What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-03-23 compared with 2025-03-24 · 81 added, 86 removed, 208 unchanged (45% of the section changed)

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The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the two-year period ended January 30, 2026 (our fiscal years 2025 and 2024).

Unless otherwise noted, all references herein for the years 2024, 2023, and 2022 represent the fiscal years ended January 31, 2025, February 2, 2024, and February 3, 2023, respectively.

Fiscal years 2024 and 2023 contained 52 weeks of operating results compared to fiscal year 2022, which contained 53 weeks.

Unless otherwise noted, all references herein for the years 2025, 2024, and 2023 represent the fiscal years ended January 30, 2026, January 31, 2025, and February 2, 2024, respectively.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

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2,636 2,566 2,531

1 The fiscal year ended February 3, 2023 had 53 weeks.

The fiscal years ended January 31, 2025 and February 2, 2024 had 52 weeks.

1 Repurchases of common stock on a trade-date basis.

Net sales for fiscal 2024 decreased 3.1% from fiscal 2023 to $83.7 billion .

Comparable sales for fiscal 2024 decreased 2.7% , consisting of a 3.0% decrease in comparable customer transactions, and a 0.3% increase in comparable average ticket .

Net earnings for fiscal 2024 de creased 10.0% to $7.0 billion.

Net sales for fiscal 2025 increased 3.1% from fiscal 2024 to $86.3 billion.

Comparable sales for fiscal 2025 increased 0.2%, consisting of a 3.0% increase in comparable average ticket, partially offset by a 2.8% decrease in comparable customer transactions.

Net earnings for fiscal 2025 decreased 4.4% to $6.7 billion.

Diluted earnings per common share decreased 3.1% in fiscal 2025 to $11.85 from $12.23 in fiscal 2024.

Included in fiscal 2024 results is pre-tax income of $177 million associated with the fiscal 2022 sale of the Canadian retail business, w hich increased diluted earnings per share by $0.24 .

Included in the fiscal 2023 results is $63 million of pre-tax income associated with the sale of the Canadian retail business, which increased diluted earnings per share by $0.11 in fiscal year 2023.

Adjusting for these items, adjusted diluted earnings per common share decreased 8.4% to $11.99 in 2024 from adjusted diluted earnings per common share of $13.09 in 2023 (see the non-GAAP financial measures discussion).

For fiscal 2024, cash flows from operating activities wer e $9.6 billion , with $1.9 billion used for capital expenditures.

Continuing to deliver on our commitment to return excess cash to shareholders, the Company repurchased $3.9 billion of common stock and paid $2.6 billion in dividends during the year.

Macroeconomic factors, such as ongoing inflation and higher interest rates resulting in depressed levels of housing turnover, continued to exert downward pressure on big-ticket DIY discretionary spending in fiscal 2024.

Despite these factors, we generated positive Pro customer comparable sales and increased Pro penetration for the year.

This is the result of our cumulative investments in the right brands and products, greater inventory depth, improved job site delivery, dedicated service levels, and the Pro customer digital experience.

In addition, our strong online performance gives us confidence that our focus on an intuitive user experience and omnichannel fulfillment capabilities, specifically more same-day delivery options and an improved Buy Online Pickup in Store experience, are resonating with our customers.

Looking Forward

The core demand drivers of our business that we track remain unchanged:

disposable personal income, home price appreciation, and the age of the housing stock.

We believe these drivers will sustain long-term demand as homeowners invest in repairs and upgrades.

Trends such as millennial household formation, the elderly preference to age in place, and the persistence of remote work also support home improvement market demand.

While these demand drivers remain supportive, broader market uncertainties also exist around tariffs, tax policy, and the overall geopolitical environment.

We remain focused on delivering strong operating performance, while continuing to make the right long-term investments for growth.

This includes executing at a high level through the near-term market pressures by driving productivity, managing costs, and investing in our updated Total Home strategy while continuing to drive sustainable, long-term shareholder value.

Included in fiscal 2025 results are pre-tax expenses of $321 million consisting of transaction costs and intangible asset amortization related to the acquisition of ADG and FBM, which decreased diluted earnings per share by $0.43 in fiscal year 2025.

Included in the fiscal 2024 results is $177 million of pre-tax income associated with the fiscal 2022 sale of the Canadian retail business, which increased diluted earnings per share by $0.24 in fiscal year 2024.

Adjusting for these items, adjusted diluted earnings per common share increased 2.4% to $12.28 in 2025 from adjusted diluted earnings per common share of $11.99 in 2024 (see the non-GAAP financial measures discussion).

For fiscal 2025, cash flows from operating activities were $9.9 billion, with $2.2 billion used for capital expenditures.

Continuing to deliver on our commitment to return excess cash to shareholders, the Company paid $2.6 billion in dividends during the year.

During 2025, we continued to drive progress across all five key initiatives of our Total Home strategy, which was reflected in the strength we delivered with our Pro customers, online, and home services.

Our Total Home strategic initiatives have appealed to both the value-conscious homeowner and the busy Pro customer.

To expand our Pro customer market, we completed the acquisitions of FBM and ADG.

We believe these acquisitions, along with our retail home improvement business, provide the large Pro customer with everything they need for the interior space of the home and position the Company to benefit when there is a recovery in the housing industry.

In addition, we continued to deliver on our Perpetual Productivity Improvement (PPI) initiatives, including completing the rollout of our front-end transformation across our store portfolio, streamlining our Freight Flow process, and driving inventory productivity while also navigating dynamic trade policies and tariffs.

Given the persistent volatility in the housing macro environment, heading into 2026 we continue our focus on our PPI initiatives and managing what is within our control.

We are pleased with our current track record of disciplined execution and are confident we are making the right investments to continue to deliver long-term sales growth and sustainable shareholder value.

The following table sets forth the percentage relationship to net sales of each line item of the consolidated statements of earnings.

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Other Metrics 2025 2024 2023

Comparable sales decrease 2

Comparable sales increase/(decrease) 1

0.2 % (2.7) % (4.7) %

Total customer transactions (in millions) 809 835 937

Customer transactions (in millions) 2,3

Average ticket 3

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At end of year:

Number of stores 1,748 1,746 1,738

Number of retail stores 1,759 1,748 1,746

Sales floor square feet (in millions) 196 195 195

Average store size selling square feet (in thousands) 4

Average retail store size selling square feet (in thousands) 4

Net earnings to average debt and shareholders’ deficit 22.1 % 27.5 % 31.6 %

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26.1 % 32.0 % 36.4 %

1 The fiscal year ended February 3, 2023 had 53 weeks.

The fiscal years ended January 31, 2025 and February 2, 2024 had 52 weeks.

2 A comparable location is defined as a retail location that has been open longer than 13 months.

1 A comparable location is a retail location that has been open longer than 13 months.

A location that is identified for relocation is no longer considered comparable in the month of its relocation.

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A location we have decided to close is no longer considered comparable as of the beginning of the month in which we announce its closing.

Operating locations which are sold are included in comparable sales until the date of sale.

Comparable sales include online sales, which positively impacted comparable sales in fiscal 2024, fiscal 2023, and fiscal 2022 by approximately 50

basis points, 25 basis points, and 45 basis points, respectively.

The comparable sales calculation for fiscal 2022 was calculated using sales for a comparable 52-week period.

3 Average ticket is defined as net sales divided by the total number of customer transactions.

Comparable sales include online sales, which positively impacted comparable sales in fiscal 2025, fiscal 2024, and fiscal 2023 by approximately 105 basis points, 50 basis points, and 25 basis points, respectively.

Acquisitions are typically included in comparable sales after they have been owned for more than 12 months.

2 In the first quarter of fiscal 2025, the Company adjusted its customer transactions metric to exclude certain order modifications which were previously included as a separate transaction.

The prior year periods have been adjusted to align with the current period presentation.

3 Customer transactions and average ticket represent metrics used by management to evaluate performance of our retail locations.

4 Average store size selling square feet is defined as sales floor square feet divided by the number of stores open at the end of the period.

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Fiscal 2025 Compared to Fiscal 2024

Net Sales – Net sales decreased 3.1% to $83.7 billion in fiscal 2024.

The decrease in total sales was primarily driven by the decrease in comparable sales.

Comparable sales decreased 2.7% over the same period, driven by a 3.0% decline in comparable customer transactions, and a 0.3% increase in comparable average ticket.

Comparable sales change during each quarter of the fiscal year, as reported, were declines of 4.1% in the first quarter, 5.1% in the second quarter, 1.1% in the third quarter, and an increase of 0.2% in the fourth quarter.

During fiscal 2024, we had comparable sales increases in Building Materials.

An additional four product categories performed above the Company average, including Hardware, Rough Plumbing, Appliances, and Millwork.

Strength in Building Materials reflects strong demand from Pro customers.

Our DIY customer categories were impacted by lower DIY discretionary demand, particularly in bigger-ticket interior projects.

Gross Margin – Gross margin as a percentage of sales for fiscal 2024 decreased seven basis points compared to fiscal 2023.

The gross margin decrease for the year was primarily driven by investments in our supply chain, partially offset by productivity initiatives.

Net Sales – Net sales increased 3.1% to $86.3 billion in fiscal 2025, driven by sales associated with new acquisitions during the year, and an increase in comparable sales of 0.2% over the same period.

The increase in comparable sales was driven by a 3.0% increase in comparable average ticket, partially offset by a decline in comparable customer transactions of 2.8%.

Comparable sales change during each quarter of the fiscal year, as reported, were a decline of 1.7% in the first quarter, an increase of 1.1% in the second quarter, an increase of 0.4% in the third quarter, and an increase of 1.3% in the fourth quarter.

During fiscal 2025, we had comparable sales increases in five of 14 product categories, including Rough Plumbing, Appliances, Building Materials, Lawn & Garden, and Paint.

Strength in these categories reflects continued growth with our Pro customer and online, as well as our broad assortment of appliances available next-day to our customers in the majority of zip codes in the United States.

Gross Margin – Gross margin as a percentage of sales for fiscal 2025 increased 16 basis points compared to fiscal 2024.

The gross margin increase for the year was primarily driven by favorability from credit revenue and improvements in inventory shrink, partially offset by the operational cost structure of acquisitions during 2025.

SG&A – SG&A expense for fiscal 2025 deleveraged 72 basis points as a percentage of sales compared to fiscal 2024.

This was primarily driven by employee compensation and benefits, due to higher bonus attainment and employee insurance costs, as well as cycling favorable legal settlements in the prior year.

Depreciation and Amortization – Depreciation and amortization expense deleveraged eight basis points for fiscal 2024 as a percentage of sales compared to fiscal 2023.

This was primarily driven by employee compensation and benefits, along with cycling prior year realized gains on contingent consideration associated with the 2022 sale of the Canadian retail business, partially offset by the operational cost structure of acquisitions during 2025.

Depreciation and Amortization – Depreciation and amortization expense deleveraged 18 basis points for fiscal 2025 as a percentage of sales compared to fiscal 2024, primarily due to amortization of intangible assets of acquired businesses in 2025.

Interest – Net – Net interest expense is comprised of the following:

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Interest – net $ 1,406 $ 1,313

Net interest expense in fiscal 2024 leveraged three basis points.

Net interest expense in fiscal 2025 deleveraged six basis points.

Income Tax Provision – Our effective income tax rate was 23.9% in fiscal 2025 compared to 24.0% in fiscal 2024.

Fiscal 2024 Compared to Fiscal 2023

For a comparison of our results of operations, financial condition, liquidity, and capital resources for the fiscal years ended February 2, 2024, and February 3, 2023, see “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition a nd Results of Operations ” of our Annual Report on Form 10-K for the fiscal year ended February 2, 2024, filed with the SEC on March 25, 2024.

For a comparison of our results of operations, financial condition, liquidity, and capital resources for the fiscal years ended January 31, 2025 , and February 2, 2024 , see “ Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition a nd Results of Operations ” of our Annual Report on Form 10-K for the fiscal year ended January 31, 2025, filed with the SEC on March 24, 2025.

Non-GAAP Financial Measures

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Fiscal 2025 Impacts

• In fiscal 2024, the Company recognized pre-tax income of $177 million consisting of realized gains on the contingent consideration associated with the fiscal 2022 sale of the Canadian retail business (Canadian retail business transaction).

• In fiscal 2025, the Company recognized pre-tax expenses of $321 million consisting of transaction costs and intangible asset amortization related to the acquisitions of Artisan Design Group and Foundation Building Materials (Acquisition of businesses).

Fiscal 2024 Impacts

• In fiscal 2023, the Company recognized pre-tax income of $63 million consisting of a realized gain on the contingent consideration and adjustments to the selling price associated with the fiscal 2022 sale of the Canadian retail business (Canadian retail business transaction).

Adjusted diluted earnings per share should not be considered an alternative to, or more meaningful indicator of, the Company’s diluted earnings per common share as prepared in accordance with GAAP.

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Non-GAAP adjustments – per share impacts

Acquisition of businesses 0.57 (0.14) 0.43 — — —

Canadian retail business transaction — — — (0.31) 0.07 (0.24)

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Return on invested capital 26.1 % 32.0 % 36.4 %

32.0 % 36.4 % 30.4 %

1 Income tax adjustment is defined as net operating profit multiplied by the effective tax rate, which was 23.9% , 24.0% , and 24.1% for fiscal 2025 , fiscal 2024 , and fiscal 2023 , respectively.

2 Average debt and shareholders’ deficit is defined as average current year and prior year ending debt, including current maturities, short- term borrowings, and operating lease liabilities, plus the average current year and prior year ending total shareholders’ deficit.

3 For the year ended January 31, 2025, February 2, 2024, and February 3, 2023, return on invested capital was impacted by approximately 44 basis points, 19 basis points, an d -800 basis points, respectively, as a result of the sale of the Canadian retail business.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long-term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, return excess cash to shareholders in the form of dividends and share repurchases, and repay debt maturities as they become due.

Cash flows from operations, combined with our continued access to capital markets on both a short-term and long-term basis, as needed, remain adequate to fund our operations, make strategic investments to support long-term growth, return cash to shareholders in the form of dividends, and repay debt maturities as they become due.

We believe these sources of liquidity will continue to support our business for the next twelve months.

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Cash flows from operating activities continued to provide the primary source of our liquidity.

The increase in net cash provided by operating activities for the year ended January 31, 2025, compared to the year ended February 2, 2024, was primarily due to timing of income tax payments and other changes in working capital, partially offset by lower net earnings.

Cash flows relating to changes in other operating liabilities improved $2.1 billion due primarily to timing of federal estimated tax payments.

Fiscal 2023 includes payment of certain fiscal 2022 estimated tax payments deferred under the income tax relief announced by the Internal Revenue Service (IRS) for businesses located in states impacted by Hurricane Ian.

In addition, fiscal 2024 benefited from deferral of certain federal estimated tax payments that were deferred until fiscal 2025 under the income tax relief announced by the IRS for businesses impacted by Hurricane Helene.

The increase in net cash provided by operating activities for the year ended January 30, 2026, compared to the year ended January 31, 2025, was primarily driven by changes in merchandise inventory due to inventory optimization efforts during the year, partially offset by lower net earnings and the timing of income tax payments which were previously deferred under the income tax relief announced by the IRS for businesses impacted by Hurricane Helene.

Cash Flows Used in Investing Activities

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Net cash used in investing activities $ (12,264) $ (1,738)

Net cash used in investing activities primarily consists of transactions related to capital expenditures.

Net cash used in investing activities is primarily driven by our acquisitions of ADG and FBM, which used $10.1 billion in fiscal year 2025, in addition to transactions related to capital expenditures.

Capital expenditures

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We may adjust our capital expenditures, if necessary or appropriate, to support our operations, to enhance long-term strategic positioning, or in response to the economic environment.

Cash Flows Used in Financing Activities

Cash Flows Provided by/Used in Financing Activities

(In millions) 2025 2024

Net cash used in financing activities $ (7,047) $ (6,666)

Net cash used in financing activities primarily consist of transactions related to our debt, share repurchases, and cash dividend payments.

In fiscal 2024, we repaid a $450 million senior note at maturity.

In fiscal 2023, we issued $3.0 billion of unsecured notes in March 2023, and during fiscal 2023, we also repaid a $500 million senior note at maturity.

We have a $2.0 billion five-year unsecured revolving third amended and restated credit agreement (the Third Amended and Restated Credit Agreement), with a syndicate of banks, which has a maturity date of December 2026 and an aggregate availability of $2.0 billion.

We also have a $2.0 billion five-year unsecured revolving amended and restated credit agreement dated September 1, 2023 (the 2023 Credit Agreement), with a syndicate of banks, which has a maturity date of September 2028 and an aggregate availability of $2.0 billion.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the Third Amended and Restated Credit Agreement and the 2023 Credit Agreement (collectively, the Credit Agreements), the Company may increase the combined aggregate availability of the Credit Agreements by an additional $1.0 billion.

The Credit Agreements support our commercial paper program.

The amount available to be drawn under the Credit Agreements is reduced by the amount of borrowings under our commercial paper program.

There were no outstanding borrowings under the commercial paper program or Credit Agreements as of January 31, 2025.

Total combined availability under the Credit Agreements as of January 31, 2025, was $4.0 billion.

There were no outstanding borrowings under the Company’s commercial paper program as of February 2, 2024, and there were no outstanding borrowings under the Credit Agreements as of February 2, 2024.

The Third Amended and Restated Credit Agreement and the 2023 Credit Agreement contain customary representations, warranties, and covenants.

We were in compliance with those covenants as of January 31, 2025.

Net cash provided by/(used in) financing activities $ 1,621 $ (7,047)

Net cash provided by/(used in) financing activities primarily consists of transactions related to our debt, share repurchases, and cash dividend payments.

During fiscal 2025, the Company issued $5.0 billion of unsecured notes.

In addition, the Company entered into a $2.0 billion unsecured term loan credit agreement (2025 Term Loan) which has a maturity date of October 2028.

The proceeds from the unsecured notes and the 2025 Term Loan were designated to finance, in part, our acquisition of FBM.

We also repaid $2.5 billion and $450 million in senior notes at maturity in fiscal 2025 and fiscal 2024, respectively.

In fiscal 2025, we entered into a $2.0 billion five-year unsecured credit agreement (2025 Credit Agreement), which has a maturity of September 2030, replacing the Company’s $2.0 billion five-year unsecured revolving credit agreement entered into in December 2021, and as amended (Third Amended and Restated Credit Agreement).

We also have amended the five-year unsecured revolving credit agreement dated September 1, 2023 (the 2023 Credit Agreement), with a syndicate of banks, which has a maturity date of September 2028 and an aggregate availability of $2.0 billion.

Under the amendment, borrowings under the 2023 Credit Agreement will no longer be subject to a SOFR credit spread adjustment.

The 2025 Credit Agreement and the 2023 Credit Agreement (collectively the Long-Term Credit Agreements) support the Company’s commercial paper program.

The amounts available to be drawn under the Credit Agreements is reduced by the amount of borrowings under our commercial paper program.

As of January 30, 2026, and January 31, 2025, there were no outstanding borrowings under the Company’s commercial paper program or the Long-Term Credit Agreements.

In fiscal 2025, the Company also entered into a $1.0 billion 364-day unsecured revolving credit agreement (collectively with the Long-term Credit Agreements the “Revolving Credit Facilities”) which has a maturity date of September 2026 and had no outstanding borrowings as of January 30, 2026.

The following table includes additional information related to our debt for fiscal 2025 and fiscal 2024:

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Maximum commercial paper outstanding at any period $ 500 $ 250

Short-term borrowings outstanding at year-end $ — $ —

Weighted-average interest rate of short-term borrowings outstanding — % — %

Share Repurchases

We have an ongoing share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions.

We have a share repurchase program, authorized by the Company’s Board of Directors, that is executed through purchases made from time to time either in the open market or through private off-market transactions.

We also withhold shares from employees to satisfy tax withholding liabilities on share-based payments.

Shares repurchased are returned to authorized and unissued status.

Shares repurchased are retired and returned to

authorized and unissued status.

The following table provides, on a settlement date basis, the total number of shares repurchased, average price paid per share, and the total amount paid for share repurchases for fiscal 2025 and fiscal 2024:

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Average price paid per share $ 243.48 $ 244.63

1 Excludes unsettled share repurchases and unpaid excise taxes.

1 Excludes unsettled share repurchases and excise taxes.

As of January 30, 2026, we had $10.8 billion remaining under our share repurchase program with no expiration date.

In fiscal 2025, the Company paused its share repurchase program.

In the third quarter of fiscal 2025, we increased our quarterly dividend payment by 4% to $1.20 per share.

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This reserve is based on our current knowledge with respect to inventory levels, sales trends and historical experience.

During fiscal 2024, our reserve decreased approximately $23 million to $222 million as of January 31, 2025.

During fiscal 2025, our reserve increased approximately $7 million to $229 million as of January 30, 2026.

We also record an inventory reserve for the estimated shrinkage between physical inventories.

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If actual results are not consistent with the assumptions and estimates used, we could be exposed to additional adjustments that could positively or negatively impact gross margin and inventory.

However, substantially all receivables

associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year.

However, substantially all receivables associated with these activities do not require subjective long-term estimates because they are collected within the following fiscal year.

Adjustments to gross margin and inventory in the following fiscal year have historically not been material.

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We do not have any excess insurance coverage for self-insured extended protection plan or medical and dental claims.

Self-insurance claims filed and claims incurred but not reported are accrued based upon our estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience.

During fiscal 2024, our self-insurance liabilities decreased approximately $138 million to $966 million as of January 31, 2025.

Self-insurance claims filed and claims incurred but not reported are accrued

based upon our estimates of the discounted ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience.

During fiscal 2025, our self-insurance liabilities increased approximately $5 million to $971 million as of January 30, 2026.

Judgments and uncertainties involved in the estimate

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A 100 basis point change in our discount rate would have affected net earnings by approximately $16 million for fiscal 2025.

Business Combinations

We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition.

Goodwill is measured as of the acquisition date as the excess of consideration transferred over the net acquisition-date fair value of the net identifiable assets acquired and liabilities assumed.

During the measurement period, which is up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill due to the use of preliminary information in our initial estimates.

Subsequent to the measurement period, any adjustments are recorded to earnings.

Judgments and uncertainties involved in the estimate

The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques when fair value is not readily available and requires a significant amount of management judgment.

For the valuation of intangible assets acquired in a business combination, we typically use an income approach.

Specifically, for the acquisitions of ADG and FBM, we used the multi-period excess earnings method to value Customer Relationships and the relief from royalty method to value Tradenames.

The significant assumptions used to estimate the fair value of intangibles included forecasted revenues and expenses, growth rates, royalty rates, attrition rates, and discount rates.

Effect if actual results differ from assumptions

Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates.

Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair value of the intangible assets acquired.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis