Home Depot Relies on Bigger Baskets as Traffic Slips

Home Depot reported fiscal second-quarter 2026 total sales of $47.9 billion, a 5.7% year-over-year increase that outpaced the 1.7% growth in comparable sales. The divergence is attributable to the acquisition of GMS, new store openings, and branch expansions. However, the core operational metric reveals a contraction in customer activity: comparable transactions declined by 1% while the average ticket rose by 2.8%. This shift indicates that the company is generating growth through larger individual purchases rather than an increase in foot traffic.

Management identified portable power and patio categories as performance highlights, though they acknowledged that larger discretionary projects remain under pressure. The reliance on ticket size for growth is viewed as a fragile foundation, particularly as housing turnover has remained at historical lows for four years. With no visible inflection point in the housing market, the company faces a structural challenge in maintaining transaction volume without aggressive discounting that could erode margins further.

Tariff Refunds Mask Margin Pressure

The reported gross margin was supported by $685 million in tariff refunds that reduced cost of goods sold. Management stated that these refunds were not retained as profit but were used to absorb unplanned increases in fuel, energy, and other product input costs. Excluding these refunds, gross margin would have faced approximately 120 basis points of pressure, split between input costs and acquisition mix effects. Since the majority of expected refunds have already been received, management projects that remaining refunds and cost pressures will offset each other over the fiscal year, resulting in a clean start for fiscal 2027.

Valuation Reflects Assumed Revenue Stagnation

Home Depot shares trade at $310.45, which is approximately 75% of the 52-week high. This valuation implies a required annual revenue growth rate of roughly negative 1.3% over a multi-year horizon, suggesting the market is pricing in a shrinking business. The low end of the company's fiscal 2026 total sales guidance of 2.5% growth already exceeds this assumed rate. Consequently, the primary risk to the stock is not revenue contraction but rather earnings stability, with management reaffirming comparable sales growth of 0% to 2% and diluted earnings per share growth of 0% to 4%.

According to GN stocks/sp500, the current pricing structure offers a margin of safety against revenue decline but leaves little room for error in margin maintenance. If further cost pressures emerge, the company will likely need to pass costs to customers, risking further reductions in transaction frequency. The strategic focus remains on leveraging high-ticket items to sustain revenue growth while managing the impact of a stagnant housing market on overall demand.