How HD (The Home Depot) Makes Money in 2026: A Deep-Dive With Income Statement

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Understanding how a home improvement retailer like Home Depot (HD) makes money is essential for investors and anyone interested in the business of retail and construction. In this post, we break down Home Depot's quarterly income statement (Q4 2025) using a Sankey chart to visualize the financial flows[1][3] — what comes in, where it goes, and what's left as profit.

Quick Home Depot Overview

Home Depot operates as the largest home improvement retailer in North America, serving both professional contractors and do-it-yourself consumers. The company generates revenue through the sale of building materials, decor, hardlines (tools and hardware), and other home improvement products across its extensive store network and digital channels. Home Depot's business model combines high-volume retail operations with strong brand recognition and customer loyalty, positioning it as a dominant player in the $400+ billion home improvement market.

Revenue Breakdown

• Total Revenue (Q4 2025): $41.4B (+2.8% YoY)
  • Home Depot's revenue growth reflects steady demand across its product categories, though growth remains modest compared to historical trends
  • The company maintains a diversified revenue base across building materials, decor, hardlines, and other product categories
  • Growth is powered by a combination of comparable store sales, new store openings, and e-commerce expansion

Gross Profit and Margins

• Gross Profit: $13.8B (33.4% gross margin)
  • Cost of Revenue: $27.5B (+2.8% YoY)
  • Home Depot maintains robust margins due to its efficient supply chain operations, scale advantages, and ability to negotiate favorable terms with suppliers
• Most costs come from the direct cost of inventory sold, reflecting the capital-intensive nature of retail operations
• The 33.4% gross margin demonstrates the inherent profitability of the home improvement retail business, where product markups support substantial operating leverage

Operating Income and Expenses

• Operating Income: $5.4B (-1.2% YoY, 12.9% margin)
• Operating Expenses: $8.5B (+5.7% YoY)
  • SG&A (Sales, General & Administrative): $7.6B (+5.9% YoY, 18.5% of revenue) — covers store operations, labor, marketing, and corporate overhead
  • Home Depot continues to invest in growth and operational efficiency while managing the rising costs of labor and store operations
• The year-over-year decline in operating income, despite revenue growth, reflects elevated operating expenses as the company invests in workforce development, technology infrastructure, and store improvements

Net Income

• Pre-Tax Income: $4.8B (-1.4% YoY, 11.5% margin)
• Income Tax: $1.2B (24.3% effective tax rate)
• Net Income: $3.6B (-1.3% YoY, 8.7% net margin)
• Home Depot converts a significant portion of sales into profit due to operational scalability and the efficiency of its retail model, though profitability declined modestly year-over-year

What Drives Home Depot's Money Machine?

• Retail Sales Volume: The vast majority of revenue comes from in-store and online sales of home improvement products, driven by housing activity, consumer spending, and contractor demand
• Comparable Store Sales: Growth is measured through comparable store sales (comp sales), which reflect the health of the underlying business independent of new store openings
• E-Commerce Expansion: Digital channels continue to grow as a percentage of total sales, offering higher margins and reaching customers beyond traditional store locations
• Supply Chain Efficiency: Home Depot's ability to manage inventory and logistics effectively directly impacts gross margins and profitability

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Visualizing Home Depot's Financial Flows

The Sankey chart below visualizes how each dollar flows from gross revenue, through costs and expenses, down to net income. This helps investors spot where value is created, what areas weigh on profits, and how efficiently the company operates[1][3].

• Most revenue flows into gross profit, with operating expenses (especially SG&A costs related to store operations and labor) taking the largest chunk
• Even after substantial operating expenses, approximately 8.7% of revenue drops to the bottom line, demonstrating the profitability of Home Depot's scaled retail operations
• Interest expenses of $579M reduce pre-tax income, reflecting the company's debt levels used to fund share buybacks and capital investments

Key Takeaways

• Home Depot's money comes overwhelmingly from retail sales of home improvement products across its store network and digital channels
• Strong gross margins of 33.4% illustrate the power of Home Depot's retail model and supplier relationships
• Operating expenses growing faster than revenue (5.7% vs. 2.8%) indicate rising costs in labor and operations, pressuring profitability
• Net margin of 8.7% reflects solid profitability despite margin compression from elevated operating costs
• The company's ability to maintain double-digit operating margins demonstrates the resilience of its business model even in moderating growth environments

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FAQ About Home Depot's Income Statement

1. What is the main source of Home Depot's revenue in 2025?

Home Depot generates substantially all of its revenue from retail sales of home improvement products, including building materials, decor, hardlines (tools and hardware), and other merchandise. The company serves both professional contractors and do-it-yourself consumers through its store network and e-commerce platform, with revenue of $41.4B in Q4 2025.

2. How profitable is Home Depot in Q4 2025?

Home Depot reported net income of $3.6B in Q4 2025, with a net margin of approximately 8.7%, reflecting solid profitability driven by strong gross margins and operational efficiency. However, net income declined 1.3% year-over-year, indicating margin pressure from rising operating expenses.

3. What are the largest expense categories for Home Depot?

The biggest expenses on Home Depot's income statement are operating expenses, particularly Sales, General & Administrative (SG&A) costs, which reached $7.6B in Q4 2025 (18.5% of revenue). These costs cover store operations, employee wages, marketing, and corporate overhead. Additionally, the company incurred $579M in net interest expense, reflecting its debt obligations.

4. Why did Home Depot's operating income decline despite revenue growth?

Home Depot's operating income fell 1.2% year-over-year even as revenue grew 2.8%, primarily because operating expenses increased 5.7% — nearly double the revenue growth rate. This reflects rising labor costs, store operating expenses, and investments in infrastructure, which outpaced the benefit of modest revenue growth.

5. How does Home Depot's effective tax rate compare to previous years?

Home Depot's effective tax rate in Q4 2025 was 24.3%, which is consistent with the federal corporate tax rate and typical for large retailers. This rate reflects the company's tax position and any available deductions or credits, and is relatively stable year-over-year.