HD — Q2 2026 Financial Report Analysis

A tariff refund, not the home-improvement customer, carried the quarter

Home Depot's fiscal second quarter (the 13 weeks ended August 2, 2026) looks solid on the surface: sales of $47.9 billion, up 5.7%, and diluted earnings per share of $4.79, up 4.6%. Underneath, almost all of the profit growth traces to a single item that has nothing to do with selling more lumber or paint. During the quarter the company received roughly $730 million in tariff refunds following the U.S. Supreme Court decision invalidating tariffs imposed under the International Emergency Economic Powers Act (IEEPA), and recognized about $685 million of that as a reduction of cost of goods sold — effectively a rebate on inventory the company had already bought and, in many cases, already sold.

Strip that out and the picture reverses. Sales growth was also mostly bought rather than earned: comparable sales — the change in sales at stores and websites open more than 52 weeks, which strips out the effect of simply owning more locations — rose only 1.7%, while the acquired distributor GMS added $1.4 billion of sales the company did not own a year ago.

The numbers

"bps" = basis points; 100 bps = 1 percentage point. Operating margin is the share of revenue left after the costs of running the business, before interest and tax. Adjusted EPS here differs from reported EPS only by the amortization of intangible assets created by acquisitions — a non-cash accounting charge — which was $125 million in the quarter versus $87 million a year ago.

What the refund is actually worth

The $685 million recognized in cost of goods sold is equal to roughly 143 basis points of sales. Gross margin rose only 30 basis points (33.4% to 33.7%), which means that without the refund, gross margin would have been near 32.2% — down roughly 115 basis points year over year. Management says as much in plain terms: the margin improvement "reflects the benefit from IEEPA tariff refunds, largely offset by incremental cost pressures related to fuel, energy, and other product input costs, as well as the inclusion of GMS in our consolidated results."

Running the same arithmetic down to the bottom line, at the quarter's 24.5% effective tax rate the $685 million is worth about $517 million after tax, or roughly $0.52 per diluted share. On that basis — our estimate, not a company-disclosed figure — earnings ex-refund would have been near $4.25 billion and EPS near $4.27, both down roughly 7% year over year rather than up ~5%. The true underlying decline is slightly larger still, because interest income also benefited: interest and other, net improved to $524 million from $550 million, which the filing attributes to "higher interest income due to interest received from IEEPA tariff refunds."

One fairness point in management's favor: the refunds are not a pure windfall dropped on an otherwise normal cost base. The company frames them as offsetting "unplanned fuel, energy, and other product input costs" that also hit this year and were not in the original plan. The refund is non-recurring, but so is part of the cost pressure it is cancelling out. What is not in doubt is that the refund is finite — the company says the $730 million received represents "the vast majority of our expected refunds," so there is little left to collect.

Takeaway: Home Depot's reported ~5% earnings growth is an accounting artifact of a one-time $685 million tariff refund booked into cost of goods sold; excluding it, second-quarter EPS fell roughly 7% year over year on a gross margin down about 115 basis points. The operating business is growing sales by buying distributors and raising prices, not by serving more customers.

Comparable sales: higher prices, fewer visits

The 1.7% comparable-sales gain breaks down into a 2.8% increase in average ticket (what the typical customer spends per transaction, $92.50 versus $90.01) against a 1.0% decline in comparable customer transactions. Total transactions fell to 443.2 million from 446.8 million. That is the third consecutive period of the same pattern: a year ago the split was +1.4% ticket against −0.4% transactions, so both halves have widened in the same directions. Growth is coming from each visit costing more, not from more visits.

Two further qualifications on the 1.7%:

• Currency flattered it. A weaker U.S. dollar added about $105 million to net sales and roughly 25 basis points to comparable sales. U.S. comparable sales rose only 1.3%, versus 1.7% for the total — the gap is Canada and Mexico, helped by exchange rates.
• The mix is small jobs. The filing is specific that results "reflect customer engagement with smaller repair and maintenance projects, despite the impact of consumer uncertainty and housing affordability pressure on home improvement demand." The departments posting positive comps — Storage & Organization, Electrical, Hardware, Power, Plumbing, Paint, Bath — are consistent with maintenance spending rather than the big-ticket remodels that drive Home Depot's best years. Online sales, at 16.6% of the total, grew 11.0%, well ahead of the store business.

Costs, meanwhile, grew faster than sales: selling, general and administrative expense rose 8.5% to $8.4 billion, moving from 17.1% to 17.6% of sales, which the company attributes to "higher operating costs relative to comparable sales performance" — in other words, the expense base grew faster than the comps needed to absorb it.

Acquisitions are now the growth engine — and they dilute margin

Home Depot reports one Primary segment (the retail stores plus HD Supply) and an "Other" bucket that holds the SRS distribution businesses. The divergence between them is the quarter's most durable story:

The Primary segment grew sales just 1.5% but improved its margin — and note that the tariff refunds were recognized "nearly all within our Primary segment," so that 30-basis-point improvement is itself refund-driven. The Other segment grew 62%, entirely on acquisitions, at roughly a third of the Primary segment's profitability, and its own margin fell 150 basis points as acquisition-related intangible amortization climbed. This is the arithmetic behind consolidated operating margin falling 20 basis points while both the headline sales and profit lines rose: the faster-growing part of Home Depot is structurally the less profitable part. Distribution is a lower-margin business than retail, by design.

The acquisitions themselves: GMS (specialty building products — drywall, ceilings, steel framing) closed September 4, 2025 and added $1.4 billion of sales in the quarter and $2.8 billion in the first half. Mingledorff's, an HVAC equipment distributor across the southeastern U.S., closed May 11, 2026 for approximately $1.1 billion in cash, creating a fifth SRS vertical and adding $410 million of definite-lived intangibles (amortized over a weighted-average 21 years) and $412 million of goodwill.

Cash and the balance sheet

First-half operating cash flow was $11.4 billion, up $2.5 billion from $9.0 billion — but the filing is explicit that this is timing, not earnings: "primarily due to changes in working capital... driven by timing of vendor payments and 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." Half-year net earnings were up only 0.9% ($8,055M versus $7,984M), so almost none of that cash-flow gain is profit growth.

That cash went to deleveraging and the dividend, not to shareholders via buybacks: the first half shows $3.0 billion of long-term debt repayment (versus $1.2 billion a year ago), $4.6 billion of dividends, $1.7 billion of capital expenditure, $1.3 billion for acquisitions — and no share repurchases at all, in either this year's or last year's first half. The buyback remains suspended while the company digests the SRS, GMS and Mingledorff's deals. The quarterly dividend was $2.33 per share versus $2.30, up 1.3%. Total assets were $109.4 billion against $105.1 billion at the February 1, 2026 year-end, with goodwill and intangibles together at $33.4 billion — close to a third of the balance sheet, a direct consequence of the acquisition strategy.

Guidance and what has to happen next

Management reaffirmed full-year fiscal 2026 guidance and stated explicitly that it "includes IEEPA tariff refunds, which are expected to partially offset unplanned fuel, energy, and other product input costs throughout the fiscal year":

Three things stand out when the guidance is checked against what the first half actually delivered.

Sales growth has to slow, and mechanically will. First-half sales rose 5.3%, against full-year guidance of 2.5–4.5%. The reason is visible in the filing rather than in any warning: GMS closed on September 4, 2025, so from the third quarter onward it sits in the prior-year base too. The roughly $1.4-billion-a-quarter inorganic boost simply stops counting as growth. With comparable sales running at 1.7% and guided to flat-to-2.0%, the reported growth rate should converge toward the comp rate in the second half.

The full-year gross-margin guide of 33.1% is below the 33.7% just delivered, consistent with the refund benefit being concentrated in this quarter and largely spent.

The EPS guide leans on the second half. First-half EPS was $8.10 versus $8.05 — up 0.6%, essentially flat, and that is with the $0.52 of refund help. Full-year guidance of flat-to-+4.0% from $14.23 implies $14.23 to $14.80, so the second half must produce roughly $6.13 to $6.70 against $6.18 in last year's second half. The low end requires only holding flat; the top of the range requires second-half EPS growth near 8% at a point when the acquisition tailwind disappears, the tariff refunds are nearly fully collected, and SG&A is still growing at more than four times the comp rate.

Our read: the reaffirmation is defensible at the bottom of the range and optimistic at the top. Home Depot's underlying retail business is running at roughly 1.3% U.S. comparable sales driven entirely by price per transaction, with customer visits declining and the filing itself naming "consumer uncertainty and housing affordability pressure" as the constraint. Nothing in this quarter suggests the big-ticket remodelling demand that historically drives Home Depot's earnings has turned; what the quarter shows instead is a company holding reported earnings roughly flat with a one-time refund, a lower-margin distribution roll-up, and a paused buyback. The thing to watch in the third quarter — reporting in November, and the first period with no GMS boost and no meaningful refund left — is whether comparable transactions stop falling. That, not the headline sales number, is the signal that the customer has come back.