Home Depot Earnings: Operating Leverage Eludes Firm in Still-Slow Housing Market

Key Morningstar Metrics for Home Depot

• Fair Value Estimate: $325.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Home Depot’s Earnings

Home Depot HD eked out comparable sales growth of 0.3% in the fourth quarter, aided by 2.4% ticket growth but hurt by a 1.6% transaction decline. Weak top-line results led to cost deleverage, surfacing an adjusted operating margin that fell 120 basis points to 10.5%, slightly ahead of implied guidance.

Why it matters: Key drivers of home improvement spending, including home prices and turnover, remain muted. With no near-term catalyst in sight, the firm expects the market to range from a 1% decline to a 1% increase, a third year of an industry seeking growth.

• Still, we think Home Depot is positioned to take share, even in a difficult environment. The firm remains focused on removing friction for its consumers across issues like order management, delivery, and communication, which should bolster its brand intangible asset.

The bottom line: We plan to raise our $325 fair value estimate for wide-moat Home Depot by a low-single-digit rate but view shares as rich. To justify the market price, the firm would have to return to a 15% operating margin, which we don’t see as feasible in the near term, given the macro environment.

• Industry conditions appear stable, as evidenced by Home Depot’s reaffirmation of its 2026 outlook for flat to 2.0% same store sales growth, 2.5%-4.5% total sales growth, and an adjusted operating margin of 12.8%-13.0%. This is in line with our preprint estimates of flat, 4%, and 13%, respectively.
• While the recently acquired distribution businesses act as a drag on operating margin over the near term, we surmise Home Depot will be able to extract additional efficiencies from rising scale and cross selling opportunities beyond 2026, allowing the metric to rise to a 14% average over time.

Between the lines: The back half of 2026 could prove favorable. The firm will be lapping minimal benefit from storm activity in 2025 and September’s acquisition of GMS, so comparisons will be easy.