Home Depot (HD)

Home improvement retail giant Home Depot (NYSE:HD) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 9.4% year on year to $39.86 billion. Its non-GAAP profit of $3.56 per share was 0.8% below analysts’ consensus estimates.

Company Overview

Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE:HD) is a home improvement retailer that sells everything from tools to building materials to appliances.

Home improvement retailers serve the maintenance and repair needs of do-it-yourself homeowners as well as professional contractors. Home is where the heart is, so any homeowner will want to keep that home in good shape by maintaining the yard, fixing leaks, or improving lighting fixtures, for example. Home improvement stores win with depth and breadth of product, in-store consultations for customers who need help, and services that cater to professionals. It is hard for non-focused retailers and e-commerce competitors to match these. However, the research, convenience, and prices of online platforms means they can’t be fully written off, either.

Home improvement retail competitors include Lowe’s (NYSE:LOW) and private company Ace Hardware. Amazon.com (NASDAQ:AMZN) and Wayfair (NYSE:W) also offer some home improvement products.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $163 billion in revenue over the past 12 months, Home Depot is a behemoth in the consumer retail sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because there are only a finite number of places to build new stores, making it harder to find incremental growth. For Home Depot to boost its sales, it likely needs to adjust its prices or lean into foreign markets.

As you can see below, Home Depot’s sales grew at a tepid 6.8% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it didn’t open many new stores.

This quarter, Home Depot reported year-on-year revenue growth of 9.4%, and its $39.86 billion of revenue exceeded Wall Street’s estimates by 1.6%.

Looking ahead, sell-side analysts expect revenue to grow 1.5% over the next 12 months, a deceleration versus the last six years. This projection doesn't excite us and indicates its products will see some demand headwinds.

Number of Stores

Home Depot listed 2,350 locations in the latest quarter and has kept its store count flat over the last two years while other consumer retail businesses have opted for growth.

When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Home Depot’s demand has been shrinking over the last two years as its same-store sales have averaged 1.9% annual declines. This performance isn’t ideal, and we’d be concerned if Home Depot starts opening new stores to artificially boost revenue growth.

In the latest quarter, Home Depot’s year on year same-store sales were essentially flat, decreasing 0.3% year-on-year. This performance was a well-appreciated turnaround from its historical levels, showing the business is improving.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

Home Depot’s gross margin is slightly below the average retailer, giving it less room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged a 33.4% gross margin over the last two years. Said differently, Home Depot had to pay a chunky $66.59 to its suppliers for every $100 in revenue.

Home Depot produced a 33.8% gross profit margin in Q1, in line with the same quarter last year and analysts’ estimates. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Home Depot has been an efficient company over the last two years. It was one of the more profitable businesses in the consumer retail sector, boasting an average operating margin of 13.6%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Home Depot’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Home Depot generated an operating profit margin of 12.9%, down 1.1 percentage points year on year. Since Home Depot’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Home Depot’s full-year EPS grew at an unimpressive 8.4% compounded annual growth rate over the last five years, in line with the broader consumer retail sector.

In Q1, Home Depot reported EPS at $3.56, down from $3.63 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Home Depot’s full-year EPS of $15.03 to grow 2%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Home Depot has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the consumer retail sector, averaging 10.5% over the last two years.

Taking a step back, we can see that Home Depot’s margin dropped by 2.5 percentage points over the last year. This decrease warrants extra caution because Home Depot failed to grow its same-store sales. Its cash profitability could decay further if it tries to reignite growth by opening new stores.

Home Depot’s free cash flow clocked in at $3.52 billion in Q1, equivalent to a 8.8% margin. The company’s cash profitability regressed as it was 3.9 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Home Depot hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 41.2%, splendid for a consumer retail business.

Home Depot reported $1.37 billion of cash and $56.41 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $24.89 billion of EBITDA over the last 12 months, we view Home Depot’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $1.10 billion of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Home Depot beat analysts’ revenue expectations this quarter. On the other hand, its EBITDA slightly missed. Zooming out, we think this was a mixed quarter. The stock traded up 1.8% to $386 immediately after reporting.

Updated: May 22, 2025 at 10:38 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Home Depot.

Home Depot’s business quality ultimately falls short of our standards. To begin with, its revenue growth was a little slower over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its shrinking same-store sales tell us it will need to change its strategy to succeed. On top of that, its gross margins indicate a disadvantaged starting point for the overall profitability of the business.

Home Depot’s P/E ratio based on the next 12 months is 23.9x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $419.84 on the company (compared to the current share price of $365.50).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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