Home Depot (NYSE: HD) delivered a second-quarter sales beat, but the quality of that beat is under scrutiny as a one-time tariff refund masked significant underlying margin pressure. The home improvement giant reported fiscal Q2 2026 results on August 20, showing a 5.7% increase in total sales to $47.86 billion, topping analyst expectations. However, the company's gross margin expansion of 25 basis points was largely a timing artifact, with a $685 million tariff refund contributing 145 basis points, while other costs and acquisition-related headwinds shaved off 120 basis points.
The retailer's comparable sales rose 1.7% year-over-year, driven entirely by a 2.8% increase in average ticket size to $92.50, as comparable transactions fell 1.0%. This indicates that while customers are spending more per visit, foot traffic remains weak, reflecting a cautious consumer environment. The company continues to see strength in smaller projects while larger, financed renovations remain soft, a trend that CFO Richard McPhail acknowledged in the earnings release.
Adjusted earnings per share came in at $4.92, surpassing the $4.73 consensus estimate, while net earnings rose 4.7% to $4.77 billion. Adjusted operating margin slipped 10 basis points to 14.7%. Despite the beat, management kept its full-year guidance unchanged, expecting sales growth of 2.5% to 4.5%, comparable sales flat to 2% growth, and adjusted EPS growth ranging from flat to 4%.
The tariff refund, related to the International Emergency Economic Powers Act (IEEPA), reduced cost of goods sold by $685 million, with an additional $45 million remaining in inventory. However, management cautioned that this benefit would be fully offset by unplanned costs over the year, and that some of the second-quarter benefit would reverse in the third quarter. This raises questions about the sustainability of the company's margin performance.
Professional customers remain a key growth area. Home Depot noted that 90% of its stores closed a sale facilitated by SRS Distribution through its QuoteCenter platform during the past year. SRS, which Home Depot acquired in 2025, is expected to grow organic sales at a mid-single-digit rate in fiscal 2026. While the integration of SRS strengthens Home Depot's position in complex, professional-grade projects, it also brings lower-margin revenue, as evidenced by the 60-basis-point drag from acquisition mix on gross margin.
Comparatively, Lowe's (NYSE: LOW) reported comparable sales growth of just 0.2% in its most recent quarter and lowered its annual outlook, underscoring the challenging housing market. Home Depot's comparable sales growth of 1.7% outpaces its rival, but the company's reliance on average ticket growth rather than traffic is a concern. With housing turnover near historic lows, the demand for big-ticket items remains subdued.
Wall Street's reaction has been mixed. Home Depot shares closed Wednesday at $344.30, up 2.02%, leaving an 8.6% upside to the consensus price target of $374.06. However, analyst targets vary widely. TD Cowen reiterated a Buy rating with a $410 target, citing stronger comps and an easier second-half setup. Truist raised its target to $373, while RBC Capital lowered its price target to $342, cautioning that the quarter would have disappointed without lumber inflation and the tariff refund.
The key test for Home Depot lies in margin quality. As the tariff refund fades, investors will need to see stronger traffic or sustained professional volumes to justify the stock's valuation. The second-quarter beat buys time, but not certainty. With housing turnover expected to remain depressed and cost pressures from tariffs, fuel, and product prices persisting, the company's ability to maintain profitability will be closely watched.
