work has just begun. But I am super proud of the team around using the machine learning and AI to drive the productivity across the stores we're in now met, who is like super, super talented and very, very efficient can start absorbing that task for us because of the levels of efficiency that we've driven.

Let's go to Chris from BNP.

All right. First question would just be, how do you think of leverage at this point in the cycle. By my estimates, you have about $38 billion of purchasing power at 3x leverage. You have a large competitor looking to do deals in this complex Pro space. So how do you balance the need to fill in gaps and be able to get an acquisition that you've been able to get, maybe you wait to deleverage? Just curious how you think about M&A from here and leverage.

You're talking about sorry, [indiscernible] you clarify that?

How do you think about leverage to do more deals? Like -- are you -- will leverage --

Yes, balance sheet leverage. Got it. We have a target that we've held for quite some time of being levered at 2x debt to [ EBITDAR]. That actually provides us room to be able to fund deals and SRS and GMS, which were really 2 of the largest deals we've done in our history, that financial flexibility allowed us to flex that ratio up but we do intend to delever back to 2x and hope to reach that towards, call it, the end of 2026. So that's our intention with respect to leverage.

Okay. And then on CapEx, like 2.5% of sales target, it sounds like stores will be constant. It sounds like the DC investments will slow doesn't seem that capital intensive on the branch cost per branch. So where's the differential go? Where are you ramping up investment to hold that 2.5% CapEx to sales ratio?

Well, certainly, we've ramped up stores as they've aged and then maintain that level, building new stores on this regular continuous basis, that was also a piece of the ramp-up. And then technology investments, you heard us talking a lot today about technology and machine learning and AI, et cetera. And so there's a step up in technology.

And the ramp down in supply chain didn't just happen during this year. In fact, it was -- over the last few years, that's ramped down. And then the -- as Ted says, the investment in the new stores and existing stores ramped up as an offset. So really, we have been on the kind of cusp of a steady state with respect to those categories for a while. And as Ted said, IT fills out the remainder of.

Okay. Let's go to Brian Nagel next.

Brian Nagel from Oppenheimer. So I have 2 questions. I'll just put them together and you can answer them separately. But the first question on the Pro business, and I think this is going to be a bit of a follow-up. But as we're thinking about the development of the business and what Home Depot is doing from a market share perspective, over time, will the margin profile improve? Are there scale benefits as the business grows?

And then second, I guess, more on the macro environment. In the presentation we talked today about home price declines in certain markets. Historically, home price declines have been a negative. But are you looking at that dynamic as we think about the macro backdrop for maybe '26 is maybe different this time that given the affordability issues out there, home price declines could actually be somewhat of a positive?

Well, I mean, it's a double-edged sword on the home price. As you say, it's a positive in that you'll get to equilibrium. It would be a near-term offset because people are very aware of the value of their home, you want to make a larger investment in your home as you see your market, if you're living in a city or a particular part of a city that home prices are going down, where we've seen a lot of delistings, for example, that people are pulling their homes off the market because they've seen the prices drop and they just don't want to sell at that price. So longer term, equilibrium is a great thing. shorter term, some near-term pain.

And I think that's what's part of the reason for '26, one of the reasons of concern is home price. When we say what's different in '26 versus '25. We've said for a long time, home price appreciation of all the things we track is one of the tightest correlation with sales. So in a year where more markets are potentially turning down, then that's part of the caution in the watch out for the potentially negative overall industry in '26.

In terms of the scale question in driving profitability, absolutely. I mean, as we said, we are the largest. We're scaled across North America. Obviously, our Home Depot store business, all the things we're building with our pro organic capabilities, SRS being one of the truly largest distribution companies and not just largest but multi footprint and all the different verticals that they play in, those businesses, the retail business and the wholesale business will definitely become more profitable with scale.

And we have time for one more question. Let's go to Peter Keith.

Peter Keith with Piper Sandler. So I'll follow up on Brian's question, just on the margin. So the pre-COVID EBIT margin was 14.5%, and today, you sit at 13%. Is there a world where we have a strong market recovery and you get back to that prior peak? Or conversely, maybe the enhancements with complex Pro and wholesale distribution are lower margin and therefore prevent that?

Well, I think, as Ted said, I'll take your question backwards. There's nothing preventing any part of our business from expanding margin. SRS has a history of expanding their margin over their 15-year history, and we certainly have that same. When you're comparing to 2019, you've got really kind of 2 things.

The first is just the mix of the acquired businesses, right? So you can think of if you combine SRS and GMS together on a pro forma basis, and you're not going to kind of see this anymore because it's embedded in our business. But that makes a 60 basis point difference, right? That's the mix impact of SRS. Then you look at what were outsized wage investments that we made through the period.

And I'll start with what we were dealing with, and I'll tell you where we stand, sort of 2022 beginning in '23, the entire market saw incredible pressure on labor retention. We weren't immune to that. We called it. We made really kind of 3 significant step-ups in wage at The Home Depot. We now feel great about where we stand. Retention and tenure are higher than they've been since pre-COVID, right?

And obviously, we'll always look to manage wage locally. But that, for the most part, is now settled, and we're in a great position. Just those 2 alone are significant impacts. And then third, I'd say is there was ramp-up alongside capital investment, as we said, you invest in IT, ramp up IT investment. You're going to have associated IT expense growing with it through that period, that was the case.

I think we are -- now when you look at the CapEx to sales intent, the relatively steady profile of our investment plan. That's why when we lay out the market recovery case, we do expect to grow operating profit faster than sales, which means margin expansion.

Okay. Helpful. And then lastly, just on the competitive environment. So we'll say we're kind of coming out of -- hopefully, coming out of a housing depression, we'll call it, the last 3 years.

And as the competitive environment, is it any different than the great financial crisis, where that pushed a lot of companies into bankruptcy and out of business, and it created this large share capture. Is it different now with fewer bankruptcies? Or is there more companies going out of business? And I'm curious both on the retail and as well on the wholesale distribution side?

I don't know if there's certainly nowhere near the bankruptcies on the individual homeowner or companies. I mean -- and that will influence the slope of this recovery when it starts, you can say on one hand, you could have a sharper slope because the consumer, the equity in their house -- there weren't as many bankruptcies in all the various distributors or Pros. But on the other hand, you weren't anywhere as deep of a trough to pull out of that you did in the GFC.

So those would be the 2 factors that we play off in our heads, which one will have the bigger impact on the slope of this thing. A, it wasn't as deep, and b, though, people are in a much better position with all this, we know pent-up demand on spend and loads of dry powder with equity in their homes and that will be the balance that we'll have to work through to ultimately determine what the slope looks like.

This concludes our question-and-answer session. Thank you for joining us today and for your interest in The Home Depot. And thank you, first and foremost, to our executive leadership team I would also like to thank the corporate events team and our production partners. And I'd like to give a huge shout out to my incredible Investor Relations team. [ Jaco, Rachel, Luke, Don, Michael, Stuart and Frank]. Thank you. This concludes our presentation today.

Greetings, and welcome to The Home Depot Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's Third Quarter 2025 Earnings Call. Joining us on our call today are Ted Decker, Chair President and CEO; Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, Executive Vice President of Merchandise Inc.; and Richard McPhail, Executive Vice President and Chief Financial Officer. [Operator Instructions] If we are unable to get to your question during the call, please call our Investor Relations department at (770) 384-2387.

Before I turn the call over to Ted, let me remind you that today's press release and the presentations made by our executives include forward-looking statements under the federal securities laws, including as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release in our most recent annual report on Form 10-K, and in our other filings with the Securities and Exchange Commission.

Today's presentation will also include certain non-GAAP measures including, but not limited to adjusted operating margin, adjusted diluted earnings per share and return on invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website.

Now let me turn the call over to Ted.

Thank you, Isabel, and good morning, everyone. Sales for the third quarter were $41.4 billion, up 2.8% from the same period last year. Comp sales increased 0.2% from the same period last year, and comps in the U.S. increased 0.1%. Adjusted diluted earnings per share were $3.74 in the third quarter, compared to $3.78 in the third quarter last year. In local currency, Canada and Mexico posted positive comps.

Our results missed our expectations primarily due to the lack of storms in the third quarter which resulted in greater-than-expected pressure in certain categories. Additionally, while underlying demand in the business remain relatively stable sequentially, an expected increase in demand in the third quarter did not materialize. We believe the consumer uncertainty and continued pressure in housing are disproportionately impacting home improvement demand. Today, we've revised our guidance for fiscal 2025, which Rich will take you through in a moment.

We remain focused on controlling what we can control. Our teams are executing at a high level, and we believe we are growing market share. We continue to invest across the business, supporting our associates and delivering the value proposition expected by our customers. In September, SRS completed the acquisition of GMS, a leading distributor of specialty building products, including drywall, ceiling and steel framing related to remodeling in construction projects. GMS further enhances SRS' position as the leading multi-category building materials distributor, bringing differentiated capabilities, product categories in customer relationships that are highly complementary to SRS' existing business. We could not be more excited to welcome GMS to the family and look forward to bringing a truly differentiated value proposition to our Pro customers.

We're excited to see many of you in person in a few weeks at our investor conference, the New York Stock Exchange on December 9. We will update you on our strategic initiatives, our unique positioning in the marketplace, our investments and the traction we are seeing with our customers as we continue to position ourselves to win market share in both the near and long term.

In closing, I would like to thank our store associates, merchants, supply chain teams and vendor partners who continue to take care of our customers and execute at a high level.

With that, let me turn the call over to Ann.

Thanks, Ted, and good morning, everyone. Our associates did an incredible job focusing on our customers and delivering exceptional customer service in our stores during the quarter. We continue to lean in on initiatives that help our associates do their jobs more effectively while also driving productivity in our operations. I'm going to highlight our progress across a number of initiatives that have helped improve the associate experience and are resulting in a better customer experience and increased customer satisfaction.

Last year, we rolled out our [ freight flow ] application to all our stores, which has improved our freight processes and driven efficiency in our operations. This initiative has significantly improved our cartons per hour metric resulting in greater efficiency in our onload and packout process. We also continue to focus on-shelf availability and through computer vision and [indiscernible] we have reached record in-stock and on-shelf availability levels, Lastly, our faster fulfillment efforts leveraging both our stores and distribution centers that you've heard about over the last few quarters have driven an over 400 basis point increase in our customer satisfaction scores.

In addition, we continue to focus on our Pro ecosystem, maturing the new capabilities we have built for Pros working on complex projects while enhancing the tools we have to serve Pros. We are pleased with the progress we are seeing as our customers engage with our capabilities. There are two new tools we have deployed over the last several months that help us differentiate our offering. The first is a new project planning tool that we launched in September, which allows our Pros to create and manage material lift and track orders and deliveries. The second tool, blueprint takeoffs, will transform the way Pros plan and prepare for their projects. This new tool leverages advanced AI and proprietary algorithms to deliver accurate blueprint takeoffs and material estimates in record time.

Both can then quickly and easily purchase all materials they need for their project through The Home Depot, simplifying this complex process by going through a single supplier. This technology replaces a manual intensive process that took weeks to complete increase in accuracy and reliability. Adding this advanced technology to our ecosystem of capabilities to better serve the Pro working on complex projects will further enable us to be the one-stop shop for all project needs from initial planning to material delivery, saving [ our ] Pros time and money. We look forward to seeing you in a few weeks in New York to provide a holistic view of how our full ecosystem is resonating with our Pros and allowing us to gain traction and win in the market.

With that, let me turn the call over to Billy.

Thank you, Ann, and good morning, everyone. I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities.

As you heard from Ted, the underlying demand in the quarter was relatively similar to what we saw in the second quarter. However, our results were below our expectations, largely due to a lack of storms relative to historic norms which most notably impacted areas of the business such as roofing, power generation and plywood to name a few.

Turning to our merchandising department comp performance for the third quarter, 9 of our 16 merchandising departments posted positive comps, including kitchen, bath, outdoor garden, storage, electrical, plumbing, millwork, hardware and appliances. During the third quarter, our comp average ticket increased 1.8% and comp transactions decreased 1.6%. The growth in comp average ticket primarily reflects a greater mix of higher ticket items, customers continuing to trade up for new and innovative products, as well as modest price increases. Big ticket comp transactions for those over $1,000 were positive 2.3% compared to the third quarter of last year. We were pleased with the performance we saw in categories such as appliances, portable power and gypsum. However, we continue to see softer engagement in larger discretionary projects where customers typically use financing to fund renovation projects.

During the third quarter, both Pro and DIY comp sales were positive and relatively in line with one another. We saw strength across Pro-heavy categories like gypsum, insulation, siding and plumbing. In DIY, we saw strength across our seasonal product offerings, including live goods, hardscapes and other garden products.

Turning to total company online comp sales, sales leveraging our digital platforms increased approximately 11% compared to the third quarter of last year. We're excited about the continued success we're seeing across our interconnected platforms, our faster delivery speeds of resonating with customers and driving greater engagement and sales. We know that as we remove friction from the experience, we see incremental customer engagement, leading to greater sales across all points of interaction.

During the third quarter, we hosted our annual supplier partnership meeting, where we focused on how we will continue to work together to bring the best products to market, deliver innovative solutions that simplify the project, and offer great value with best-in-class features and benefits. At the event, we recognized a number of vendors across categories who continue to transform the industry with the innovation they bring to our customers on a daily basis. They include [ Leaderson ], [ Cover Torque ], [ Feather River ], [ Milwaukee ], [ RYOBI ], [indiscernible] and many more. We are proud of the innovation and partnership that our suppliers bring to The Home Depot, and the value we're able to offer both our Pro and DIY customers.

As we turn our attention to the fourth quarter, we're looking forward to the excitement we will bring with our annual holiday, Black Friday and Gift Center events. In our Gift Center event, we continue to lean into brands that matter most for our customers with our assortment of Milwaukee, RYOBI, [indiscernible], DEWALT, [ Rigid ], [ Diablo ], Husky and more. We'll have something for everyone, whether it's our wide assortment of [ cordless ] RYOBI tools for Milwaukee hand tools.

And in appliances for Black Friday, we have exciting offers on LG, Samsung, [ Bosch, Whirlpool, GE and Frigidaire ]. Our assortment includes multiple exclusive products like LG stainless steel front store refrigerator with craft ice, and [indiscernible] new gallery dishwasher with a wash cycle time of only 50 minutes. This quarter, I'm also excited to announce the addition of [ PGT ] Windows to a wide assortment of exclusive retail brands, including American Craftsman and Anderson windows. PGT's impact-resistant windows are engineered to meet some of the highest performance standards in the industry, reducing storm damage risk, providing energy efficiency, UV protection and sound reduction. And they will be exclusive to The Home Depot in the big box channel.

Our merchandising organization remains focused on being our customers' advocate for value. This means continuing to provide a broad assortment of best-in-class products that are in stock and available for our customers. It is the power of our vendor relationships, coupled with our best-in-class merchant organization that allows us to offer our customers the best brands with the most innovation to solve pain points, increase functionality and enhance performance at the best value in the market.

With that, I'd like to turn the call over to Richard.

Thank you, Billy, and good morning, everyone. In the third quarter, total sales were $41.4 billion, an increase of $1.1 billion, or approximately 3% from last year. Total sales include approximately $900 million from the recent acquisition of GMS, which represents approximately 8 weeks of sales in the quarter.

During the third quarter, our total company comps were positive 0.2%, with comps of positive 2% in August, positive 0.5% in September, and negative 1.5% in October. Comps in the U.S. were positive 0.1% for the quarter with comps of positive 2.2% in August, positive 0.3% in September and negative 1.7% in October. For the quarter and in local currency, Canada and Mexico posted positive comps.

In the third quarter, our gross margin was 33.4%, flat compared to the third quarter of 2024, which was in line with our expectations. During the third quarter, operating expense as a percent of sales increased approximately 55 basis points to 20.5% compared to the third quarter of 2024. Our operating expense included transaction fees related to the acquisition of GMS, but otherwise were in line with our expectations. Our operating margin for the third quarter was 12.9%, compared to 13.5% in the third quarter of 2024. In the quarter, pretax intangible asset amortization was $158 million. Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the third quarter was 13.3%, compared to 13.8% in the third quarter of 2024.

Interest and other expense for the third quarter was $596 million, which is in line with our expectations. In the third quarter, our effective tax rate was 24.3%, compared to 24.4% in the third quarter of fiscal 2024. Our diluted earnings per share for the third quarter were $3.62, compared to $3.67 in the third quarter of 2024. Excluding intangible asset amortization, our adjusted diluted earnings per share for the third quarter were $3.74, compared to $3.78 in the third quarter of 2024. During the third quarter, we opened 3 new stores, bringing our total store count to 2,356. At the end of the quarter, merchandise inventories were $26.2 billion, up approximately $2.3 billion compared to the third quarter of 2024 and inventory turns or 4.5x, down from 4.8x last year.

Turning to capital allocation. During the third quarter, we invested approximately $900 million back into our business in the form of capital expenditures, and we paid approximately $2.3 billion in dividends to our shareholders. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 26.3%, down from 31.5% in the third quarter of fiscal 2024.

Now I will comment on our outlook for fiscal 2025. Today, we are updating our fiscal 2025 guidance to include softer-than-expected results in the third quarter, continued pressure in the fourth quarter from the lack of storm activity, ongoing consumer uncertainty and housing pressure, as well as the inclusion of the GMS acquisition into our consolidated results. For fiscal 2025, we expect total sales growth of approximately positive 3% with GMS expected to contribute approximately $2 billion in incremental sales, and comp sales growth percent to be slightly positive compared to fiscal 2024.

Our gross margin is expected to be approximately 33.2%. Further, we expect operating margin of approximately 12.6% and adjusted operating margin of approximately 13%. Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $2.3 billion. We expect our diluted earnings per share to decline approximately 6% compared to fiscal 2024, when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024. And we expect our adjusted diluted earnings per share to decline approximately 5% compared to fiscal 2024, when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024.

We plan to continue investing in our business with capital expenditures of approximately 2.5% of sales for fiscal 2025. We believe that we will grow market share in any environment by strengthening our competitive position with our customers and delivering the best customer experience in home improvement.

Thank you for your participation in today's call. And Christine, we are now ready for questions.

[Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley.

My first question is more short term on the fourth quarter. So when you guided for the full year after the second quarter, we didn't have GMS in the numbers. Now we do. And then we now know your third quarter came in a little light, and that the fourth quarter may be a little lighter on revenue as well. So there's some deleverage.

We're having a tough time getting to the full amount of, call it, EBIT dollar shortfall, because GMS looks like they made money last year. Are there any expenses that are tied to it? Or how do we think about the deleverage?

Yes. Simeon, thanks for the question. I think you could look at it two ways. Let's talk about fiscal year and then let's talk about Q4.

So fiscal year, as you know, we've revised our guidance by 40 basis points from 13.4% adjusted operating margin to 13% operating margin. The walk there, let's talk about the most significant item, which is GMS, the inclusion of GMS in our results. If you take their likely impact to 2025, and you add the transaction expenses to it, you're basically at 20 basis points of year-over-year impact to operating margin. You then take into account the decrease in our comp sales from one comp to slightly positive.

And then we -- so that assumption would have obviously deleverage that we've spoken of previously. And then with respect to SRS and its impact. First, SRS continues to perform extremely well. There is significant pressure in the roofing market. We know that shipments are down double digits from the absence of storm activity this year. SRS actually comped flat for Q3. And so we think that they are taking significant share. But as our expectations have weakened slightly for them in the full year, rather than seeing them grow at mid-single digits, they're likely to grow low single digits.

You do some see some deleverage in SRS in the supply chain and in OpEx. And so you add those together and get your revision to the fiscal year guide. And really, you just add to that if you're talking about Q4, you have all the same dynamics, but let's not forget, you're comparing Q4 last year has 14 weeks of expense. Q4 this year has 13 weeks of expense. And so you've got 50-ish basis points of operating expense deleverage in the quarter. So hopefully, that will help you with the walk.

Yes, that helps a lot. And then a follow-up. You mentioned on this call and in the release that there was an expectation of increased or improving demand. I guess, for the remainder of the year at one point. Was that an expectation based on housing or an expectation that there would be storms? And if there was any volatility related to government shutdown, do you have enough time looking backwards since the reopening that there's been an improvement in how the consumer is behaving.

Yes, Simeon, let me step back and just paint a broader picture of what we're seeing with the consumer in our sector. Our comps definitely slowed as the quarter progressed, but great work by the team to register the positive comp for the entire quarter. And as we said, the primary driver of that sales pressure was the lack of storm activity in the quarter. We don't plan per storms per se, but there's always some weather impact in the baseline. And given last year, a pretty significant storm activity in this year, truly zero. There was no storm activity this year. So we saw that most acutely in October. That was the single heaviest impacted month, and that's where, as Richard called out, the comp progression return negative in October.

And then you talked about the overall economy in housing, we did expect to start seeing some pickup in demand in the second half of the year. And this wasn't just the calendar dynamic of things will be better in the second half. We're expecting interest rates and mortgage rates to come down, which they did, that would have been some assistance to housing. But we really just saw ongoing consumer uncertainty and pressure in housing that are disproportionately impacting home improvement demand.

I think the good news is the team, as I said, is executing at a very high level, and we believe we're taking share. And if you adjust for the storm activity, our Q3 comp, the underlying business comp, was essentially the exact same as Q2. In adjusting, again, for storm and weather, call that underlying business to be about a 1% comp in each of Q2 and Q3.

So now here we are going into Q4, and we're going to see even more quarter-over-quarter pressure from the storm activity. So again, there's nothing that's happened this year. The storm activity and the rebuild and repair continued into Q4 last year. So we'll have even more storm pressure year-over-year in Q4. And then we just don't see the catalyst to increase that underlying storm adjusted demand in the market. So it's certainly a very interesting consumer dynamic out there.

On the one hand, you look at certain economic indicators and you say, geez, things are pretty good. You look at GDP, you look at PCE, those are both strong. But on the other hand, what's impacting us and home improvement is the ongoing pressure in housing, in incremental consumer uncertainty. So take housing. I mean, housing has been soft for some time. We all know the higher interest rates and affordability concerns. But what we're seeing now is even less turnover, the housing activity is truly a 40-year lows as a percentage of housing stock. I think we're at 2.9% turnover. And then home prices have started to adjust in even more markets over this past quarter.

And then when you look at the consumer, what's going to spark the consumer? We still believe we have one of the healthiest consumer segments in the whole economy. But again, the economic uncertainty continues largely now due to living costs, affordability's a word that's being used a lot. Layoffs, increased job concerns, et cetera. So that's why we don't see an uptick in that underlying storm adjusted demand in the business.

So as I said earlier, we're going to keep controlling what we can control, support our associates and deliver just a great value proposition for the customer, and I believe we took share in Q3, and year-to-date this year, and do the same thing in Q4.

Our next question comes from the line of Zack Fadem with Wells Fargo.

Wanted to start on the average ticket. I guess, any call-outs on commodities versus same-SKU inflation? And then with last quarter ticking down on promo, curious how Q3 played out, and whether you'd expect the industry to be more or less promotional this Q4?

Zack, it's Billy. Thanks for the question. As it relates to ticket, as we've talked about on the few calls, I mean we've continued to see customers trade up for innovation. In fact, we really haven't seen any trade down that we haven't spoken about in previous calls as it relates to that. So a modest increase in ticket, but most notably, that was from people, innovation and things in the marketplace that we've seen.

As it relates to the promotional activity, it's really consistent year-over-year, both in Q3 and Q4. And as Ted mentioned, the fundamental demand in our business, while it didn't increase certainly was very consistent with what we saw in Q2 outside as we mentioned, in the storm impact. So from a fundamental standpoint, feel very good about that and continue to see customers engage projects, as I mentioned, they're going to continue to have pressure where they're financed. But from a promotional activity standpoint, it's really a similar environment than it was in really for the balance of the year, and certainly as it relates to Q4 a year ago, it's a similar environment for us as well.

Got it. And then, Richard, a couple of follow-ups on GMS. First of all, on operating expenses. Could you help us understand what's onetime in terms of impact transactions, et cetera, on Q3 and Q4? And then on the inventory growth, up about 10%, any color you can offer on how much is GMS versus underlying volume versus pricing?

Sure. You can think about the GMS transaction fees is about 5 basis points of margin to the year, or 5 basis points of expense when you put it. About 15 basis points for the quarter. Obviously, Q3 is one of our larger quarters. And you can think of the impact is about $0.05 of EPS for the year for GMS transaction fees, and those all occurred in Q3.

With respect to the inventory, inventory increases reflect, principally, the inclusion of GMS now in our balance sheet. And the fact that we've leaned into investments, in particular investments with respect to hitting our speed promise. So we've seen fantastic results from improving our speed and reliability of delivery over the last year. That's something we've leaned into. We have our DFC network, which we think is unmatched in our market. And as we see results from it, and obviously, this quarter, you saw an 11% comp online, we're going to continue to lean into that investment. So for the most part, it's investments in the business.

Our next question comes from the line of Michael Lasser with UBS.

Given all the comments from this morning, [indiscernible] question, can home improvement demand recover without some assistance from either an increase in underlying housing activity or a reduction in interest rates? And how should this faster the market's expectation towards the recovery, or potential recovery in 2026?

Thanks, Michael. We've talked about all the different drivers of demand in our segment. And there are leads and lags in all of them, and we've clearly called out over time the most statistically relevant would be home price appreciation and household formation and housing turnover. Those three right now are pressured for sure.

But we also know that we've more than worked our way through the pull forward of the COVID years. And there are many industry reports and calculations of now under spend per household. So on one hand, we're looking at something as much as a $50 billion cumulative under spend in normal repair and remodel activity in U.S. housing. On the other hand, we have less turnover and home price appreciation. So that tension is going to have to balance itself out as we work through the rest of this year and into next year.

But fundamentally, our job is to put great value propositions in front of the customer and take share in any environment. So can The Home Depot grow? The answer is yes. Will the industry have some shorter-term pressures with turnover in home price? Yes, as well.

My second question is, as The Home Depot has taken a significant number of big steps over the last few years to gain market share, particularly in the Pro segment, has The Home Depot increased its fixed cost structure such that it's now experiencing deleverage as sales are under pressure, but this can act as a significant tailwind to the earnings outlook as sales improve?

Yes. I mean you're right, Mike. We have had a number of big steps on Pro. It's -- we've talked about the size of the overall home improvement TAM at $1-plus trillion and evenly split between Pro and consumer, and how strong we've always been in both sectors out of our stores, the Pro and the consumer. But identified real opportunity to bring increased value proposition to that Pro space by building out wholesale [indiscernible] type capabilities to capture more share of wallet with that customer. And that's what we've been doing, and we'll talk a lot about that more in a few weeks in New York, but we're very, very happy with all the initiatives and the organic investments we've made to build out those capabilities.

And then we've augmented that with two acquisitions very, very strong wholesale platforms with each of SRS [ and ] GMS. Your question specifically on fixed cost structure. What's interesting, we've mentioned this several times, the organic effort is reasonably asset light. This -- the -- regardless of whether we lease our DCs or not, the capital deployed in those DCs is first and foremost for general store replenishment. It's an added benefit that we're able then to deliver to the customer out of those buildings.

And as Richard said, the speed equation is a flywheel that works and all our investments in our direct fulfillment centers, regardless of what we're doing with the Pro, that's to serve all customers and increase the speed, which we have done very effectively. And then all the other related operating costs, we have variable incentive pay structures for our outside salespeople. We lease trucks, and we add trucks and take trucks away from markets as volume ebbs and flows through the season. So really other than an IT spend, which is modest investment in the scheme of things, there's not been a lot of incremental fixed cost put into the business to support the Pro organic initiatives.

Our next question comes from the line of Christopher Horvers with JPMorgan.

So I wanted to follow up on the implied 4Q operating margin question. It looks like you're saying about 10.3%. Did you say that 50 basis points of that was the 53rd week lap? And is there anything like unique that we should think about that this is not -- this is or is not the right level to start to think about building the business as we look to the out year? So for example, 53rd week lap, or perhaps the seasonality of the SRS and GMS business structurally changing the normal flow of operating margin over the year?

I would -- yes, thanks, Chris. I would use our full year guide as the appropriate jumping off point, I think Q4 has a couple items of noise. The first was the 53rd week. The second actually is the shape of the business. And if you look, you can actually see, for instance, the public filings of GMS when they were a public company and see the Q4, or rather our Q4, is a significant low point from a volume perspective.

That's true for SRS as well. And so SRS and GMS see seasonal swings that are greater than Home Depot you're going to just see that amplified if you hold Q4 in isolation. And so that's why I would really point you to the full year as the right jumping off point for your modeling.

That's super helpful. I mean if you step back about...

And the 53rd week is a year-over-year contract. So it doesn't impact your 2025 numbers, but it does impact the year-over-year.

Got it. Makes sense. If you think about this quarter, I mean if you look at the monthly basis, even with the really tough weather/hurricane driven compare in October. Maybe you also look at the last -- the first 3 quarters of the year. The 2-year trend seems to be improving on the line, which points to replacement cycle demand and maybe some pricing and just life moves on. I guess -- and then there's some research out there that points to maybe the consumer is waiting for the full effect of the head.

We have a couple of meetings coming up and you had all this noise with a government shutdown that impacted even retailers that sell milk and eggs, and [ take share ] every day. So why wouldn't we think that the launch point into 2026 is, sort of one, or if not better, than this 1%, sort of, underlying demand? Just because uncertainty goes away, full effect to the Fed, housing stock ages and life moves on and replacement cycle demand continues to build.

Yes. And Chris, another positive add. There'll be more robust tax returns and the tax rates going into effect in '26. So yes, there is a positive story there. But again, the underlying 1% that is what it was. And this ongoing consumer uncertainty we're talking about and specifically housing turnover and now price, those are near-term and newer phenomenon.

Let me -- Chris, I mean I'll just circle back. I was focusing on your question in context of Q4 being a jumping off point and thinking about 53rd week. Let me add something, though, when you pro forma GMS, we do need to take that into account. So on a pro forma basis, recall, we've sort of guided you to within The Home Depot numbers now with SRS included, SRS changes our margin profile by about 80 basis points of gross margin and about 40 basis points of operating margin.

GMS, which was about half the size of SRS, is about half the impact. So you've got a pro forma, this is not fiscal year, but a pro forma impact of about 40 basis points of GMS and about 20 basis points -- and about 20 basis points of operating margin for GMS. So 40, 20. You add those together, you roughly have a change in our profile with both of them together of 120 basis points of gross margin and 60 basis points of operating margin.

Now when you're talking fiscal year 2025, Obviously, we have some wonkiness in the comparison periods. We've owned SRS for a full year of 2025, but only on a partial year in 2024. We owned GMS for about 5 months in 2025, and own them for no months in 2024. So I'm just going to avoid all the steps in the math and tell you on a fiscal year perspective, you've got about a 55 basis point impact to gross margin year-over-year, reflecting the ownership of both SRS and GMS, and about a 35 basis point impact to operating margin mix, reflecting the year-over-year comparison of those ownership periods of SRS and GMS.

We'll clarify this more just one more time when we move forward and in the future talk about future years. But hopefully, that gives you a little bit more clarity. So I do want to put an asterisk. The jumping off point is our full year guidance, but you also have to include that comparison, or rather the full year impacts of GMS next year.

Right, offset by a tick of transaction fees?

That would be correct. Yes.

Our next question comes from the line of Zhihan Ma with Bernstein.

I wanted to follow up on the complex Pro and GMS side. So firstly, a short-term question, the $2 billion contribution to sales from GMS this year, I think if we do the math based on the reported numbers last year, kind of implies a high single-digit percentage decline on a year-over-year basis. I don't know if I completely got the math right? If that's true, how much of that is macro weakness versus underlying [ CR ] dynamics? And is there any additional color you can provide on that underlying market?

So basically, you're owning it for a quarter plus 8 weeks, and you're heading into the lowest quarter of the year for GMS' fiscal year. There was also weather impact Home Depot, SRS and GMS. No one was immune to the broader weather impacts in the market. And so $2 billion is an approximation. We know that GMS continues to take share. We continue to take shares in enterprise and particularly in all of GMS' categories, and we feel great about that business going forward.

Got it. And then a long-term question to your point about the current margin dilution impact from the acquisitions. Is there a long-term argument that as you further consolidate, assume if you further consolidate in the complex Pro space, is there a path for you to structurally improve or recover your margins as you start to gain more [indiscernible] power versus suppliers?

Well, there's structural differences in the margins of the wholesale business in retail. I mean, at the highest level, retail would have higher gross and lower operating cost in the inverse with wholesale. Of course, as we drive synergies between the two platforms, and the most important synergy is the cross-sell and the value proposition to the Pro, we'll be able to leverage incremental sales in both retail and wholesale platforms to leverage the businesses and, of course, just operating efficiencies across a larger scale business, we'll be able to drive efficiencies as well.

But the fundamental difference of wholesale margin structure and retail margin structure would be the case going forward. Those wouldn't dramatically change.

Our next question comes from the line of Seth Sigman with Barclays.

I had a couple of follow-up questions. Just first on transactions slowed while ticket accelerated this quarter. Just curious, how do you read that? Are there any signs of elasticity? Maybe just elaborate on price changes that you made in the quarter? Or is the slowdown in transaction just really storm related?

Yes. Thanks, Seth. It's Billy. I'll answer your last question first. As it relates to the transaction that was really related strictly to the storm impact that we called out.

As I mentioned, in our Q2 call after some policy changes were made around tariffs, we would take some moderate price moves with the entire strategy to make sure we protected the project. And so as it relates to elasticity, it's a little early, and then you couple that with a lot of dynamics in the marketplace over the last 60 days, 90 days since our last call, it's a little early to say how much of that was going to -- the elasticity piece will play out.

I'm thrilled with the work that the team has done. If you go into our stores right now and look at Gift Center and all the value that we have there, and certainly with our holiday program, same thing. So we're watching that. Again, our entire goal was to project the project. And it bears also to point out that over 50% of our inventory is not part of tariffs and it's obviously sourced domestically. So we'll continue to watch that and look forward to the Q4.

Okay. And then just to follow up on some of the demand comments today and what seems like a more cautious view on the consumer, I'm just trying to figure out how to reconcile that with big ticket still outperforming? You've had a few quarters of big ticket being positive that continued this quarter. And I guess just based on what you've seen historically, should that be a leading indicator for big projects that have still been pressured? How do you think about that?

Well, I mean, you pointed out correctly and in my prepared comments, I talked about big ticket transactions over $1,000, or positive 2.3%. But I wouldn't read into that from a project standpoint. Think about appliances. Think about power tools, and some of those pieces. Those are individual items as we've kind of talked about that metric in the past, versus more of the project-oriented pieces that customers are still challenged with based on all the things that we talked about earlier.

I think some of that -- some of the big ticket as well, we've called out, there was pressure on commodities overall. But some of that big ticket is the success in our Pro initiatives. I mean the managed accounts, the activities that [indiscernible] and team are driving to capture more share of larger pro complex purchase. That is also driving that. So it's not so much that it's an indicator of demand as it is an indication of our taking share in bigger ticket Pro oriented project.

Our next question comes from the line of Chuck Grom with Gordon Haskett.

There's a lot of talk about a [ K-shaped ] economy right now, but we're starting to see more evidence of job losses for white collar employees. So I guess I'm curious when you look at your data, is there anything you see that supports more fatigue in your upper income customer base? And I guess as a follow-up, anything regionally that you'd call out over the past couple of months?

Well, I think that regionally, the most acute difference, again, is the storm and weather patterns. On the larger, the higher income cohort, we don't see anything specific. As Billy said, there has not been a lot of trade down and we've talked in the past. Things like countertops, there's been some trade down, but we have still not seen trade down across the broader assortment in the store.

If there's an indication of maybe some fatigue in taking on bigger projects, we have seen Pro backlogs and larger backlogs start to diminish a little bit. So our Pros are reporting months that they're booked out. As we know some time ago, you couldn't find a Pro. And then they all had full books and we're seeing a little softening in larger project backlog. I can't say we've tied that directly to an income cohort, so we've definitely seen the dynamic.

Okay. And then just, Richard, can we just double click on the opportunity to improve the margin structures of both GMS and SRS? It sounds like 35 basis points of pressure this year. You probably have some wrap of that into '26. But just like broader picture over the next few years, I mean, how should we think about the improvement line for those 2 businesses?

Well, we don't like to separate them out. While they do operate independently, as Ted said, the name of the game here is synergies and synergies in the form of cross-selling. And so I think the leverage in the businesses is going to be a function of how we create a differentiated value proposition across the entire enterprise, including SRS and GMS.

So look, SRS, the combined entity is an engine for growth for The Home Depot. And so we're just getting started. So I wouldn't put a formula on it. But it's all going to be a function of how fast we can drive cross-sell.

Our next question comes from the line of Steve Forbes with Guggenheim.

Maybe, Richard, on the idea of cross-selling, I would love to sort of hear high-level thoughts on -- I don't know if you can like rank order how you guys see the cross-selling opportunities to get today now that GMS is integrated. Sort of what are you sort of building the business for from a cross-selling standpoint as we head into next year? Like rank order the opportunities would be great?

Yes. I mean, it's [ Mike ] here. Thanks for the question. We see just from the relationships that have already been established between the outside sales force that we've got, we're here within Home Depot, combined with the sales forces that they have originally with SRS and now with GMS, there is account handoffs that happened.

So a great example, recently, with GMS engaged in a large roofing sale on a property. The customer was looking for much more in terms of product, in terms of whether it be framing, flooring and more. And that relationship than that SRS introduced to The Home Depot outside sales force to come in and sell that engagement to the contractor work quite successful. And that's just one example of many that have happened, and they happen both ways. Whereby the Home Depot sales organization recognizes a large roofing opportunity that they can pass over to SRS, or a large drywall opportunity that they can pass over to GMS. And those engagements are happening on a daily and weekly basis.

And then just a quick follow-up. I was hoping to maybe explore the branch growth opportunity across SRS, DMS and heritage. So I don't know, Ted, if you can provide a current update on branch counts across the various assets?

And then -- and then like what's the right way to think about or think through the out-year branch growth opportunity? And I don't know if you can, sort of, talk about like what's the end state as you see it today, versus the [ 1,200 ] you have today? How do we sort of think about the footprint evolving over the next 3, 5 or so years?

Yes. We'll certainly go into a lot more detail in a few weeks. But the model that SRS deploys is very similar to GMS that they will -- they'll drive organic comp growth through existing branches. They open greenfield branches, and then they'll focus on tuck-in customer list expansion-oriented acquisitions. And they've been doing that quite successfully on the branches. Think of SRS, GMS 40 to 50 branches a year. And they've been sort of running at that pace since we acquired SRS. And then they've done a handful of little tuck-in acquisitions. And again, these can be a one branch, $5-ish million acquisition, or a smaller regional $30 million, $40 million, $50 million a couple of few branch operations. So it's going really, really well, and we see that continuing a key part of their business model.

And I mean, just to -- it's not just about our plans, it's actually happening right now. If you talk about our noncomp sales, putting new stores and new SRS branches together, you've got about 0.5 point of sales growth driven by those two investments. And so we're thrilled with that.

Christine, we have time for one more question.

Our final question will come from the line of Steven Zaccone with Citi.

I wanted to follow up on the storm impact. So it sounds like it was 80 basis points for the third quarter, pressure to same-store sales. How large will that be in the fourth quarter? And then we should be mindful that that's also a headwind to think about in the first half of next year?

Well, thanks. As Ted said, the underlying demand for the business was sort of similar Q2 to Q3. If you talk about storm Q3 to Q4, we absolutely are lapping strong results, in fact, even slightly higher sales last year in Q4 than in Q3. Let's call it relatively even. So let's say, you basically -- if you've got underlying minus the storm impact, you've got pretty much similar run rates for Q3 and Q4.

Okay. Understood. And then your comments on the housing pressure, how does that inform you maybe near to medium-term outlook for SRS and GMS, right? Like these are new assets for Home Depot. So should we think that original expectation of mid-single-digit growth for SRS stepping down to low single digits, is that kind of a run rate we should consider for the near to medium term?

I mean I wouldn't say that. We'll, again, talk more about this in a few weeks. But the first thing to remember is SRS is much more in the reroof than new construction. So they're 80-plus percent reroof. So yes, they're 15%, 20% of the business that goes into new construction is impacted. But the fundamental business is reroof activity. Again, which is why it's disproportionately impacted with storms, particularly in their home and biggest market, which is Texas, which is by far, we think of hurricanes, we think of hail and other wind events. There was none such in 2025.

So no, we look at SRS is a long-term mid-single-digit grower. And this is principally a storm impacted dynamic that's taken them down to flattish right now. But as Richard said earlier, we think roofing shipments, you can see this [ at the ] reported data, roofing square shipments into the market are down mid-teens and SRS was flat. So clearly taking share.

Ms. Janci, I'd like to turn the floor back over to you for closing comments.

Thanks, Christine, and thank you all for joining us today. We look forward to speaking with you at our investor conference on December 9.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Good morning 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. There's 2 buckets of questions, I think, that we get asked the most about when it comes to Home Depot. And maybe 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. So maybe we can start there, and you can talk about what you're seeing from the consumer and why now and what you expect?

Well, we feel much better than we did last year, Kate. So when we were here last year, we were entering, I think it was our eighth quarter of negative comps. And now sitting here today, we just wrapped up in Q2, our third quarter of positive comps in the state. So there definitely has been a momentum switch that started in the back half of last year and continued into the full first 2 quarters of 2025. And 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 merchant departments, which Billy can hit on the number of departments that we've seen positive traction.

So our consumer is -- 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 percent since the end of '19. 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. So we have an employed, healthy core customer who's now starting to reengage in home improvement. Housing hasn't been particularly helpful. So you asked about the housing market. Some people are saying that it's close to frozen and 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. So we're not really making a dent in the shortage of housing. And then there's just been a lot of economic uncertainty that we think is preventing people from taking out a HELOC or cash out refi at their home. They have a tremendous amount of equity in the home. We've never seen more untapped equity. But with just -- 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 #1 reason that they haven't engaged with big projects.

But 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. But all things being equal, feel much better sitting here with you this year than a year ago.

And Billy, you can talk about the breadth.

Yes. And then as you mentioned, Kate, you said about our Q2 call, we did see the broadest base of kind of across our store impact. If you look at our top 20 categories that made up essentially the 14 U.S. comp we had, we had 13 of 16 departments in the U.S. positive comp. And only 5 -- 4 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. But it 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. But really pleased. The first time going back to, I think, the back half of '22, we saw that kind of broad-based impact across the business in a very positive way.

And I'd also say, Kate, our growth in addition to, I think, a more supportive environment, we continue to take share. So we're taking share with the consumer part of our business and the Pro part of the business. So all the things we're doing to build out Pro capabilities are resonating with our Pro customers. And then we're half the business, half the market is still that consumer DIY, and we're doing a tremendous amount in terms of delivery, our digital platforms, marketing to continue engaging with that consumer. And we're growing in virtually every category faster than the marketplace. So we love the customers responding to the capabilities and service levels we're putting into the marketplace.

That's great. Yes, it's definitely a different tone than it was last year. So it's great to hear. But the other thing that's maybe a little bit different from last year is tariffs. And Billy, you had talked again on the quarterly call 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 -- imports are outside the U.S. So how is the supply chain functioned in this very volatile environment? How is the merchandising team operated? And how -- where is the mitigation come from?

Yes. So you're right, things certainly have changed on the tariff front since we were here a year ago. And even candidly, back to Q1, we made -- 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. So listen, we said on the call, prices will move. There's no question about it. But if you step back, more than 50% of our goods are manufactured in the U.S. are not associated with anything tariff related. So we 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, work closely with our suppliers. Our #1 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 on those projects. And 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. And so while prices will move, we're going to be laser-focused on creating the best value for our customers, protecting the project is going to be a real key to us in the back half of the year. And 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. But we 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.

So we feel great about that position and how we'll manage that going forward and really 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. And we love our shelf price every day. we'll continue to protect that project at all costs.

And then 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. But maybe for holiday or Halloween or more of the discretionary occasions, have you had to work through that assortment a little bit differently than your past?

Yes. I think the holiday things you referenced, that's even a little bit different. While that's discretionary, yes, that's more of a onetime sort of impact. We spend a lot of time, again, this was a moving set of circumstances throughout the spring. And specifically to Q4, you're planning that in that time frame. So we 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. So 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, and we've talked about this many times, there 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. So we'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 head down. That's the only job right now among the 5 other things they're doing is really going bay by bay, SKU by SKU, assortment by assortment and seeing where if a retail has ultimately moved, is there going to be an impact to that product, meaning 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. So that was the kind of the first bucket of questions we got the macro and tariff. The second is about the Complex Pro. And there are a couple of different directions we can go with this. But maybe we could start with capital allocation. You have a long history now of making acquisitions. We've always been very consistent with these acquisitions and acquiring companies that can help you build out capabilities, HD Supply and Interline, for example, in the MRO space and now more recently, SRS and GMS. So could you maybe talk about how you're viewing your acquisition strategy going forward and in the context of your capital allocation priorities?

Sure. So capital 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. And then in the past, when we had excess cash after those demands, we would buy back shares. That's still the play in capital allocation. But one 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, we've made 2 decent-sized acquisitions. And because we have a pretty conservative outlook on leverage, we said that we would suspend buybacks until we got our leverage back down to our -- more or less to our target of 2x. So that pushes out buybacks just on our cash flow forecast into the back half of '26. But all 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.

So as 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 in somewhat. SRS, for example, has a very robust trade credit practice. It's what they've always done. So they'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 in 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. And as well as SRS was going, it just made sense to engage GMS and they were super open to the prospect of not just joining Home Depot, but joining the SRS platform. So GMS will be rolled in as 2 more verticals of ceiling and drywall into SRS. That management team happily, the operating team is staying and the sales force team is staying, and they will report into the SRS team. And we'll continue to look at opportunities from an M&A perspective. One thing that can I 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, we've owned them. 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. So we always look at the cost-benefit analysis of greenfielding a new site versus acquiring an operation that has a robust customer base. So we'll continue with -- and these are very modest in the scheme of things, acquisitions. Whether we do anything at scale anytime soon, we'll continue to review that. But the 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.

And 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?

Yes. It will always continue to develop. But yes, 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. So 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 obviously opened late at night and weekends, but their principal purchases were with distribution. And what we said is, well, we have the product, we're in your geographies and you're already shopping with us, why would you spend more with us? And they all love Home Depot, thankfully. They're like, yes, we love your brand. We love your product. We love the brands you sell, but you need to develop these capabilities to get that share of wallet. I mean we're not going to pay for a window package on a Visa card 3 months before it's delivered. That's just not -- that's not how we operate our business. And we're not going to come and pick up a truckload of shingles, those have to be delivered to the job site.

So we set about to build the capabilities to capture more share of wallet with that customer. And we're not just getting the share of wallet because we've entered the game, we have to offer value to them. And the 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 and how many projects can I turn? So the value proposition is, hey, we have the product, we have the brands you want, you like the Home Depot offering as we build out these capabilities and 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? And they said, absolutely, and we'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 -- so the 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. And M&A is an accelerator to that effort, but not necessary. And certainly, from where we are today, we're in great shape, and 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 lift 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. Is there a way you can quantify what lift you're seeing from this increased speed and how important it is to, again, just taking more share?

Yes. I think -- and Billy, please add. I mean it's clear that of all the capabilities that the Pro and the consumer is looking for is speed. They certainly want a great product at great value, but delivery and then speed of delivery is increasingly the battleground. So some 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. And we started to build out a supply chain to replenish our stores as well as deliver to customer, even going back to 2018, 2019. And thankfully, we did. We've built out over 20 -- think of pick, pack and ship. I mean these are massive 500,000 to 1 million square feet distribution centers, pick, pack and ship, largely parcel, but some big and bulky as well, where we could reach 90% of the population in 2 days or less. So we've now accomplished that. But not everyone necessarily appreciated that.

And then 2 days is great, but next day and even same day is better. So 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. So 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. We got -- we believe and we look at prices daily, we widened our price gap with key competition. We, for the first time, partnered with delivery agents and sort of 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, and those have been great partnerships.

So we put all that together and went to market with it and increased our marketing budget significantly. And the proof is in the pudding and the acceleration of our online business as people realize, wow, Home Depot, like I just ordered that. I mean it came in the afternoon that I ordered it. So our 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.

Yes. And 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. So really implementing some technology around ship from best location with the lens of same-day, next day kind of what the customer is really looking for and in some cases, demanding. And so we put our stores in the middle of that where we couldn't meet a next-day delivery from our 23 DFCs that we had and putting them in the middle of that has been really great. We mentioned some of the partnerships we've had. But there's no question that, 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. And we've been delivering parcel for some time.

So the technology around ship from best location, and this 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. And we'll talk more about that in December, of course. But that's been a big game changer. We had 12% comps, as we mentioned during the call online. And 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.

So really pleased with the stickiness of those customers, the repeatable ordering that they're doing and really -- and we invested -- you saw our inventory numbers. We invested. We'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. And again, we'll talk more about that in December, but we're really excited about the work that's been done there.

Yes. And the speed has never been faster. So we're measuring, as you can imagine, every day, what's our average promise time on parcel, on bulk, on how shipped, on vendor shipped, percentages delivered same day, next day, 2 days. And all those metrics have had dramatic improvements over the last several months and again, all being reflected in that acceleration of the online comp.

Great. Thank you for that. In the last 5 minutes here, we have 5 questions we're asking every company that's up here on stage with us today, just meant to kind of be rapid fire questions. We've touched on some of them already. But the health of the consumer in the second half environment, do you expect the environment in the second half of '25 to be better the 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?

Yes. It's interesting. I think folks that follow us knows we have the widest set of competitive set of anybody. So 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 burnie markets would always say, prices go up, units go down. So -- but in any number of time, we have hundreds and hundreds of pricing tests ongoing, up, down, commodity, so by market. So we watch that very closely and know that we'll see about the pressure on the consumer more broadly in the back half, but the 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.

Yes. Well, as I mentioned, we made some significant investments in our supply chain assets. And again, thrilled with those. We haven't made any purchases, pull 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. So kind of BAU is there. We'll continue to make investments where we see our customers leaning in. And as I mentioned, the DFC and our FDC networks, we'll continue to invest there, but we haven't pulled any inventory forward. So 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 '26, so freight, wages, materials.

I'd say on operating costs, same, not a big change. When we affirmed guidance on the second quarter, we did comp and margin as well. So I would say that will largely be the same in the back half, and we'll talk about '26 onwards in December at our investor conference.

And then 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 speed up, slow down or be about the same in '26?

Yes. Our space is a little different. I think competitive stance in the players will be largely unchanged, I mean, for the foreseeable future. There might be some consolidation. There's a long-term trend of consolidation in distribution space. Every distributor regardless of product category is doing those small regional acquisitions when family-owned businesses choose to sell. But other than the normal flow of distribution consolidation, that would be similar competitive set. And again, in our retail space, you know the players, and I think we're all healthy and sticking around.

Okay. Well, thank you so much for joining us today. I appreciate the time.

Thank you. Kate.

Thank you all.

Thank you.

Greetings, and welcome to The Home Depot Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Isabel Janci. Please go ahead.

Thank you, Christine, and good morning, everyone. Welcome to Home Depot's Second Quarter 2025 Earnings Call. Joining us on our call today are Ted Decker, Chair, President and CEO, and Ann-Marie Campbell, Senior Executive Vice President; Billy Bastek, Executive Vice President of Merchandising; and Richard McPhail, Executive Vice President and Chief Financial Officer.[Operator Instructions] If we are unable to get to your question during the call, please call Investor Relations at (770) 384-2387.

Before I turn the call over to Ted, let me remind you that today's press release and the presentations made by our executives include forward-looking statements under the federal securities laws including as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to the factors identified in the release and in our most recent annual report on Form 10-K, and in our other filings with the Securities and Exchange Commission.

Today's presentation will also include certain non-GAAP measures including, but not limited to adjusted operating margins, adjusted diluted earnings per share, and return on invested capital. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our website.

Now let me turn the call over to Ted.

Thank you, Isabel, and good morning, everyone. Sales for the second quarter were $45.3 billion, up 4.9% from the same period last year. Comp sales increased 1% from the same period last year, and comps in the U.S. increased 1.4%. Adjusted diluted earnings per share were $4.68 in the second quarter, compared to $4.67 in the second quarter last year. In local currency, Canada and Mexico posted positive comps.

Our second quarter results were in line with our expectations. The momentum that began in the back half of last year continued throughout the first half as we saw our customers engage more broadly in smaller home improvement projects. In fact, the performance across the business was the strongest we've seen in over 2 years.

Our results are a testament to our focus on enhancing the customer experience as we invest in our strategic initiatives. From technology investments that drive productivity, to the capabilities we are building with our Pro ecosystem, to better serve complex purchases through faster delivery options for all of our customers, we are growing market share with these initiatives.

Just over a year ago, we completed the acquisition of SRS. This strategic acquisition was important for several reasons. It gave us a right to win with a specialty trade Pro, enhanced development of our Pro ecosystem and provided a number of cross-selling opportunities. Over the past year, SRS has exceeded our expectations driving market-leading growth, accelerating our organic ecosystem efforts and driving revenue synergies. We could not be more pleased with their performance.

As we announced in June, we are excited about the pending acquisition, [ GMS ], a leading distributor of specialty building products, including drywall, ceilings and steel framing, related to remodeling and construction projects. This acquisition will add a highly complementary adjacent vertical to SRS' business with differentiated capabilities, product categories and customer relationships. It will also broaden SRS' distribution footprint across the U.S. and Canada.

In fact, SRS will now have a network of more than 1,200 locations, a sales operation of over 3,500 associates in a fleet of nearly 8,000 trucks capable of making tens of thousands of job site deliveries per day. Additionally, GMS will be additive to our organic efforts to better serve Pros working on complex projects, enabling us to offer a deeper and broader assortment of interior building products and services, as well as additional fulfillment options.

Despite the uncertainty and volatility in the market, we are confident that we can effectively navigate this environment. Over the last several years, our teams have done an incredible job partnering with our vendors to diversify product sourcing, which gives us unique flexibility in our supply chain. We will continue to work with our vendors to ensure that we have the right products, at the right value, in stock, and on shelf for our customers to purchase. I could not be more excited about the incredible opportunities in front of us to continue growing share with all our customers. Our store associates merchants, supply chain teams and vendor partners are executing at a high level, and I would like to thank them for all that they do.

With that, let me turn the call over to Ann.

Thanks, Ted, and good morning, everyone. Our associates did an incredible job delivering exceptional customer service, and I'd also like to thank them for all that they do. We know that when we enable our associates to focus on serving the customer, we grow sales. And over the last several years, we've been investing in a multitude of initiatives across our operations that not only allow our associates to more effectively serve customers, but also drive productivity in our operations.

From optimizing freight flow through our proprietary [ rate flow ] application to ensuring we have the right products in stock and on the shelf for customers to enhance how we pick and [ state ] online orders, we are excited about the progress we're making and the results we are seeing.

Our stores continue to be the center of the ecosystem and critical hubs for customers' shopping experience. And last year, we made technology improvements across all stores and [ DFCs ] to better leverage all of our assets, enabling faster delivery of online orders. We have continued to improve delivery times and we now have the fastest delivery speed across the greatest number of products in company history, both same day and next day.

We are seeing a double-digit lift in spend with customers who utilize our faster delivery options as they return more frequently to shop in stores and online. This is all a result of our efforts to shift from best location, which uses machine learning models to determine the optimal delivery mode to maximize speed and efficiency.

To support this incremental demand, we have added more order fulfillment associates, or [indiscernible] in our stores, and through enhancements toward [ HD phones ] we are now able to strategically direct them to more effectively manage online orders. For example, this quarter, we rolled out enhancements to [indiscernible] app that prioritizes orders and enables back ticking of several orders at once. Having dedicated associates for these orders, coupled with powerful technology in their end, ensures that orders are efficiently and accurately picked, driving fastest -- faster fulfillment times and higher customer satisfaction.

As we have mentioned in the past, we continue to focus on our Pro ecosystem maturing the new capabilities we have built for Pros working on complex projects. We are thrilled with the progress we've made across expanded assortments, fulfillment options, our sales teams, account management and more recently, trade credit and order management.

As you know, we have been leveraging SRS to continue to ramp up our trade credit capabilities. Today, we have several thousand Pros with a trade credit account and we've seen a double-digit lift in their spend across channels once these Pros started using their trade credit. And while we continue to roll this out more broadly, we are also focused on ensuring connectivity through different sales channels included our B2B website and/or stores.

For example, we want Pros to be able to transact with our stores seamlessly, including checking and using the available credit on their account while they're shopping in our stores. And later this year, we anticipate that all trade credit customers will be able to seamlessly use free credit for in-store purchases.

Our order management system is another important capability that enables us to more easily manage Pro product deliveries throughout the life of their project. Order management brings together systems and processes that enable us to effectively capture, modify, deliver and offer post-sales support for Pro orders. And while there's still work to do, we have already deployed a number of benefits. In some markets, we can now reserve inventory, to modify orders before fulfillment and invoice upon delivery. For example, today, we can quickly and easily change an order from [indiscernible] in a store to delivery to the job site. These are a few of the critical features and benefits we're working on that will deliver exceptional value to a Pro.

With that, let me turn the call over to Billy.

Thank you, Ann, and good morning, everyone. I want to start by also thanking all of our associates and supplier partners for their ongoing commitment to serving our customers and communities. As you heard from Ted, during the second quarter, we saw continued momentum in the underlying demand across home improvement-related projects. And our performance was the strongest it has been in over 2 years.

Turning to our merchandising department comp performance for the second quarter, 12 of our 16 merchandising departments posted positive comps, including storage, bath, hardware, building materials, indoor garden, electrical, kitchen, outdoor garden, millwork, power, plumbing and appliances.

During the second quarter, our comp average ticket increased 1.4%, and comp transactions decreased 0.4%. The growth in our comp average ticket primarily reflects a greater mix of higher ticket items, inflation from core commodity categories, including lumber and copper, and a modest decrease in promotional activity relative to prior years.

Big ticket comp transactions, or those over $1,000, were positive 2.6% compared to the second quarter of last year. We were pleased with the performance we saw in categories such as building materials, lumber and hardware. However, we continue to see softer engagement in larger discretionary projects where customers typically use financing to fund the renovation project.

During the second quarter, both Pro and DIY comp sales were positive and relatively in line with one another. In the second quarter, we saw strength across many Pro-heavy categories like dimensional lumber, concrete and decking. And in DIY, we saw strength across our seasonal product categories, including [ patio ], grills and live goods.

Turning to total company online comp sales. Sales leveraging our digital platforms increased approximately 12% compared to the second quarter of last year. We're excited about the continued success we are seeing across our interconnected platforms. As Ann mentioned, our faster delivery speeds are resonating with customers and driving greater engagement and sales. We know that as we remove friction from the experience, we see incremental customer engagement.

We also continued to invest in improving search functionality leveraging AI, and enhanced our [indiscernible] again capabilities, allowing customers to easily and conveniently reorder products regardless of where the original purchase occurred.

During the second quarter, we leaned into products and projects that are resonating with our customers, and we continue to focus on innovation to deliver the best value proposition for home improvement projects, while enhancing the customer experience. For example, in paint, we continue to see the benefits of the investments we are making with products, delivery and loyalty. You might recall that we are the only home improvement big-box retailer to offer [ Kills ] branded [indiscernible]. We also enhanced our fulfillment options, including our in-store service and job site delivery capabilities with the [ Pro Who Paints ]. All of these initiatives have driven continued share gains in the quarter.

Across our Power department, the strong competitive advantage that we have built with our extensive lineup of battery-powered platforms continues to drive share growth in these categories. In fact, we achieved a company sales record for battery-powered tools during the second quarter.

And in our Storage department, the team continues to bring new innovation to the market. Whether it's our mini [indiscernible], the large mega [indiscernible] for our improved storage systems. All of these products help drive positive sales and unit comps in the category for the quarter.

Finally, we continue to see great success across our Appliance business. As we've mentioned before, the improvements we've made to the shopping experience are resonating with our customers.

As we look ahead to the third quarter, our merchandising organization remains focused on being our customers' advocate for value. This means continuing to provide a bright assortment of best-in-class products that are in stock and available for our customers when they need it. As we prepare for the holiday season in the back half of the year, we are committed to providing our customers with new and innovative products at a great value. This quarter, we are extremely excited about our lineup for Halloween as the products bring excitement to our stores and help drive traffic. Our merchants have worked with our supplier partners to put together a compelling assortment of product offerings for this Halloween season, including the return of many fan favorites such as [ Skelly ] and [ Barclay ], as well as the new collections for the Halloween enthusiasts. Our sneak preview of our Halloween lineup was a huge success, and we look forward to the full rollout in the coming weeks.

With that, I'd like to turn the call over to Richard.

Thank you, Billy, and good morning, everyone. In the second quarter, total sales were $45.3 billion, an increase of $2.1 billion, or approximately 4.9% from last year. As a reminder, SRS entered our total company comp base in late June.

During the second quarter, our total company comps were positive 1%, with comps of negative 0.3% in May, flat in June, and positive 3.1% in July. Comps in the U.S. were positive 1.4% for the quarter, with comps of positive 0.3% in May, positive 0.5% in June, and positive 3.3% in July. For the quarter and in local currency, Canada and Mexico posted positive comps. Additionally, foreign exchange rates negatively impacted total company comps by approximately 40 basis points for the quarter.

In the second quarter, our gross margin was 33.4%, a slight increase compared to the second quarter of 2024, which was in line with our expectations. During the second quarter, operating expense as a percent of sales increased approximately 65 basis points to 18.9%, compared to the second quarter of 2024. Our operating expense performance was in line with our expectations.

Our operating margin for the second quarter was 14.5%, compared to 15.1% in the second quarter of 2024. In the quarter, pretax intangible asset amortization was $139 million. Excluding the intangible asset amortization in the quarter, our adjusted operating margin for the second quarter was 14.8%, compared to 15.3% in the second quarter of 2024. Interest and other expense for the second quarter increased by $61 million to $550 million, which was in line with our expectations. In the second quarter, our effective tax rate was 24.2%, compared to 24.5% in the second quarter of fiscal 2024.

Our diluted earnings per share for the second quarter were $4.58, compared to $4.60 in the second quarter of 2024. Excluding intangible asset amortization, our adjusted diluted earnings per share for the second quarter were $4.68, a slight increase compared to the second quarter of 2024.

During the second quarter, we opened three new stores, bringing our total store count to 2,353. At the end of the quarter, merchandise inventories were $24.8 billion, up approximately $1.8 billion compared to the second quarter of 2024. And inventory turns were 4.6x, down from 4.9x last year.

Turning to capital allocation. During the second quarter, we invested approximately $915 million back into our business in the form of capital expenditures. And during the quarter, we paid approximately $2.3 billion in dividends to our shareholders. Computed on the average of beginning and ending long-term debt and equity for the trailing 12 months, return on invested capital was 27.2%, down from 31.9% in the second quarter of fiscal 2024.

Now I will comment on our outlook for fiscal 2025. As you heard from Ted, our performance during the second quarter was in line with our expectations. The customer engagement we saw in the back half of 2024 continued into the first half of 2025 with notable improvements in underlying demand during the second quarter. As we look to the remainder of the year, we are confident in our ability to manage through the macroeconomic environment as it stands today. As a result, we are reaffirming our fiscal 2025 guidance.

As a reminder, our guidance does not include any assumptions on impacts to the pending [ GMS ] acquisition, fluctuations in foreign exchange rates, changes in the interest rate environment, or a recovery in demand for larger remodeling projects. We expect total sales growth to outpace sales comp, with sales growth of approximately positive 2.8% and comp sales growth of approximately positive 1% compared to fiscal 2024. Our gross margin is expected to be approximately 33.4%, essentially flat compared to fiscal 2024. Further, we expect operating margin of approximately 13% and adjusted operating margin of approximately 13.4%. Our effective tax rate is targeted at approximately 24.5%. We expect net interest expense of approximately $2.2 billion.

We expect our diluted earnings per share to decline approximately 3%, compared to fiscal 2024, when comparing the 52 weeks in fiscal 2025 to the 53 weeks in fiscal 2024. And we expect our adjusted diluted earnings per share to decline approximately 2% compared to fiscal 2024. On a 52-week basis, adjusted diluted earnings per share would be essentially flat compared to fiscal 2024.

We plan to continue investing in our business with capital expenditures of approximately 2.5% of sales for fiscal 2025. We believe that we will grow market share in any environment by strengthening our competitive position with our customers and delivering the best customer experience in home improvement.

Thank you for your participation in today's call. And Christine, we are now ready for questions.

[Operator Instructions] Our first question comes from the line of Zach Fadem with Wells Fargo.

Starting with the July improvement, and if you view this more of a catch-up due to weather, or underlying change in trend? And then as you think about the second half comp about a 50 basis point improvement implied from Q2, a couple of points on a 2-year basis.

Perhaps we could level set on the drivers across traffic, ticket, pricing, et cetera, and whether you anticipate any changes there?

Thanks, Zach. That's a fulsome question. We feel really great about our Q2 performance. As you know, we had a really tough weather in the first quarter of the year, leading to relatively flat U.S. comps and slightly negative overall with FX, and recovered here with 1% for the company and 1.4% for the U.S. And as you said, those comps got markedly stronger as the months went on through the quarter. And that's really a factor of two things.

First, we definitely saw a broader engagement across the portfolio. These are the best comps we've seen across the most departments in nearly 2 years. As Billy said, the performance adjusted for some of the hurricane activity we saw last year across the regions was consistent in the consumers. Both Pro and consumer engaged broadly across the business, granted in smaller projects. We still haven't seen the recovery in much larger discretionary projects.

And then finally, weather did have a big impact. We had a -- not a great spring overall, and that went into Q2. But in July, in particular, the north, the weather in the North in particular, really turned favorable and that team responded and we captured great sales. So I feel great about underlying momentum in the business, helped by a little weather.

And when you look at the back half of the year, just focus on the U.S., and Richard can go into some exchange rate differentials. But when you look at the U.S. we're looking at just a slight uptick in comp to have that 1% for the full year. So we're just under 1% in the first half, [ do ] a little better than 1% in the back half, gets us to that 1% guide for the year. So we feel really good about our ability to do that, particularly with the broader engagement across the portfolio.

And Richard, there's some FX?

Sure. Just to tick out what Ted said. So recall when we established guidance at the beginning of the year, our guidance assumed a slight improvement and frankly, a continuation in the momentum that we had seen in the back half of 2024, to continue gradually through the year 2025. That's what we've seen to date. And so that is still embedded in the assumptions underlying our guidance.

So just to tick it out, we were a positive 0.9% in the U.S. in the first half. And as Ted said, we're assuming a slight improvement in that trajectory. From an FX perspective, total company had a 55 basis point headwind from FX in the first half. At current FX rates, that actually flips to a 25 basis point tailwind. And so for those reasons, we feel confident in our guide.

And I think it's also important to note that the momentum that we saw through the second quarter has continued through the first 2 weeks of the third quarter.

Thanks Richard and Ted for all the color there. And then just a follow-up. There's been a lot more talk about the potential for rate cuts later this year. And we also have some tax reform dynamics as well.

So just curious to what extent these could be positive catalysts for your business? And if you have any thoughts on the level of rate cut you'd need to see to begin seeing that impact?

Yes. Certainly, some relief on mortgage rates, in particular, could help, I think, referring to it a bit of a frozen housing market with 40-plus year low turnover rates, and even new starts are struggling a bit. So lower rates would certainly help. We don't have a crystal ball on what that number is.

When we talk generally, though, to our customers, each of our sets of consumers, and Pros, the #1 reason for deferring the large project is general economic uncertainty. That is larger than prices of projects, of labor availability, all the various things we've talked about in the past. By a wide margin, economic uncertainty is number one.

And when you look at things like the tax bill passing, last time we were together, we didn't know what tax rates would be, corporate or personal rates. That's all been settled with even some more favorable lowering of taxes and increases in child tax credits and the like. So little help on the interest rate front would be helpful. And then I think we have a great result with the tax package that passed that should put some more discretionary spending in our consumers' wallets.

And just from a pure cash tax perspective, we will see a benefit from bonus depreciation and the full expensing of R&D. That's not a book benefit, but it's a cash tax benefit, and we'll be thinking about how that factors into our plans going forward.

Our next question comes from the line of Steven Zaccone with Citi.

I want to follow up on Zach's second question there. Ted, when you think about some of the clarity you've gotten on the tax package and then we're waiting on rates. [ When does ] it inform your view on the shape of recovery in that large project activity? As we sit here today, do you think that's something to materialize in the next 12 months?

Well, again, we don't know when those rates will come. There's clearly expectation that we start to get some cuts in the second half of this year. Remember that the short-term rates, while that will help on a HELOC rate, which is often utilized for larger projects, the longer rate is more associated. The mortgage rate is more associated with the 10-year and the longer bond rates. So again, I'm optimistic that with some of the reduction in the overall deficit, that will be the longer, more sustainable benefit to the long-term rates, and we see some progress there.

So with lower taxes and now permanent tax position that it's certainty is removed and with lower rates. Hard, Steve, to pick the number that unlocks turnover and mobility in U.S. housing and in new construction. But things will certainly look better given tax and interest rates than the environment we're in right now.

Okay. Understood. And then maybe just for the second half of the year. Can you help us think a bit more about AUR and pricing? How did that perform in the quarter? It sounds like promotional activity was down a bit. But just as you think about the second half of the year, the complexion of ticket and transaction, how does pricing fit into that equation?

Yes. Thanks, Steven. This is Billy. Let me give some more color on that. Both kind of the macro piece for us as we think about diversification and those things, and I can give you a little color on some of the Q2 performance that you asked about. But listen, I'd say a couple of things on pricing. Going back to our call in May.

First, it's super important to remember that over 50% of our products are sourced domestically and wouldn't be subject to any tariffs. Now some of the imported goods, obviously, tariff rates are significantly higher today than they were when we spoke in May. So as you'd expect, there'll be some modest price movement in some categories, but it won't be broad based.

And I think it's important to keep in mind as well, our customers tend to shop for the entire project. [ And ] you think about a small flooring project, tile, the [ ground ] bath tub and vanity, and a bath project. And so we're laser-focused on protecting the cost of the entire project. And so listen, our goal is to maintain the best value for our customers. We're going to take a portfolio approach, as we've talked a lot about in the past, as we always do, and we'll have a price leadership position in home improvement.

The second piece that you alluded to, some of the dynamics in Q2 when I mentioned in my prepared remarks, about some promotional activity that was really focused around just some of the smaller garden projects. Think [indiscernible], think chemicals, those things. I mean, those are the biggest headwinds that we had as it related to just the transaction comp in the quarter. So that was -- if you think about our job, which is to help impact some of the tariff pressure being a little less promotional on a couple of those garden areas was just the nature of what we did in Q2. And so again, 4 of those 5 categories that we saw an impact from were just related to some of the lower ticket garden projects.

Our next question comes from the line of Christopher Horvers with JPMorgan.

So my first question is more near term and then my follow-up is a bit more bigger picture. So following up on this last line of the question, there are a number of like puts and takes in the back half around comp cadence that I'd love for you to talk about. Do you expect much difference between the quarters? It looks like the hurricane lift was pretty similar. But then ticket inflation, given inventory receipts and seasonal probably accelerates over the year.

But on the other side, you have this sort of [indiscernible] December post-election with the consumer. So any thoughts there on the puts and takes of comp cadence in the back half?

Yes, Chris, as Rich and I outlined earlier, there's not a big uptick necessary to meet our guide. The U.S. business will be more or less a similar comp rate with no meaningful lift necessary, and we get that swing of 80 basis points of FX pressure for total company.

On ticket and transactions, you saw higher ticket in Q2 to transactions. And as Billy said, that is really the increase in spend on large items where we had a 2.6% comp in tickets over $1,000. And again, that was broad-based. In the lack of a lot of promotional activity in outdoor garden, that tends to be smaller ticket. That mix effect is what helped the ticket. It really wasn't price. And then similarly, that slight decrease in transactions was all in that modest pullback in outdoor garden promotions. And -- but I mean, that explains all of the negative transactions that we saw.

So you're going to cycle through the -- we're not planning for any more hurricanes. The hurricane impacts were smaller in Q2 than they were in Q1. They'll be smaller yet again in 3 and 4. So we're just looking at the continued momentum broadly in our departments, in our geographies, to deliver that 1% guidance.

Got it. And then bigger picture on GMS. Could you compare and contrast the business relative to the Roofing business, which is SRS's largest vertical. From the outside, it seems to some that GMS is maybe more commodity-oriented and something that perhaps you could have achieved through the expanded fulfillment offering that you have in about 20 markets in the large Pro side.

Is there something particularly in the assets that you want to acquire that? Was it easier to buy than build? Is it sort of [indiscernible] so foundational. And so thus, it's a big part of the market? Is it the sales force, and so forth?

Sure. Chris, it's a number of those things. So let me just wind back a minute. As I said, we're super pleased with SRS. Roofing is the biggest category, also pool and landscape. And those are verticals that they run as a specialty trade distributor. And from what we saw in public company announcements in Q2, we took share. We won in the marketplace in each of those three verticals.

And when we look at the opportunity set in our Pro initiative we talked about a game board, different categories, and different customers in different purchase occasions. And where are there attractive profit pools and share opportunities, we're building out with our own organic Pro ecosystem, a focus on the cross trade pro who's going to shop across the Home Depot store, which will increasingly engage with them with an outside sales force, and sales trade credit and delivery, as we've talked about.

But then we've also said, well, there are these verticals of specialty that are very attractive, SRS being incredibly attractive in roofing pool and landscape. In [ drywall ], in sealing are very much adjacent complementary verticals to that SRS business model. So small branches, truckload delivery, high inventory turn, effective sales engagement, asset-light similar margins going into, again, largely residential remodel and construction. We believe GMS is the best property, the best asset in that space. And we've been talking to them for some time.

[ Dan Tinker ] in the SRS team had been in contact with John Turner and the leadership of GMS for some time. This was not something that happened overnight. This is something we've been engaging with them and thinking about how these two businesses could add value working together. And the management teams, the cultures, the approach to single ERP systems, go-to-market strategies at the branch level are very, very similar to SRS. We think this will be a seamless integration under that SRS platform, and they'll attack their markets the way they always have growing specialty trade business. And then Anne and Mike and our teams as we build out our Pro ecosystem, we have a great new list of larger customers. We have an additional 400 nodes of distribution to add to the 800 that SRS already have.

As I said, in my remarks, 1,200 additional distribution branches in total that when, Anne mentioned, ship from best location. We'll be leveraging those branches as well, combined with the 2,000 stores. You can start to see this ecosystem that we're putting together with customers, with sales force, with distribution nodes, and with delivery assets. We're just super excited on how we can take incremental share bringing this unified capability set together.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

I want to follow up, please, on -- with the phrase that Richard, you used in prepared remarks, and then I think Ted said it again, this notable improvement in underlying demand. You qualified it with some commentary around weather. I assume also maybe bathtub effect is the same definition.

Can you talk about the degree to which you think there is underlying turning in housing? Or was this market share? Or was this weather? Are we seeing an inflection?

Thanks, Simeon. Well, as we've said, I think our assumption, what we've observed and the assumption going forward, is that first more than anything, we have a very healthy customer, right? Our customers, the homeowner or the Pro that serves that homeowner. They're fully employed. They've seen strong income gains over the past several years. They have seen home price appreciation of 50% since 2019. They're sitting on [indiscernible] equity of over $11 trillion, which is double that they were sitting on in 2019.

And so as we predicted, we have observed continued engagement, and momentum in engagement, across the core of our categories. As Billy spelled out, 12 of 16 categories in positive comp territory, the strongest and broadest performance we've seen in over 2 years. And that's what we expected and that's what we've seen.

As Ted pointed out, and as we've discussed before, our customers still tell us that the rate environment is giving them pause on larger remodeling projects that would typically require debt financing, and Ted alluded to where mortgage rates and HELOC rates are. We know that, that is still an impediment in our customers' mindset to executing on projects.

What I think is important to note is our Pros, we survey every quarter and say that their customers tell them they're deferring projects. They're not canceling projects. Home improvement demand persists. And so our job is to position ourselves to be ready for that. At the same time, our guidance for the remainder of the year, as I said, doesn't assume any improvement in the outlook for larger projects, or a turn in housing per se. It really just assumes that consistent momentum that we've already seen really for 4 quarters now. And that continued in the first 2 weeks of the quarter.

Okay. And a follow-up, can I ask about proof points on the complex projects, or complex Pro? Are you seeing sequential inflections, whether it's some of the core capabilities that Home Depot has implemented, or related to crossover benefits from SRS?

Yes. On your share comment, we believe we're taking share. As I said, we've looked at the public company disclosures that reporting of Q2 and how we performed and that includes paint, roofing, landscape, drywall. We're starting to see some really neat cross synergies on distribution front and on the sales front. And Mike or Ann, if you'd like to comment a little bit about the momentum we're seeing in our organic efforts and then with some of the cross-sell with SRS?

Yes. As Ann mentioned in her prepared remarks, we're pretty thrilled with the progress making as we continue investing in the Pro ecosystem, continue to optimize assortments as she talked about, account management, our sales force service model, fulfillment, among other things, notably for that cross-sell Pro. So notably, delivery reliability, specifically related to being on time and complete paramount for the Pro experience. And we're pleased with the improvement that we've seen in terms of the Pros feedback around customer satisfaction with their deliveries, along with our improved performance for being on time and complete.

And we see this both for large job site deliveries, notably on flatbeds and box trucks, but also their use of car deliveries. As we've leveraged our distribution assets for faster parcel delivery, we've seen a double-digit lift in spend on parcel items enabling Pros to stay on the job site.

And then just further with Pro trade credit works hand-in-hand with the advances we're making with order management and delivery. And again, as Ann noted, seeing strong lift from now being able to invoice on delivery of goods versus upon the purchase of those goods.

Our next question comes from the line of Scott Ciccarelli with Truist.

I guess this is a bit of a follow-up to Simeon's question. You have previously given us some figures on the incremental sales you've been able to generate from your complex Pro efforts. Can you update us on that most recent performance? And where you have rolled it out? Obviously, you just talked about kind of the whats [indiscernible] are happening. But how should we be thinking about the growth curve in those markets?

Scott, yes, we're not going to keep updating that $1 billion. We just wanted to -- it was a nice hallmark for us to hit the $1 billion mark on incremental sales. But trust me, we are reviewing every week's incrementality on all we're doing with the Pro initiative.

As Mike said, it starts with an engaged sales force. This is solution selling with a mature outside sales force supported with inside sales support. On-time and complete delivery is paramount, and that is where we've seen a real step change. John Deaton and his team on the delivery side from our FDCs, remember, the 70 markets, we have the flatbed distribution centers. We have 20-plus parcel delivery facilities. We have 200-plus market delivery operations, which are the big bulky product and appliances. Ann mentioned the shift from best location. We're leveraging stores as well. So we're putting all those nodes into an opportunity set to optimize delivery for the customer.

Which node is going to have the quickest delivery time at the lowest cost at the greatest chance of being on time and complete for the customer. And that's all the machine learning and AI, we're putting into effect to make that happen. We've seen step change improvement in our on-time and complete delivery. That's giving our sales team more confidence to sell. That's keep -- retaining customers who try to [indiscernible], try us again, we satisfy them again.

Now you add trade credit to the equation. It's still such early days with trade credit, and we have [ millions ] of pro customers, and we literally have small single-digit thousands on trade credit. So this virtuous cycle of this whole ecosystem trying to work is gaining steam. And the great thing about having someone like SRS and then doing all the diligence in the work with GMS, we actually understand in that part of the business is behaving like a distributor, and we are satisfying these larger Pros in their complex [indiscernible] as we need to as a true professional wholesale deliverer. So super excited and the momentum is building.

Our next question comes from the line of Michael Lasser with UBS.

So over the last several years, Home Depot has taken some big swings, made some big calls, including building the Pro ecosystem, buying SRS and now GMS. Are these calls driven by something that you are seeing that is changing in the home improvement market? Or something that's changing in the Home Depot that's needing -- the prompting -- the need to take bigger calls in order to gain market share?

And as part of this, how do you weigh the potential trade-off between growth in returns in these capital allocation decisions? Or is that just a [ moot ] point because Home Depot is going to be able to achieve both in a robust recovery situation in the next few years?

Great question, Michael. I'd also add what we've done with e-commerce and the big swing we've done building out the distribution centers. Our e-commerce, which has taken tremendous share. I'll let Richard talk about trade-off returns.

As we've said, we look at this game board and this opportunity set of where [ their ] profit pools and where we can satisfy the customer? But we're always looking customers back as we went into this. And what we told by our Pro customers, they're dealing with so many different suppliers. They're dealing with 20, 30, 50 different suppliers on a job site. If we can make their job easier to take out 5 different sales calls, 5 other delivery trucks, 5 other invoice payment cycles. I mean that is making their business easier, and that is our value proposition is that we can get a lot more from one supplier. We'll never get 100% of someone's spend, or even 100% of someone spend in a particular category. But the more we can consolidate activity for them, particularly on a job site in the selling cycle and the billing and payment cycle, that's our value proposition, and that's where they told us we have the right to win, and they're interested in that.

I'd also say that there is some consolidation. There's consolidation on the manufacturer side, on the distributor side, and even the customer side. And scale matters. And we've always been the scaled player, and not in the Pro wholesale type activity, but certainly in home improvement. And we're satisfying that scale game as well, and we think the returns you get there in a different way.

But Richard, the return profile is attractive?

Absolutely. So look, when we think about capital allocation, as we've always told you, we invest in our business first. And that's what we've leaned into in these last few years. We view our goal here is to drive sales growth through driving the share capture, which then drives EPS growth. We have to do that in concert with creating shareholder value. And so that's when returns [indiscernible]

We understand, first of all, just on the TAM and the share capture perspective, we've seen an increased TAM, but we've also increased our TAM through the acquisition of SRS. And then GMS would further increase that TAM. So we have one of the most attractive addressable markets in the, I call it, the U.S. consumer economy, North American consumer economy, and it starts there.

Second, as you -- as Ted said, we're the scale player in that market. And so we have tremendous opportunities, and we feel like it's our responsibility to put ourselves in a unique position to win share. So now let's talk about returns.

Simply put, when we find an investment that allows us to drive share capture, and drive earnings growth, that drives a return higher than our cost of capital with a little bit of a margin of safety built in, we're going to make that investment. And so you've seen us lean in to a variety of investments over the last 5 years.

What might surprise you is that many of these investments are more capital-light and higher return -- have a higher return profile than some of our more conventional investments. I'll give you two examples.

When you think about a SRS branch, comparatively speaking, the capital required, and then the return on that capital through time, is actually lower capital required on a percent of sales basis than a Home Depot store would be. And the return on that capital actually comes more quickly than it does at the Home Depot store. And by the way, we think that The Home Depot store is one of the most rock-solid investments we can make, which is why we've leaned into that program. So SRS, wholesale distribution, a capital-light model.

Second, our DFCs. If you take our DFCs and you look at where they are on their maturity curve, they're actually generating higher returns on invested capital than an equivalent Home Depot store would at this point in their life cycle. Again, if you're using the benchmark, a Home Depot store to us is almost like buying treasuries. I mean that is as close to a -- the most confident return we can drive in this business. And the incremental investments we're making, I'll argue, are positioned to drive higher returns on that capital.

Now if you look at it in the earlier stages of investment, ROIC is lower in the earlier stages and in the later stages of that same investment, it's higher. So we're simply ascribing to the fact that we have an opportunity to position ourselves like no one else in our $1 trillion total addressable market to win, and win over the long term.

My quick follow-up is the decision to reduce promotional activity during the quarter was tied to the tariff situation. So A, how do you expect this to unfold? It's likely that tariffs are going to be with us for a while. Does that mean Home Depot's posture around promotional activity will be reduced?

And B, how do you expect this to impact the P&L over the next few quarters? And what have you assumed that within your guidance?

Yes. Thanks, Michael. And as I mentioned a little bit earlier to Steven's question, we did pull back -- again, those were primarily in the outside garden space, which caused some of that transaction comp noise that I mentioned.

I mean listen, the Home Depot is an [ EDLP ] retailer. And so anything that we can do to continue to drive value for our customers in this marketplace. And going forward -- and you're right. The tariffs, they've been increased since we met in May. That's all in our go-forward guidance. So listen, we feel great about the values. I mentioned holiday. we have many things coming up in the back half of the year. We'll talk a little bit more in Q3 about our gift center and all the things that we'll have there. We're going to continue to be focused on EDLP and taking market share.

We love our price position as it stands today, and we look forward to partnering even closer with our supplier partners and continuing to drive that value for customers. And believe me, there will be plenty of great opportunities for our consumers, our customers every day in our stores now through the back half of the year.

Christine, we have time for one more question.

Our final question comes from the line of Chuck Grom with Gordon Haskett.

My question is for Billy. On category performance. I was hoping you could maybe double click on the areas where the business has most notably improved? You guys have called out 12, but out of 16 categories. That's the best breadth of I think, since the second quarter of '22.

So maybe just click on the categories a little bit? And then also regionally, any call outs in the quarter?

Yes. No, happy to talk through that. It's great, Chuck. As you mentioned, and we called out 12 of our 16 departments posted positive comps. We actually had 13 in the U.S. had some FX pressure in paint. But really, it was the [indiscernible] based performance that, as I mentioned, the strongest we've seen in over 2 years. So I called out some of the seasonal pieces, [indiscernible], live goods and barbecue. But just to give some color on some of the other businesses. And I know Richard talked about this being much more broad-based.

But if you think about our portable power business, our cleaning business, dimensional lumber, concrete, water heaters, vanities, interior paint. And in fact, the largest comp contributions to the quarter were really outside of seasonal. Of course, we saw a pickup. Ted mentioned the North picking up. And certainly, more traffic in our stores drives more projects as well. But it was really broad-based across the business, not only the 12 departments, but I gave you some color around just what we're seeing inside some of those, what we consider really core home improvement projects that are just outside of, obviously, your typical when spring comes and you sell a little bit more of the garden space.

We're really, really pleased, thrilled with the work that the merchant team has done along with our supply chain folks. Just incredible work and really excited about the back half of the year and more of the broad-based impact that we're seeing.

That's great. And then a follow-up just on -- for Richard, on gross margins flat year-over-year. Can we just talk about the moving parts in the quarter? How you're thinking about the cadence in the back half?

And then zooming out, I think this will be the third straight year. Gross margins will be around [ 33.4% ]. I guess how are you thinking about that line item in the out years?

Right. We'll just -- we'll keep our comments to this year. Gross margin, we guided at the beginning of the year that it's going to be essentially flat at 33.4%. You're not going to see a lot of movement in that line item other than seasonal swing a little bit that we always see. And so we've reaffirmed guidance at that level. And then we'll address future years when we get together in December.

Ms. Janci, I'd like to turn the floor back over to you for closing comments.

Thank you. Thank you all for joining us today. We look forward to speaking with you on our third quarter earnings call in November.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.