Home Depot posted its best comparable sales figure in several quarters and beat consensus on both revenue and earnings. Operating margin still went backwards. Sitting between those two facts is a $685 million tariff refund that ran through cost of goods sold in the quarter. That refund was worth roughly 52 cents a share after tax, based on the company's 24.5% effective rate and about 995 million diluted shares. The adjusted earnings beat was about 19 cents. Investors spent Tuesday working out how much of the quarter belonged to the business and how much belonged to a refund.
The stock's path said something about that debate. Shares traded more than 2% higher before the open, touched $344.54 during the session, then gave back most of the gain and were up less than 1% in late trading near $339.50. The tape was unhelpful, with long-term Treasury yields rising and housing data landing soft the same morning. Even so, a beat of this size fading through the session is worth noticing. The shares remain roughly 20% below their 52-week high of $426.75 and below both their 50-day and 200-day averages.
A refund did most of the margin work
Gross margin came in at 33.7%, up about 25 basis points from a year earlier. The refund alone contributed roughly 145 basis points. Home Depot received $730 million in IEEPA tariff refunds during the quarter, of which $685 million reduced cost of goods sold. The remaining $45 million sits in inventory and will reach the income statement as that inventory turns.
Chief Financial Officer Richard McPhail laid out the offsets on the call. Unplanned fuel, energy and input costs cost about 60 basis points. Mix from the GMS and Mingledorff's acquisitions cost about another 60 basis points. Strip out the refund and the underlying gross margin trend was down, not up.
Operating margin makes the point more plainly. It fell to 14.3% on a GAAP basis from 14.5%, and to 14.7% from 14.8% on the company's adjusted basis, which excludes $178 million of pretax intangible amortization. So gross margin rose 25 basis points while operating margin fell 20. Operating expenses grew faster than sales in a quarter that carried a large one-time cost credit.
Michael Lasser of UBS put the question directly, asking whether Home Depot had missed its own underlying profitability plan once the refund is removed. Management said results would have exceeded expectations regardless. That is a counterfactual, and nothing disclosed on the call allows an outside party to test it.
The comp accelerated on price, not visits
Total comparable sales rose 1.7%, with U.S. comps up 1.3%. The monthly cadence improved through the quarter, from 1.2% in May to 1.5% in June and 2.3% in July. Thirteen of sixteen merchandising departments posted positive comps. Digital sales grew 11%, the fifth straight quarter of double-digit online growth.
The composition is where the argument sits. Comparable average ticket rose 2.8%. Comparable transactions fell 1.0%. Customers are spending more per visit while visiting less often. Big-ticket transactions above $1,000 did rise 2.4%, which cuts against the simplest bearish read, and executives pointed to Pro demand and better in-stock levels as drivers.
Lasser also asked whether the sequential acceleration reflected share gains or a genuine market recovery. Management chose share gains, citing delivery investments, on-shelf availability and its Magic Apron tools. Merchandising chief Billy Bastek described customers who “continue to engage in smaller, repair and maintenance projects,” while “larger discretionary projects remain under pressure.” That is not the profile of a housing recovery. It is the profile of a retailer holding its ground inside a stalled one.
Growth is arriving with lower returns
Total sales rose 5.7% to $47.861 billion. Only 1.7 points of that came from comparable sales. The rest came from acquisitions, new stores and new SRS branches. Home Depot now operates 2,364 stores and more than 1,340 SRS branch locations.
That bought-in growth carries a cost. Trailing twelve-month return on invested capital fell to 24.8% from 27.2%. Inventory turns slipped to 4.5 times from 4.6, with merchandise inventories up about $2 billion to $26.8 billion. Diluted share count was essentially flat year over year, so none of the earnings growth came from repurchases.
The first-half figures compress the issue. Six-month sales rose 5.3% to $89.6 billion. Six-month net earnings rose 0.9%, and GAAP diluted earnings per share moved from $8.03 to $8.09. Free cash flow was a bright spot, up 21.1% to $4.512 billion in the quarter against $880 million of capital spending and $2.3 billion of dividends.
Unchanged guidance is doing real work
Management reaffirmed every full-year metric. Sales growth of 2.5% to 4.5%, comparable sales of flat to 2.0%, gross margin near 33.1%, GAAP operating margin of 12.4% to 12.6%, and earnings per share growth of flat to 4%.
Compare those to the quarter just reported. Gross margin of 33.7% against a 33.1% full-year target. Operating margin of 14.3% against a 12.4% to 12.6% full-year target. Seasonality explains part of that. The refund explains part of it too. What remains is a second half management is not willing to underwrite more confidently.
Seth Sigman of Barclays and Kate McShane of Goldman Sachs both asked why the range was not narrowed after a quarter that ran above its midpoint. McPhail pointed to volatility, unplanned cost pressure and housing conditions he called frozen. He went further on the call, noting that housing turnover “has never been lower as a percentage of the housing stock” and that “there's just no sign of an inflection point at this moment.”
There is also a governance question that drew almost no attention. Chief Executive Ted Decker began a temporary medical leave disclosed on August 12. McPhail is serving as interim principal executive officer, Ann-Marie Campbell is running day-to-day operations, and lead director Gregory Brenneman is chairing the board. The company has said only that it expects Decker back in a few months. One analyst offered well-wishes on the call. Nobody asked about continuity.
What the second half has to show
The refund does not repeat at this scale. Third-quarter gross margin is therefore the cleanest read investors will get on whether the underlying trend McPhail described is improving or eroding. Watch the comparable transaction line just as closely. Ticket-led comps can run for a few quarters, but sustained growth eventually needs people walking through doors.
Three other markers matter. Whether the roughly 60 basis points of fuel and input cost pressure proves temporary or resets the cost base into fiscal 2027. Whether the $400 million cross-sell target across SRS and GMS shows up in disclosed numbers rather than qualitative description. And whether return on invested capital stabilizes, since the acquisition strategy is currently buying revenue growth at a lower return than the legacy business earns.
The bull case did get evidence this quarter. Comps accelerated every month, digital compounded, big-ticket transactions turned positive, and cash generation improved sharply. The bear case got evidence too, in a declining transaction count, an operating margin that fell despite a large cost credit, first-half earnings that barely grew on 5.3% more sales, and a guidance range management would not touch. Home Depot argued on Tuesday that it is winning share inside a bad market. The next quarter, without a refund inside it, is where that claim gets priced.