Morningstar DBRS Confirms The Home Depot, Inc.'s Issuer Rating at "A" and Home Depot of Canada Inc.'s Commercial Paper at R-1 (low), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed The Home Depot, Inc.'s (Home Depot or the Company) Issuer Rating and Senior Unsecured Debt rating at "A" and its Commercial Paper rating at R-1 (low). Concurrently, Morningstar DBRS confirmed Home Depot of Canada Inc.'s Commercial Paper rating at R-1 (low). The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmations reflect Home Depot's steady operating performance during the last 12 months, which was in line with Morningstar DBRS' expectations, and are supported by Morningstar DBRS' view that Home Depot is well placed in the current credit rating category with adequate cushion to withstand any near-term market volatility. Morningstar DBRS acknowledges the considerable uncertainty related to potential shifts in U.S. tariff policy, and while this uncertainty, coupled with the negative implications of any trade policy shifts on consumer demand, presents a potential downside risk to earnings forecasts, Morningstar DBRS believes that Home Depot's large scale, supply chain diversification, and proven operating flexibility should largely mitigate the negative impact of these potential risks on the Company's operating performance. Furthermore, the Stable trends reflect Morningstar DBRS' expectation that the Company will continue to balance investment spending and shareholder returns, such that leverage remains relatively stable and appropriate for the current credit rating category.

CREDIT RATING DRIVERS
Looking ahead, Morningstar DBRS may take a negative credit rating action if weaker-than-expected operating performance and/or more aggressive financial management policies result in credit metrics weakening on a sustained basis (i.e., debt-to-EBITDA leverage above 2.5 times (x)).

Conversely, and although unlikely in the near term, if Home Depot's earnings profile were to improve considerably and/or capital allocation were managed such that key credit metrics improve to levels considered strong for the current credit ratings (i.e., debt-to-EBITDA leverage is maintained structurally well below 2.0x), Morningstar DBRS may take a positive credit rating action.

EARNINGS OUTLOOK
Morningstar DBRS believes Home Depot's earnings profile will remain stable and relatively strong for the current "A" credit rating category, despite the expectation of relatively weaker consumer demand and moderating but persistent inflationary pressures in the near term. Morningstar DBRS expects consumer spending trends in the home improvement sector to largely remain the same as last year, with repair and remodeling projects forming the bulk of sales, while larger home renovation projects as well as discretionary spending on seasonal goods and home decor remain subdued. Morningstar DBRS expects Home Depot's total revenue to grow modestly in F2025 (period ending January 2026), taking into account the full-year contribution from the SRS Distribution, Inc. (SRS) acquisition and 12 to 13 new store openings, while comparative sales remain relatively flat year over year. For F2026, Morningstar DBRS expects some recovery in large home-related renovation projects and higher-ticket product categories to facilitate low-single-digit sales growth year over year. Morningstar DBRS expects EBITDA margins to remain relatively flat as cost-saving initiatives and efficiency improvement benefits are offset by the relatively lower-margin SRS business and operating deleveraging in the near term. As such, Morningstar DBRS forecasts EBITDA to improve marginally toward $25.0 billion in F2025 and toward $26.0 billion in F2026.

FINANCIAL OUTLOOK
In terms of financial profile, Morningstar DBRS expects Home Depot's strong free cash flow (FCF)-generating ability and disciplined financial management to continue to offset any earnings pressure in the near term. Morningstar DBRS notes that Home Depot's deleveraging plan after the SRS acquisition in June 2024 has remained on track, as the Company has already repaid the majority of the short-term borrowings used to fund the transaction. As a result, key credit metrics have returned to levels Morningstar DBRS considers acceptable for the current credit rating category (debt-to-EBITDA less than 2.5x at the end of F2024). Morningstar DBRS forecasts cash flow from operations to improve toward $20.0 billion in F2025 and F2026 from approximately $19.0 billion in F2024 and to remain more than sufficient for annual capital expenditure outflow of approximately $4.0 billion and annual dividend payments of around $9.2 billion during this period. Morningstar DBRS expects the Company to continue to use its FCF (before any working capital changes) of approximately $7.0 billion in F2025 toward additional debt reduction in line with its deleveraging plan. Morningstar DBRS notes the Company's announcement to temporarily pause its share repurchase program to prioritize debt reduction such that the leverage ratio returns to its target level of 2.0x. For F2026 and onward, Morningstar DBRS expects the Company to use its FCF and some incremental debt to fund share repurchases but expects it to do so within the bounds of its publicly stated leverage target (lease-adjusted debt-to-EBITDAR of 2.0x).

CREDIT RATING RATIONALE
Home Depot's credit ratings are supported by its dominant market position, large scale, geographic diversification, and FCF-generating capacity. The credit ratings also reflect the intense competition and cyclicality of the home improvement retail industry as well as risks related to possible future growth strategies.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Further details on the Issuer's Intrinsic Assessment can be found at https://www.dbrsmorningstar.com/research/452420.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025) https://dbrs.morningstar.com/research/447184

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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