Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion provides an analysis of the Company's financial condition and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and related notes included in this report and in the 2025 Form 10-K and with our MD&A included in the 2025 Form 10-K.
TABLE OF CONTENTS
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Liquidity and Capital Resources | |
Critical Accounting Estimates | |
EXECUTIVE SUMMARY
We reported net sales of $41.8 billion in the first quarter of fiscal 2026. Net earnings were $3.3 billion, or $3.30 per diluted share.
During the first three months of fiscal 2026, we generated $6.0 billion of cash flow from operations. This cash flow, together with cash on hand, was used to fund $2.3 billion in cash dividends, repay $1.4 billion of long-term debt, and repay $1.0 billion of net commercial paper borrowings. In addition, we funded $844 million in capital expenditures.
In February 2026, we announced a 1.3% increase in our quarterly cash dividend to $2.33 per share.
Our inventory turnover ratio was 4.2 times at the end of the first quarter of fiscal 2026, compared to 4.3 times at the end of the first quarter of fiscal 2025. The decrease in our inventory turnover ratio was primarily driven by higher average inventory levels during the first three months of fiscal 2026.
Our ROIC for the trailing twelve-month period was 25.4% at the end of the first quarter of fiscal 2026 and 31.3% at the end of the first quarter of fiscal 2025. The decrease in ROIC was primarily driven by higher average equity due to our ongoing pause in share repurchases and higher average long-term debt largely due to the financing of the SRS acquisition. See theNon-GAAP Financial Measures section below for our definition and calculation of ROIC.
During the first three months of fiscal 2026, we opened one new store in the U.S. and one new store in Mexico, resulting in a total store count of 2,361 at May 3, 2026. A total of 325 stores, or 13.8%, were located in Canada and Mexico. At the end of the first quarter of fiscal 2026, we also operated over 1,280 locations within our SRS non-reportable operating segments throughout the U.S. and Canada.
Tariffs and Other Trade Policy Matters
We continue to monitor developments with respect to tariffs and other trade policy matters closely, including impacts from the U.S. Supreme Court decision that struck down tariffs imposed under the International Emergency Economic Powers Act ("IEEPA") and other litigation, as well as the implementation of additional tariffs. We had not received any IEEPA tariff refunds pursuant to the U.S. Supreme Court ruling or recorded any such refunds in our financial statements as of May 3, 2026. Although an immaterial amount of these IEEPA tariff refunds has been received since the end of the first quarter of fiscal 2026, the timing of any further refunds and the total amount ultimately received or recorded remains uncertain.
As tariff and trade policy discussions are ongoing and related matters continue to evolve, we cannot predict with certainty their ultimate impact on our business in future periods, including our results of operations and cash flows. For more information on these risks and uncertainties see Part I, Item 1A. "Risk Factors" of our 2025 Form 10-K.
RESULTS OF OPERATIONS
The following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings.
FISCAL 2026 AND FISCAL 2025 THREE MONTH COMPARISONS
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
|
May 3, 2026 | |
May 4, 2025 |
|
dollars in millions | $ | |
% of
Net Sales | |
$ | |
% of
Net Sales |
| Net sales |
$ |
41,765 | | | | |
$ |
39,856 | | | |
|
Gross profit |
13,781 | | |
33.0 |
% | |
13,459 | | |
33.8 |
% |
|
Operating expenses: | | | | | | | |
|
Selling, general and administrative |
7,959 | | |
19.1 | | |
7,530 | | |
18.9 | |
|
Depreciation and amortization |
841 | | |
2.0 | | |
796 | | |
2.0 | |
|
Total operating expenses |
8,800 | | |
21.1 | | |
8,326 | | |
20.9 | |
|
Operating income |
4,981 | | |
11.9 | | |
5,133 | | |
12.9 | |
|
Interest and other (income) expense: | | | | | | | |
|
Interest income and other, net |
(7) | | |
- | | |
(24) | | |
(0.1) | |
|
Interest expense |
611 | | |
1.5 | | |
615 | | |
1.5 | |
|
Interest and other, net |
604 | | |
1.4 | | |
591 | | |
1.5 | |
|
Earnings before provision for income taxes |
4,377 | | |
10.5 | | |
4,542 | | |
11.4 | |
|
Provision for income taxes |
1,088 | | |
2.6 | | |
1,109 | | |
2.8 | |
|
Net earnings |
$ |
3,289 | | |
7.9 |
% | |
$ |
3,433 | | |
8.6 |
% |
-----
Note: Certain percentages may not sum to totals due to rounding.
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
|
Selected financial and sales data: |
May 3,
2026 | |
May 4,
2025 | |
% Change |
Comparable sales (% change) | 0.6 |
% | |
(0.3) |
% | |
N/A |
Comparable customer transactions (% change) (1) | (1.3) |
% | |
(0.5) |
% | |
N/A |
Comparable average ticket (% change) (1) (2) | 2.2 |
% | |
- |
% | |
N/A |
Customer transactions (in millions) (1) | 391.1 | | |
394.8 | | |
(0.9) |
% |
Average ticket (1) (2) | $ |
92.76 | | |
$ |
90.71 | | |
2.3 |
% |
Diluted earnings per share | $ |
3.30 | | |
$ |
3.45 | | |
(4.3) |
% |
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(1)Customer transactions and average ticket measures do not include results from HD Supply or SRS.
(2)Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance.
Sales
We assess our sales performance by evaluating both net sales and comparable sales.
Net Sales. Net sales for the first quarter of fiscal 2026 were $41.8 billion, an increase of 4.8% from $39.9 billion for the first quarter of fiscal 2025. The increase in net sales for the first quarter of fiscal 2026 was primarily driven by sales from GMS, which was acquired on September 4, 2025 and contributed $1.3 billion of net sales during the first quarter of fiscal 2026. Net sales also increased due to the impact of a positive comparable sales environment and sales from new stores and branches.
Online sales represented 16.5% of net sales during the first quarter of fiscal 2026 and increased by 10.5% compared to the first quarter of fiscal 2025. Online sales consist of sales of products generated through websites and mobile applications and does not include results from HD Supply or SRS.
A weaker U.S. dollar compared to the first quarter of fiscal 2025 positively impacted net sales by $220 million during the first quarter of fiscal 2026.
Comparable Sales. Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior period of equivalent length. Comparable sales includes sales at locations, physical and online, open greater than 52 weeks (including remodels and relocations) and excludes closed stores. Acquisitions are typically included in comparable sales after they have been owned for more than 52 weeks. Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as similarly titled measures reported by other companies.
Total comparable sales for the first quarter of fiscal 2026 increased 0.6%, primarily reflecting a 2.2% increase in comparable average ticket, partially offset by a 1.3% decrease in comparable customer transactions compared to the first quarter of fiscal 2025. Foreign exchange rates positively impacted comparable sales by approximately 55 basis points for the first quarter of fiscal 2026. Our comparable sales results reflect customer engagement with smaller home improvement projects, despite the impact of consumer uncertainty and housing affordability pressure on home improvement demand.
During the first quarter of fiscal 2026, our Storage & Organization, Power, Hardware, Plumbing, Electrical, Bath, Indoor Garden, Paint, and Kitchen & Blinds merchandising departments within our Primary segment posted positive comparable sales compared to the first quarter of fiscal 2025.
Gross Profit
Gross profit for the first quarter of fiscal 2026 increased 2.4% to $13.8 billion from $13.5 billion for the first quarter of fiscal 2025. Gross profit as a percentage of net sales, or gross profit margin, was 33.0% for the first quarter of fiscal 2026 compared to 33.8% for the first quarter of fiscal 2025, and primarily reflects the inclusion of GMS in our consolidated results.
Operating Expenses
Our operating expenses are composed of SG&A and depreciation and amortization.
Selling, General & Administrative. SG&A for the first quarter of fiscal 2026 increased $429 million, or 5.7%, to $8.0 billion from $7.5 billion for the first quarter of fiscal 2025. As a percentage of net sales, SG&A was 19.1% for the first quarter of fiscal 2026 compared to 18.9% for the first quarter of fiscal 2025, primarily reflecting higher operating costs relative to comparable sales performance.
Depreciation and Amortization. Depreciation and amortization for the first quarter of fiscal 2026 increased $45 million, or 5.7%, to $841 million from $796 million for the first quarter of fiscal 2025. As a percentage of net sales, depreciation and amortization was 2.0% for both the first quarter of fiscal 2026 and 2025.
Interest and Other, net
Interest and other, net was $604 million for the first quarter of fiscal 2026 compared to $591 million for the first quarter of fiscal 2025. As a percentage of net sales, interest and other, net was 1.4% for the first quarter of fiscal 2026 compared to 1.5% for the first quarter of fiscal 2025.
Provision for Income Taxes
Our combined effective income tax rate was 24.9% for the first quarter of fiscal 2026 compared to 24.4% for the first quarter of fiscal 2025.
Diluted Earnings per Share
Diluted earnings per share were $3.30 for the first quarter of fiscal 2026 compared to $3.45 for the first quarter of fiscal 2025. The decrease in diluted earnings per share was primarily driven by lower net earnings during the first quarter of fiscal 2026.
NON-GAAP FINANCIAL MEASURES
To provide clarity on our operating performance, we supplement our reporting with certain non-GAAP financial measures. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies.
Return on Invested Capital
We believe ROIC is meaningful for management, investors and ratings agencies because it measures how effectively we deploy our capital base. ROIC is a non-GAAP profitability measure, not a measure of financial performance under GAAP. We define ROIC as NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by average debt and equity. We define average debt and equity as the average of beginning and ending long-term debt (including current installments) and equity for the most recent twelve-month period.
The following table presents the calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP financial measure):
| | | | | | | | | | | |
|
Twelve Months Ended (2) |
| dollars in millions |
May 3,
2026 | |
May 4,
2025 |
|
Net earnings |
$ |
14,012 | | |
$ |
14,639 | |
|
Interest and other, net |
2,301 | | |
2,283 | |
|
Provision for income taxes |
4,425 | | |
4,658 | |
|
Operating income |
20,738 | | |
21,580 | |
Income tax adjustment (1) | (5,003) | | |
(5,151) | |
|
NOPAT |
$ |
15,735 | | |
$ |
16,429 | |
| | | |
|
Average debt and equity |
$ |
62,032 | | |
$ |
52,413 | |
| | | |
|
ROIC |
25.4 |
% | |
31.3 |
% |
-----
(1)Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months.
(2)The fourth quarter of fiscal 2024 includes 14 weeks. All other quarters include 13 weeks. Consistent with our consolidated financial statements, periods presented only include operating results for acquisitions since their respective acquisition dates.
LIQUIDITY AND CAPITAL RESOURCES
At May 3, 2026, we had $1.6 billion in cash and cash equivalents, of which $1.0 billion was held by our foreign subsidiaries. We believe that our current cash position, cash flow generated from operations, funds available from our commercial paper program, and access to the long-term debt capital markets should be sufficient not only for our operating requirements, any required debt payments, and satisfaction of other contractual obligations, but also to enable us to invest in the business, fund dividend payments, and fund any share repurchases through the next several fiscal years. In addition, we believe that we have the ability to obtain alternative sources of financing, if necessary or appropriate.
Our material cash requirements include contractual and other obligations arising in the normal course of business. Our contractual obligations include long-term debt and related interest payments, operating and finance lease obligations, and purchase obligations. In addition to our cash requirements, we follow a disciplined approach to capital allocation. This approach first prioritizes investing in the business, followed by paying dividends, with the intent of then returning excess cash to shareholders in the form of share repurchases. In March 2024, we paused share repurchases in connection with the SRS acquisition and do not have plans to resume share repurchases in fiscal 2026 as we seek to reduce our outstanding debt.
During the first three months of fiscal 2026, we invested $844 million back into our business in the form of capital expenditures. We plan to invest approximately $4 billion back into our business in the form of capital expenditures in fiscal 2026, in line with our expectation of approximately 2.5% of projected fiscal 2026 net sales. We expect to make investments across initiatives supporting our strategy of driving our core and culture, including building new stores and maintaining existing stores, delivering a frictionless interconnected experience, and winning with Pros. However, as in the past, we may adjust our capital expenditures to support the operations of the business, to enhance long-term strategic positioning, or in response to the economic environment, as necessary or appropriate. We may also utilize strategic acquisitions to help accelerate our strategic initiatives.
In February 2026, we announced a 1.3% increase in our quarterly cash dividend from $2.30 to $2.33 per share. During the first three months of fiscal 2026, we paid cash dividends of $2.3 billion to shareholders. We intend to pay a dividend in the future; however, any future dividend is subject to declaration by our Board based on our earnings, capital requirements, financial condition, and other factors considered relevant by our Board.
In August 2023, our Board approved a $15.0 billion share repurchase authorization that replaced the previous authorization of $15.0 billion, which was approved in August 2022. The August 2023 authorization does not have a prescribed expiration date. As of May 3, 2026, approximately $11.7 billion of the $15.0 billion share repurchase authorization remained available.
DEBT
We have a commercial paper program that allows for an aggregate of $11.0 billion in borrowings, and is supported by $11.0 billion of back-up credit facilities. These backup credit facilities consist of a five-year $3.5 billion credit facility scheduled to expire in May 2030, a 364-day $3.5 billion credit facility scheduled to expire in July 2026, a three-year $3.0 billion back-up credit facility scheduled to expire in July 2028, and a 364-day $1.0 billion back-up credit facility scheduled to expire in July 2026.
During the first three months of fiscal 2026, all of our short term borrowings were under our commercial paper program. We utilized commercial paper borrowings to support general liquidity, including the repayment of long-term debt, and the maximum amount outstanding during the first three months of fiscal 2026 was $6.2 billion. At May 3, 2026, we had outstanding borrowings under our commercial paper program of $3.5 billion with a weighted average interest rate of 3.8%, we had no outstanding borrowings under our back-up credit facilities, and we were in compliance with all of the covenants contained in our back-up credit facilities, none of which are expected to impact our liquidity or capital resources.
We also issue senior notes from time to time. We did not have any issuances of senior notes during the first three months of fiscal 2026. In April 2026, we repaid our $1.3 billion 3.00% senior notes at maturity.
The indentures governing our senior notes do not generally limit our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. The indentures governing our notes contain various covenants, none of which are expected to impact our liquidity or capital resources. We were in compliance with all such covenants at May 3, 2026. SeeNote 5 to our consolidated financial statements for further discussion of our debt arrangements.
CASH FLOWS SUMMARY
Operating Activities
Cash flow generated from operations provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, associate compensation, operations, occupancy costs, and income taxes. Cash provided by or used in operating activities is also subject to changes in working capital. Working capital at any point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.
Net cash provided by operating activities increased by $1.7 billion in the first three months of fiscal 2026 compared to the first three months of fiscal 2025, primarily due to changes in working capital. Changes in working capital were primarily driven by inventory management, along with the deferral of our fourth quarter fiscal 2024 estimated federal tax payment to the first quarter of fiscal 2025, which resulted in fewer income tax payments in the first three months of fiscal 2026 compared to the first three months of fiscal 2025.
Investing Activities
Net cash used in investing activities increased by $178 million in the first three months of fiscal 2026 compared to the first three months of fiscal 2025, primarily resulting from a higher volume of immaterial acquisitions during the first quarter of fiscal 2026.
Financing Activities
Net cash used in financing activities in the first three months of fiscal 2026 primarily reflected $2.3 billion of cash dividends paid, $1.4 billion of repayments of long-term debt, and $1.0 billion of net repayments of commercial paper borrowings. Net cash used in financing activities in the first three months of fiscal 2025 primarily reflected $2.3 billion of cash dividends paid, $1.1 billion of repayments of long-term debt, and $278 million of net repayments of commercial paper borrowings.
CRITICAL ACCOUNTING ESTIMATES
During the first three months of fiscal 2026, there were no changes to our critical accounting estimates or our significant accounting policies as disclosed in the 2025 Form 10-K. Our significant accounting policies are disclosed inNote 1 to our consolidated financial statements.
ADDITIONAL INFORMATION
For information on accounting pronouncements that have impacted or may materially impact our consolidated financial condition, results of operations, or cash flows, seeNote 1 to our consolidated financial statements. 
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