Home Depot Inc (HD) — Q3 2025 Earnings Call Transcript

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. 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 remains relatively stable sequentially, an expected increase in demand in the third quarter did not materialize. We believe 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 look forward to seeing many of you in person in a few weeks at our investor conference at 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 technology, 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 projects 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 while increasing 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 while 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 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, DEWALT, Husky 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, DEWALT, Husky and more. We'll have something for everyone, whether it's our wide assortment of cordless RYOBI tools or 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 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 of 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 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.

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?

Thank you for your question, Simeon. There are two aspects to consider: the fiscal year and Q4. We've adjusted our guidance for the fiscal year from a 13.4% adjusted operating margin to a 13% operating margin, a 40 basis point change. The largest factor influencing this is the impact of GMS inclusion in our results, which is expected to have a 20 basis point year-over-year effect on operating margin when accounting for transaction expenses. Additionally, our comparable sales have decreased from one comp to slightly positive, which contributes to the deleverage we've discussed earlier. Regarding SRS, it's still performing exceptionally well despite significant pressure in the roofing market with shipments down due to a lack of storm activity this year. For Q3, SRS managed to remain flat, suggesting they are gaining market share, though we now expect their full-year growth to shift from mid-single digits to low single digits. Furthermore, there is some deleverage occurring in the SRS supply chain and operating expenses, leading to our revised fiscal year guidance. Looking at Q4, the same dynamics apply, but it's important to note that last year's Q4 had 14 weeks of expenses while this year has 13 weeks, resulting in about a 50 basis point operating expense deleverage for the quarter. I hope this clarifies the situation.

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 for storms per se, but there's always some weather impact in the baseline. And given last year, with pretty significant storm activity, this year there was 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 returned 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, we expected 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 the 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 and 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 at 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 is 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.

I 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 in 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 to what it was 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 one-time 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 as 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 as 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.

Given all the comments from this morning, 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 factor into 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 underspend per household. So on one hand, we're looking at something as much as a $50 billion cumulative underspend 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, you're correct, Mike. We have made several significant advances in the Pro segment. We've discussed the overall home improvement total addressable market being over $1 trillion, split evenly between Pro and consumer, and our longstanding strength in both areas from our stores. We've recognized a real opportunity to enhance our value proposition in the Pro space by expanding our wholesale capabilities to capture a greater share of spending from that customer base. This is what we've been focusing on, and we'll provide more details about it in a few weeks in New York. We're very pleased with the initiatives and the organic investments we've made to develop these capabilities. Furthermore, we've complemented this with two acquisitions of strong wholesale platforms, SRS and GMS. Regarding your specific question about fixed cost structure, it's worth noting that our organic efforts are relatively asset-light. Whether we lease our distribution centers or not, the capital we invest in those facilities is primarily for general store replenishment. The added advantage is that we can serve customers from those buildings. As Richard mentioned, the speed element functions as a flywheel, and all our investments in direct fulfillment centers are aimed at serving all customers and increasing speed, which we've achieved effectively. Additionally, our other operating costs include variable incentive pay structures for our outside sales team. We lease trucks and adjust our fleet in response to market volume changes throughout the seasons. So aside from a modest IT investment, which is minimal in the grand scheme, we haven't added significant fixed costs to support our Pro organic initiatives.

I wanted to follow up on the implied fourth quarter operating margin question. It seems you're indicating approximately 10.3%. Did you mention that 50 basis points of that was related to the 53rd week lap? Is there anything unique we should consider that might indicate whether this is the right level for thinking about building the business as we look to future years? For instance, the 53rd week lap, or perhaps changes in the seasonality of the SRS and GMS business affecting the normal flow of operating margin throughout the year?

Thank you, Chris. I would recommend using our full year guidance as a starting point. I think Q4 has a few factors that could create some noise. The first is the 53rd week. The second factor is the nature of the business. If you look at the historical public filings of GMS when they were a public company, you'll notice that our Q4 represents a significant low point in terms of volume. This is also true for SRS. Both SRS and GMS experience seasonal swings that are more pronounced than those of Home Depot, which will be exaggerated if you consider Q4 in isolation. Therefore, I suggest using the full year as the best reference 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 consider this quarter on a monthly basis, even with the challenging weather and hurricanes in October, and also take into account the first three quarters of the year, the two-year trend appears to be improving, which indicates a demand for replacements, possible pricing changes, and the ongoing nature of life. Research suggests that consumers may be waiting for the full impact of the situation. We have several meetings approaching, and the noise surrounding the government shutdown has affected even retailers that sell groceries. Therefore, why wouldn’t we anticipate that the entry point into 2026 is at least as strong, if not stronger, than the underlying demand of around 1%? As uncertainty diminishes, the full effects of the Federal Reserve actions are realized, the housing stock ages, and the demand for replacements continues to grow.

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 price, those are near-term and newer phenomenon.

Let me circle back to your question regarding Q4 as a starting point and the consideration of the 53rd week. It's important to note that when we look at GMS on a pro forma basis, we need to consider its impact. Remember, we've provided guidance that includes The Home Depot numbers with SRS factored in. SRS affects our gross margin profile by roughly 80 basis points and our operating margin by about 40 basis points. GMS, which is approximately half the size of SRS, has about half the impact. Thus, on a pro forma basis—this isn't for the fiscal year but a pro forma impact—we're looking at about 40 basis points for GMS and around 20 basis points for operating margin related to GMS. So, adding those together gives us a change in our profile of roughly 120 basis points for gross margin and 60 basis points for operating margin when combined. Looking at fiscal year 2025, we have some complexities in the comparison periods. We owned SRS for a full year in 2025, but only for part of the year in 2024, while we owned GMS for about five months in 2025 and not at all in 2024. To simplify, from a fiscal year perspective, there's an approximate 55 basis point impact on gross margin year-over-year, attributed to the ownership of both SRS and GMS, and about a 35 basis point impact on operating margin due to the mix reflective of those ownership periods. We will clarify this further in future discussions about upcoming years, but hopefully, this provides additional clarity. I want to emphasize that while our full-year guidance serves as a foundation, it's essential to also consider the full-year impacts of GMS next year.

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 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 share 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 power versus suppliers?

Well, there are 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.

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, thank you, Seth. It's Billy. I'll address your last question first. The transaction issue we discussed is primarily linked to the impact of the storm that we mentioned. As I indicated during our Q2 call after implementing some policy changes regarding tariffs, we planned to make some moderate price adjustments across the board to ensure we protected the project. When it comes to elasticity, it's a bit early to assess this, especially considering all the dynamics in the marketplace over the past 60 to 90 days since our last call. I'm pleased with what the team has accomplished. If you visit our stores right now, you'll see the value we have at the Gift Center, and our holiday program reflects the same. We're closely monitoring this. Our primary objective was to safeguard the project. It’s also important to highlight that over 50% of our inventory is exempt from tariffs and is sourced domestically. We'll keep an eye on this and I'm looking forward to the Q4 results.

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 as 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 believe part of the reason for the pressure on commodities is related to our success with Pro initiatives. Specifically, the managed accounts and efforts we are undertaking to capture a larger share of significant pro complex purchases are contributing to this. Therefore, it's not necessarily an indicator of demand but rather a sign of us gaining market share in larger pro-oriented projects.

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 two 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.

Maybe, Richard, I'd like to hear your high-level thoughts on cross-selling opportunities now that GMS is integrated. How do you prioritize these opportunities as we look toward next year? It would be helpful to understand the ranking of these prospects.

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 here within Home Depot, combined with the sales forces that they have originally with SRS and now with GMS, there are 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 then that SRS introduced to The Home Depot outside sales force to come in and sell that engagement to the contractor worked quite successfully. 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.

I would like to follow up on the branch growth opportunity across SRS, GMS, and heritage. Ted, could you provide an update on the current branch counts for these different assets? Additionally, how should we approach the potential for branch growth in the coming years? Can you discuss your vision for the future state compared to the 1,200 branches currently in operation? How do you see the footprint changing over the next three to five years?

Yes, we'll definitely provide more details in a few weeks. The model SRS uses is quite similar to GMS in that they will drive organic growth through existing branches. They open new branches and focus on acquiring customer lists that enhance their operations. They've had considerable success with this strategy at their branches, maintaining a pace of opening 40 to 50 branches each year since we acquired SRS. Additionally, they have completed some smaller acquisitions, which can range from a one-branch purchase for $5 million to regional operations worth $30 million, $40 million, or $50 million. Everything is progressing very well, and we see this as a vital component of their business model.

It's not just about our plans; it's actually happening right now. If you look at our non-comp sales and consider the impact of opening new stores and new SRS branches, we are seeing approximately 0.5 points of sales growth from these investments. We are excited about that.

I wanted to follow up on the storm impact. So it sounds like it was around 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?

Thank you. As Ted mentioned, the fundamental demand for the business was quite similar from Q2 to Q3. When looking at the impact of the storm from Q3 to Q4, we are definitely comparing ourselves against strong results, with even slightly higher sales in Q4 of last year compared to Q3. It's fairly consistent. So, if you factor in the underlying performance minus the storm effect, the run rates for Q3 and Q4 are essentially similar.

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 as a long-term mid-single-digit grower. And this is principally a storm impacted dynamic that's taken them down to flat right now. But as Richard said earlier, we think roofing shipments, you can see this in the reported data, roofing square shipments into the market are down mid-teens, and SRS was flat. So clearly taking share.

Christine, 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.