Will they or won't they? That's the question on investors' and shoppers' minds alike as retailers start outlining their strategies to deal with tariffs. Walmart said last week that it would need to raise some prices, but it provided a broad outline of how it would seek to minimize the price hikes through redistributing its import bases, reworking packaging, and other actions.
Home Depot (HD -0.77%), on the other hand, told investors during its first-quarter earnings report that it wouldn't raise prices. That was welcome news, considering all the other problems the company is having today.
Let's take a deeper look at what's going on.
Image source: Home Depot.
Ongoing pressure in the business
Home Depot is a perennial winner and market beater, but it's experiencing strong external pressure from a variety of interconnected sources. The real estate industry is struggling through continued high interest and mortgage rates, leading to lower sales in the home improvement sector, and inflation is making it harder for customers to spend on anything extra. Home improvement is often a gray zone between essentials and discretionary spending.
As the leader in the industry, Home Depot benefits from spending on what consumers can't avoid, but it feels the pinch in other categories.
"People are painting again and working in their yards and doing smaller projects, but just have not engaged in the larger projects," CEO Ted Decker said during the first-quarter earnings call.
The 2025 fiscal first quarter (ended May 4) was mixed, but in line with expectations. Sales increased 9.4% year over year, but comparable sales (comps) were down 0.3%. That means the growth is coming from new stores, of which there were three in the first quarter, and acquisitions, like SRS Distribution, which Home Depot purchased last year. Adjusted earnings per share (EPS) were $3.56, down from $3.67 last year and $0.04 below analyst expectations.
High scale, strong leverage
Decker said that 50% of the company's merchandise is sourced in the U.S., and over the past few years, it's diversified its supply base so it's not reliant on any one country. He said that within the next 12 months, it will reach a level that no country outside the U.S. will be responsible for more than 10% of its purchases.
Decker explained that the company has many levers to pull to offer a strong value proposition for customers even now, and that it's weathered many economic events in the past. He noted that for most homeowners, their house is their most expensive asset, and aging homes need work.
Indeed, 55% of homes are at least 40 years old, and Home Depot is well-positioned to benefit from consumer spending. It's doing whatever it can to be the company to beat: upgrading its digital platforms, renovating its stores, investing in technology, and focusing on the consumer experience.
To that end, Home Depot doesn't see the likelihood that it will need to increase many prices. It has an elastic model that can call up different supply lines, and it anticipates being able to cut out whatever products would require higher pricing. The company sees this as an exciting opportunity to capture market share from other retailers that don't have its scale and leverage.
Higher margins for retail
Although there's pressure, Home Depot still has high margins compared with other retailers. Walmart, for example, said it can't absorb tariffs because its profit margins are already low; about 2.4% today.
Home Depot, on the other hand, enjoys a high profit margin compared to large retailers like Walmart, Costco Wholesale, and Target. Groceries have low margins, so this makes sense, but its profit margin is also higher than more similar companies like Lowe's and Floor & Decor.
WMT Profit Margin data by YCharts
If Home Depot doesn't have to raise prices, it can grow its market share while keeping its margins healthy.
Always opportunities
Investors shouldn't get scared off because of short-term pressure. Home Depot's management is always finding ways to generate growth opportunities and become more efficient, and its approach to tariffs should boost investor confidence. The company purchased SRS last year to expand its market opportunity, which it sees as $1 trillion.
And don't forget Home Depot's dividend. It yields 2.4% at the current price, and it's reliable and growing. All this means Home Depot is an excellent, all-weather choice for long-term value investors.
