Fitch Affirms The Home Depot's IDR at 'A'; Outlook Stable

Published: 2025-07-02 05:04:11 ET HD

Published on 07/02/2025 at 05:04

Fitch Ratings has affirmed The Home Depot, Inc.'s ratings, including its Long-Term Issuer Default Rating (IDR) at 'A' and Short-Term IDR at 'F1' following the company's proposed acquisition of GMS, Inc.

The Rating Outlook is Stable.

The affirmation and Outlook reflect Fitch's expectation that the $5.5 billion cash- and debt-funded acquisition will only modestly delay Home Depot's deleveraging trajectory after the SRS acquisition in 2024. Fitch expects the proposed GMS acquisition to modestly increase proforma EBITDAR leverage to about 2.4x in 2025 and about 2.15x in 2026, versus prior expectations of around 2.3x and 2.0x, before returning to 2.0x in 2027.

Fitch expects Home Depot will continue pausing share repurchases and dedicate FCF to debt reduction until it reaches its 2.0x leverage target. The ratings are further supported by Home Depot's large scale, with fiscal 2024 revenue of about $160 billion, and robust cash flow, which provides good financial flexibility.

Key Rating Drivers

Modest Delay in Deleveraging: The GMS acquisition will add about $5.5 billion in debt and around $530 million in operating and financial lease liabilities to Home Depot's capital structure, modestly delaying its deleveraging trajectory. To support its ability to reduce debt, Fitch expects Home Depot will continue to pause share repurchases and deploy FCF to debt reduction until it reaches its leverage target.

Considering Home Depot's historical adherence to its 2.0x leverage policy and strong annual cash flow generation, Fitch expects the company to manage its leverage at or under 2.0x over the medium term absent material macroeconomic pressures. However, if Home Depot continues making sizeable acquisitions that keep leverage above 2x over the medium term, Fitch could take negative rating action.

Category Under Pressure: Fitch's base case assumes Home Depot's sales could be around $164 billion in 2025, assuming the GMS acquisition closes in 3Q25, compared to $159.5 billion in 2024. We expect tariff impacts to pressure Home Depot's sales, but the 2024 SRS acquisition and partial year of GMS in 2025 should offset potential declines in volumes due to eroding consumer confidence and declining affordability in the second half of 2025. While Home Depot's core consumers are typically wealthier homeowners; however, volatility in financial markets stemming from the tariffs could also affect this cohort.

Home Depot's continued investment in technology and efforts to improve customer experience, along with growing offerings to pro customers, should help it grow market share. Fitch expects these factors, combined with an aging U.S. housing stock and the potential for moderating interest rates, to support annual organic growth in the low single digits over the longer term. Sales and profitability may still face increased volatility in the short term.

Acquisitions Increase Pro Offerings: Home Depot's proposed acquisition fits with its strategy of growing market share by increasing offerings to complex pros working on larger projects. The acquisition adds drywall, ceilings and other offering to its specialty trade distribution platform that it has been building since the June 2024 acquisition of SRS. Fitch believes these acquisitions will enable the company to address a larger total addressable market and support its ability to grow market share with larger pro customers.

Broadening Market View: In 2024, Home Depot reported that its addressable market was around $1 trillion, up from $650 billion in 2019. While a portion of this increase is due to market expansion, the majority relates to Home Depot's expanding view of its market, including more offerings for professionals, subsectors such as home decor and a stronger presence in Canada and Mexico. Management believes its market share is around 17%.

Declining EBITDA: Fitch projects Home Depot's EBITDA will decline to about $24 billion (mid-14% margin) in 2025 from around $25.3 billion (around 16% margin) in 2024. The decline in profitability is primarily due to inflationary tariffs and dilutive impact of acquisitions. We expect gross margin to drop from 33.4% in 2024 to the mid-32% range in 2025. Fitch also expects Home Depot will increase prices, collaborate with suppliers to lower costs, and partially absorb the impact of cost increases to mitigate tariffs. The company's large scale and purchasing power should support its ability to navigate tariffs more successfully than smaller retailers.

Disciplined Capital Allocation: Home Depot's scale and stable growth should enable the company to continue managing its EBITDAR leverage target of 2.0x over the medium term. The company's strong FCF and pause of share repurchases to reduce debt after recent acquisitions highlights its ability and willingness to reduce leverage after acquisitions.

Scale and Cash Flow: Home Depot's scale and cash flow are a competitive advantage, allowing it to invest in its business and make acquisitions while managing leverage at levels acceptable for its rating. Success in home improvement requires significant investments in inventory breadth and customer service, and discounters focus on categories with narrow assortment needs and limited customer service. Home Depot's scale, inventory breadth and focus on customer service supports its strong competitive position and ability to maintain or increase market share.

Peer Analysis

Compared to Home Depot, higher-rated peers like Walmart, Inc. (Walmart; AA/Stable) and Amazon.com, Inc. (Amazon; AA-/Stable) benefit from their larger scale. Additionally, Walmart has a large international presence, and Amazon is a leader in global e-commerce and cloud computing services.

Walmart was about 60% larger than Home Depot from an EBITDA standpoint in 2024, and Fitch projects its EBITDAR leverage will trend near 2.0x. Amazon's EBITDA was more than 5x Home Depot's in 2024, with EBITDAR leverage likely to trend below 2.0x over the medium term. Like Home Depot, Target Corporation (Target; A/Negative) manages to leverage at or below 2.0x, though its scale is much smaller than Home Depot, generating $8.6 billion in EBITDA in 2024.

The home improvement industry's bulky product array, heavy service component and need to source inventory rapidly for construction help insulate the category against online incursion relative to many other consumer product categories. Home Depot leverages its website to drive instore sales as about half of online U.S. orders are fulfilled through their stores.

Key Assumptions

Fitch expects a 3% rise in revenue for 2025, reaching around $164 billion. This increase is due to inflation and the annualized impact of the SRS acquisition and the partial year impact of GMS, which offsets declining volumes caused by tariff pressures. Revenue growth could remain in mid-to-low single-digit range in 2026 and thereafter, supported by a full year of GMS in 2026, easing interest rates, market share gains and potential improvements in consumer sentiment and affordability;

Fitch anticipates Home Depot's EBITDA to decrease to around $24 billion in 2025, down from approximately $25.3 billion in 2024, as the impact from tariffs is partially offset by the acquisition of GMS. EBITDA could rise to the mid $25 billion range in 2026 due to cost mitigation measures and revenue growth. EBITDA margins are projected to decline to the mid 14% range in 2025 from 15.9% in 2024, before recovering to the 15% range in 2026 and thereafter;

Fitch forecasts that FCF, after dividends, which was about $7 billion in 2024, could decrease to the high $3 billion range in 2025 and range from $4 billion to $5 billion range over the rating horizon. Capex is projected to be around 2.4% of revenues in 2025;

Fitch expects Home Depot to use its FCF to reduce debt incurred for the SRS and GMS transactions until it achieves its 2.0x leverage target. After reaching this target, the company could use FCF or proceeds from debt issuance for share buybacks, while managing its FCF and balance sheet to maintain EBITDAR leverage within its 2.0x leverage target;

Home Depot's unsecured commercial paper (CP) and revolver have a floating interest rate structure, with Fitch assuming secured overnight financing rate (SOFR) base rates of about 3.5% to 4.5% over the forecast horizon. Home Depot's bonds have a fixed interest rate structure, with new bond interest assumed at 5.5%.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Weaker than expected operating trends leading to a slower than anticipated pace of deleveraging and EBITDAR leverage sustained above management's 2.0x leverage target;

Moves by management to more shareholder-friendly policies, or debt-financed acquisition leading to EBITDAR leverage sustaining above 2.0x.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Continued positive operating trends, together with EBITDAR leverage sustained below 1.5x, could lead to a positive rating action. Fitch does not expect this will occur given management's 2.0x leverage target.

Liquidity and Debt Structure

As of May 4, 2025, Home Depot had liquidity of around $8.3 billion, comprised of $1.37 billion in cash and around $7 billion available on its revolving credit facilities. The company has a $7.0 billion commercial paper program, which is backstopped by a $3.5 billion credit facility that matures in May 2030, and a $3.5 billion 364-day facility maturing in May 2026.

Debt on May 4, 2025, totaled about $50.4 billion, comprised of around $38 million in commercial paper, $315 million in other debt and the remainder in senior unsecured notes. The company has around $3.25 billion of notes maturing in 2025 and around $4.5 billion in 2026 that Fitch expects the company will repay from cash flow. The company has good financial flexibility through internally generated FCF, which averaged around $7 billion after dividends annually over the past five years.

Issuer Profile

With about $159.5 billion and $25 billion of revenue and EBITDA in 2024, Home Depot is the leader in the U.S. home improvement retail industry. Its scale and strong cash flow allow it to reinvest in its business and defend or expand share over time.

Summary of Financial Adjustments

Fitch adjusts for non-cash stock-based compensation. For instance, stock-based compensation for the fiscal year ending Feb. 2, 2025, amounted to $442 million. Additionally, Fitch considers interest on lease liabilities and the amortization of lease assets as operating costs, in accordance with Fitch's 'Corporate Rating Criteria'.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.