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HOME DEPOT, INC. (HD)

CIK: 0000354950. SIC: 5211 Retail-Lumber & Other Building Materials Dealers. Latest 10-K as of: 2026-03-18.

SIC breadcrumb: Retail Trade > Building Materials, Hardware, Garden Supply, And Mobile Home Dealers > SIC 5211 Retail-Lumber & Other Building Materials Dealers

SEC company page: https://www.sec.gov/edgar/browse/?CIK=354950. Latest filing source: 0001628280-26-019436.

Selected Fundamentals

MetricValueUnitFYFiled
Revenue164,683,000,000USD20252026-03-18
Net income14,156,000,000USD20252026-03-18
Assets105,095,000,000USD20252026-03-18

Macro Cross-References

Latest 10-K MD&A

Extracted between Item 7 and the next Item 7A/8 heading after HTML sanitization. Confidence: high. Filing date: 2026-03-18. Report date: 2026-02-01.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion provides an analysis of the Company’s financial condition and results of operations from management's perspective and should be read in conjunction with the consolidated financial statements and related notes included in this report. The discussion in this Form 10-K generally focuses on fiscal 2025 compared to fiscal 2024. A discussion of our results of operations and changes in financial condition for fiscal 2024 compared to fiscal 2023 has been omitted from this report, but can be found in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K for fiscal 2024. For purposes of comparison, fiscal 2025 and fiscal 2023 include 52 weeks and fiscal 2024 includes 53 weeks.

TABLE OF CONTENTS

Executive Summary

28

Results of Operations

29

Liquidity and Capital Resources

31

Critical Accounting Estimates

34

Fiscal 2025 Form 10-K

27

Table of Contents

EXECUTIVE SUMMARY

We reported net sales of $164.7 billion in fiscal 2025. Net earnings were $14.2 billion, or $14.23 per diluted share.

During fiscal 2025, we generated $16.3 billion of cash flow from operations, received $4.1 billion of proceeds from commercial paper borrowings, net of repayments, and received $2.2 billion of proceeds from the issuance of long-term debt, net of discounts. This cash flow, together with cash on hand, was used to fund $9.2 billion in cash dividends, repay $5.0 billion of long-term debt, and fund $3.7 billion in capital expenditures. As described below, we also completed the GMS acquisition for aggregate cash consideration totaling approximately $5.5 billion, including the repayment of certain of GMS’s outstanding debt.

In February 2026, we announced a 1.3% increase in our quarterly cash dividend to $2.33 per share.

Our inventory turnover ratio was 4.4 times at the end of fiscal 2025, compared to 4.7 times at the end of fiscal 2024. The decrease in our inventory turnover ratio was primarily driven by higher average inventory levels during fiscal 2025.

Our ROIC was 25.7% for fiscal 2025 and 31.3% for fiscal 2024. The decrease in ROIC was primarily driven by higher average equity due to our ongoing pause in share repurchases and higher average long-term debt largely due to the financing of the SRS acquisition. See the Non-GAAP Financial Measures section below for our definition and calculation of ROIC.

During fiscal 2025, we opened ten new stores in the U.S. and two new stores in Mexico, resulting in a total store count of 2,359 at February 1, 2026. A total of 324 of our stores, or 13.7%, were located in Canada and Mexico. At the end of fiscal 2025, we also operated over 1,250 locations within our SRS non-reportable operating segments throughout the U.S. and Canada.

GMS Acquisition

On June 29, 2025, we entered into a definitive agreement to acquire GMS, a leading distributor of specialty building products, including drywall, ceilings, steel framing and other complementary construction products, through branches located across the U.S. and Canada. Under the terms of the merger agreement, we, through a wholly owned subsidiary, made a cash tender offer to purchase all outstanding shares of GMS common stock for $110 per share. All conditions of the offer were satisfied, including receipt of the requisite regulatory approvals, and the merger was completed on September 4, 2025. As a result of the merger, GMS became a direct subsidiary of SRS and an indirect, wholly owned subsidiary of the Company. We believe the GMS acquisition will enhance SRS's position as a leading multi-category building materials distributor, bringing differentiated capabilities, product categories and customer relationships that are highly complementary to SRS's existing business. Refer to Note 13 to our consolidated financial statements for further discussion on the acquisition.

Tariffs and Other Trade Policy Matters

We continue to monitor developments with respect to tariffs and other trade policy matters closely, including impacts from the recent U.S. Supreme Court decision that struck down tariffs imposed under the International Emergency Economic Powers Act. We have worked, and continue to work, diligently to diversify our global supply chain and to implement other cost mitigation initiatives. While we experienced increased costs as a result of tariffs in fiscal 2025, our actions, including diversification efforts and some price increases, along with our scale, vendor relationships, experienced internal teams, and other initiatives allowed us to effectively mitigate the impact on our results of operations. We plan to continue to assess our sourcing and other mitigation strategies to maintain a strong value proposition for our customers and believe we remain well positioned to manage the impact that tariffs in effect as of the date of this filing are expected to have on our business.

As trade policy discussions are ongoing and related developments continue to evolve, we cannot predict with certainty their ultimate impact on our business in future periods, including our results of operations and cash flows. For more information on these risks and uncertainties see Part I, Item 1A. “Risk Factors.”

Fiscal 2025 Form 10-K

28

Table of Contents

RESULTS OF OPERATIONS

The following table presents the percentage relationship between net sales and major categories in our consolidated statements of earnings:

Fiscal

Fiscal

Fiscal

2025

2024

2023

dollars in millions

$

% of Net Sales

$

% of Net Sales

$

% of Net Sales

Net sales

$

164,683 

$

159,514 

$

152,669 

Gross profit

54,865 

33.3 

%

53,308 

33.4 

%

50,960 

33.4 

%

Operating expenses:

Selling, general and administrative

30,702 

18.6 

28,748 

18.0 

26,598 

17.4 

Depreciation and amortization

3,273 

2.0 

3,034 

1.9 

2,673 

1.8 

Total operating expenses

33,975 

20.6 

31,782 

19.9 

29,271 

19.2 

Operating income

20,890 

12.7 

21,526 

13.5 

21,689 

14.2 

Interest and other (income) expense:

Interest income and other, net

(124)

(0.1)

(201)

(0.1)

(178)

(0.1)

Interest expense

2,412 

1.5 

2,321 

1.5 

1,943 

1.3 

Interest and other, net

2,288 

1.4 

2,120 

1.3 

1,765 

1.2 

Earnings before provision for income taxes

18,602 

11.3 

19,406 

12.2 

19,924 

13.1 

Provision for income taxes

4,446 

2.7 

4,600 

2.9 

4,781 

3.1 

Net earnings

$

14,156 

8.6 

%

$

14,806 

9.3 

%

$

15,143 

9.9 

%

—————

Note: Fiscal 2025 and fiscal 2023 include 52 weeks. Fiscal 2024 includes 53 weeks. Certain percentages may not sum to totals due to rounding. 

% Change

Selected financial and sales data:

Fiscal

Fiscal

Fiscal

Fiscal

Fiscal

2025

2024

2023

2025 vs. 2024

2024 vs. 2023

Comparable sales (% change) (1)

0.3 

%

(1.8)

%

(3.2)

%

N/A

N/A

Comparable customer transactions (% change) (1) (2)

(1.0)

%

(1.0)

%

(2.9)

%

N/A

N/A

Comparable average ticket (% change) (1) (2) (3)

1.4 

%

(0.9)

%

(0.3)

%

N/A

N/A

Customer transactions (in millions) (2)

1,601.5

1,637.2

1,621.8

(2.2)

%

0.9 

%

Average ticket (2) (3)

$90.56

$89.31

$90.07

1.4 

%

(0.8)

%

Diluted earnings per share (4)

$14.23

$14.91

$15.11

(4.6)

%

(1.3)

%

—————

(1)Does not include results from the 53rd week of fiscal 2024.

(2)Customer transactions and average ticket measures do not include results from HD Supply or SRS (including GMS).

(3)Average ticket represents the average price paid per transaction and is used by management to monitor the performance of the Company, as it represents a primary driver in measuring sales performance.

(4)The 53rd week of fiscal 2024 increased diluted earnings per share in fiscal 2024 by approximately $0.30.

FISCAL 2025 COMPARED TO FISCAL 2024

Sales

We assess our sales performance by evaluating both net sales and comparable sales. Fiscal 2025 consisted of 52 weeks compared to 53 weeks in fiscal 2024. For purposes of the following discussion, comparable sales, comparable customer transactions, and comparable average ticket are based upon the comparable 52-week period from fiscal 2024.

Net Sales. Net sales for fiscal 2025 increased $5.2 billion, or 3.2%, to $164.7 billion. The increase in net sales for fiscal 2025 was primarily driven by SRS, which was acquired on June 18, 2024, and GMS, which was acquired on September 4, 2025. In aggregate, these acquisitions contributed approximately $6.3 billion of incremental net sales during fiscal 2025. Net sales also increased due to sales from new stores and the impact of a positive comparable sales environment. These increases were partially offset by the additional week in fiscal 2024 which contributed approximately $2.5 billion in net sales in fiscal 2024.

Fiscal 2025 Form 10-K

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Online sales represented 15.9% of net sales during fiscal 2025 and increased by 8.7% compared to fiscal 2024. Calculated on a comparable week basis relative to fiscal 2024, online sales increased by 10.4%. Online sales consist of sales of products generated through websites and mobile applications and does not include results from HD Supply or SRS (including GMS).

A stronger U.S. dollar compared to fiscal 2024 negatively impacted net sales by $307 million in fiscal 2025.

Comparable Sales. Comparable sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior period of equivalent length. Comparable sales includes sales at locations, physical and online, open greater than 52 weeks (including remodels and relocations) and excludes closed stores. Acquisitions are typically included in comparable sales after they have been owned for more than 52 weeks. For our calculation of comparable sales in fiscal 2025, we compare weeks 1 through 52 in fiscal 2025 against weeks 2 through 53 in fiscal 2024. Comparable sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as similarly titled measures reported by other companies.

Total comparable sales increased 0.3% in fiscal 2025, primarily reflecting a 1.4% increase in comparable average ticket, partially offset by a 1.0% decrease in comparable customer transactions compared to fiscal 2024. Our comparable sales results reflect customer engagement with smaller home improvement projects, which was offset by the impact of continued macroeconomic uncertainties and other macroeconomic factors, including a persisting high interest rate environment, that continue to pressure broader home improvement demand.

For fiscal 2025, our Storage & Organization, Electrical, Bath, Plumbing, Indoor Garden, Outdoor Garden, Kitchen & Blinds, Hardware, Power, Building Materials, and Appliances merchandising departments within our Primary segment posted positive comparable sales compared to fiscal 2024. Our other merchandising departments within our Primary segment posted negative comparable sales during fiscal 2025 compared to fiscal 2024.

Gross Profit

Gross profit increased $1.6 billion, or 2.9%, to $54.9 billion in fiscal 2025. Gross profit as a percent of net sales, or gross profit margin, was 33.3% in fiscal 2025 compared to 33.4% in fiscal 2024. The decrease in gross profit margin reflects the inclusion of SRS and GMS in our consolidated results, partially offset by lower shrink and certain supply chain benefits within our Primary segment.

Operating Expenses

Our operating expenses are composed of SG&A and depreciation and amortization.

Selling, General & Administrative. SG&A increased $2.0 billion, or 6.8%, to $30.7 billion in fiscal 2025. As a percent of net sales, SG&A was 18.6% in fiscal 2025 compared to 18.0% in fiscal 2024, which primarily reflects higher payroll and related costs in fiscal 2025 along with the impact of a non-recurring legal-related benefit recognized during fiscal 2024 within our Primary segment.

Depreciation and Amortization. Depreciation and amortization increased $239 million, or 7.9%, to $3.3 billion in fiscal 2025. As a percent of net sales, depreciation and amortization was 2.0% in fiscal 2025 compared to 1.9% in fiscal 2024, which primarily reflects increased intangible asset amortization expense resulting from our acquisitions of SRS and GMS.

Interest and Other, net

Interest and other, net increased $168 million, or 7.9%, to $2.3 billion in fiscal 2025. As a percentage of net sales, interest and other, net, was 1.4% in fiscal 2025 compared to 1.3% in fiscal 2024, primarily due to higher average long-term debt balances and lower interest income in fiscal 2025.

Provision for Income Taxes

Our combined effective income tax rate was 23.9% in fiscal 2025 compared to 23.7% in fiscal 2024.

Diluted Earnings per Share

Diluted earnings per share were $14.23 in fiscal 2025 compared to $14.91 in fiscal 2024. The decrease in diluted earnings per share for fiscal 2025 was primarily driven by lower net earnings during fiscal 2025. The 53rd week of fiscal 2024 increased diluted earnings per share in fiscal 2024 by approximately $0.30.

Fiscal 2025 Form 10-K

30

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NON-GAAP FINANCIAL MEASURES

To provide clarity on our operating performance, we supplement our reporting with certain non-GAAP financial measures. However, this supplemental information should not be considered in isolation or as a substitute for the related GAAP measures. Non-GAAP financial measures presented herein may differ from similar measures used by other companies.

Return on Invested Capital

We believe ROIC is meaningful for management, investors and ratings agencies because it measures how effectively we deploy our capital base. ROIC is a non-GAAP profitability measure, not a measure of financial performance under GAAP. We define ROIC as NOPAT, a non-GAAP financial measure, for the most recent twelve-month period, divided by average debt and equity. We define average debt and equity as the average of beginning and ending long-term debt (including current installments) and equity for the most recent twelve-month period.

The following table presents the calculation of ROIC, together with a reconciliation of NOPAT to net earnings (the most comparable GAAP financial measure):

Fiscal

Fiscal

Fiscal

dollars in millions

2025

2024

2023

Net earnings

$

14,156 

$

14,806 

$

15,143 

Interest and other, net

2,288 

2,120 

1,765 

Provision for income taxes

4,446 

4,600 

4,781 

Operating income

20,890 

21,526 

21,689 

Income tax adjustment (1)

(4,993)

(5,102)

(5,205)

NOPAT

$

15,897 

$

16,424 

$

16,484 

Average debt and equity

$

61,914 

$

52,431 

$

44,955 

ROIC

25.7 

%

31.3 

%

36.7 

%

—————

Note: Fiscal 2025 and fiscal 2023 include 52 weeks. Fiscal 2024 includes 53 weeks. Consistent with our consolidated financial statements, periods presented only include operating results for acquisitions since their respective acquisition dates.

(1)Income tax adjustment is defined as operating income multiplied by our effective tax rate for the trailing twelve months.

LIQUIDITY AND CAPITAL RESOURCES

At February 1, 2026, we had $1.4 billion in cash and cash equivalents, of which $1.0 billion was held by our foreign subsidiaries. We believe that our current cash position, cash flow generated from operations, funds available from our commercial paper program, and access to the long-term debt capital markets should be sufficient not only for our operating requirements, any required debt payments, and satisfaction of other contractual obligations, but also to enable us to invest in the business, fund dividend payments, and fund any share repurchases through the next several fiscal years. In addition, we believe we have the ability to obtain alternative sources of financing, if necessary or appropriate.

Our material cash requirements include contractual and other obligations arising in the normal course of business. Our contractual obligations include long-term debt and related interest payments, operating and finance lease obligations, and purchase obligations. In addition to our cash requirements, we follow a disciplined approach to capital allocation. This approach first prioritizes investing in the business, followed by paying dividends, with the intent of then returning excess cash to shareholders in the form of share repurchases. In March 2024, we paused share repurchases in connection with the SRS acquisition and do not have plans to resume share repurchases in fiscal 2026 as we seek to reduce our outstanding debt.

On July 4, 2025, the legislation commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”) was signed into law in the U.S., which contains a broad range of tax provisions, including the allowance to expense 100% of the cost of qualified property and immediate expensing of domestic research and experimental expenditures. The above mentioned provisions resulted in a reduction in our fiscal 2025 cash tax payments.

Fiscal 2025 Form 10-K

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During fiscal 2025, we invested approximately $3.7 billion back into our business in the form of capital expenditures. We plan to invest approximately $4 billion back into our business in the form of capital expenditures in fiscal 2026, in line with our expectation of approximately 2.5% of projected fiscal 2026 net sales. We expect to make these investments across initiatives supporting our strategy of driving our core and culture, including building new stores and maintaining existing stores, delivering a frictionless, interconnected experience, and winning with Pros. However, as in the past, we may adjust our capital expenditures to support the operations of the business, to enhance long-term strategic positioning, or in response to the economic environment, as necessary or appropriate. We may also utilize strategic acquisitions to help accelerate our strategic initiatives.

During fiscal 2025, we paid cash dividends of $9.2 billion to shareholders. In February 2026, we announced a 1.3% increase in our quarterly cash dividend from $2.30 to $2.33 per share. We intend to pay a dividend in the future; however, any future dividend is subject to declaration by our Board based on our earnings, capital requirements, financial condition, and other factors considered relevant by our Board.

In August 2023, our Board approved a $15.0 billion share repurchase authorization that replaced the previous authorization of $15.0 billion, which was approved in August 2022. The August 2023 authorization does not have a prescribed expiration date. As of February 1, 2026, approximately $11.7 billion of the $15.0 billion share repurchase authorization remained available.

DEBT

At the beginning of fiscal 2025, we had a commercial paper program that allowed for an aggregate of $7.0 billion in borrowings, and was supported by $7.0 billion of back-up credit facilities. These back-up credit facilities consisted of a five-year $3.5 billion credit facility scheduled to expire in July 2027, a 364-day $2.0 billion credit facility scheduled to expire in May 2025, and a 364-day $1.5 billion credit facility scheduled to expire in July 2025.

In May 2025, we terminated all three back-up credit facility agreements and simultaneously entered into a new five-year $3.5 billion credit facility scheduled to expire in May 2030 and a new 364-day $3.5 billion credit facility scheduled to expire in May 2026.

In July 2025, we increased our commercial paper program by $4.0 billion in connection with the anticipated financing of the GMS acquisition (see Note 13 to our consolidated financial statements). In July 2025, in connection with the increase in the commercial paper program, we also entered into a new three-year $3.0 billion back-up credit facility scheduled to expire in July 2028, and a new 364-day $1.0 billion back-up credit facility scheduled to expire in July 2026, as well as amended and restated our existing 364-day $3.5 billion credit facility to extend the maturity from May 2026 to July 2026. In the aggregate, as of February 1, 2026, our commercial paper program allows for borrowings up to $11.0 billion and is supported by $11.0 billion of back-up credit facilities.

On September 4, 2025, we utilized approximately $2.0 billion of commercial paper borrowings, together with cash on hand, to fund the GMS acquisition. These borrowings were subsequently repaid with the $2.0 billion of proceeds from our September 2025 senior notes issuance. We also utilized commercial paper borrowings in fiscal 2025 to support general liquidity, including the repayment of senior note maturities.

During fiscal 2025, all of our short-term borrowings were under our commercial paper program, and the maximum amount outstanding during that period was $5.8 billion. At February 1, 2026, we had outstanding borrowings under our commercial paper program of $4.5 billion with a weighted average interest rate of 3.7%. At February 1, 2026, we had no outstanding borrowings under our back-up credit facilities, and we were in compliance with all of the covenants contained in our back-up credit facilities, none of which are expected to impact our liquidity or capital resources.

We also issue senior notes from time to time. As discussed above, in September 2025, we issued $2.0 billion of senior notes, which were used to repay commercial paper borrowings used to fund the GMS acquisition. Separately, during fiscal 2025, we repaid an aggregate of $4.25 billion of senior notes at maturity.

At February 1, 2026, we had an aggregate principal amount of senior notes outstanding of $48.8 billion, with $4.6 billion payable within 12 months. Future interest payments associated with these senior notes total $25.4 billion, with $2.0 billion payable within 12 months, based on current interest rates, which include the impact of our active interest rate swap agreements.

The indentures governing our senior notes do not generally limit our ability to incur additional indebtedness or require us to maintain financial ratios or specified levels of net worth or liquidity. The indentures governing our notes contain various covenants, none of which are expected to impact our liquidity or capital resources. We were in compliance with all such covenants at February 1, 2026. See Note 5 to our consolidated financial statements for further discussion of our debt arrangements.

Fiscal 2025 Form 10-K

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LEASES

We use operating and finance leases largely to obtain a portion of our real estate, including our stores, distribution centers, branches, and support centers. At February 1, 2026, we had aggregate remaining lease payment obligations of $15.9 billion, with $2.2 billion payable within 12 months. Aggregate lease obligations include approximately $675 million of obligations related to leases not yet commenced. See Note 3 to our consolidated financial statements for further discussion of our operating and finance leases.

PURCHASE OBLIGATIONS AND OTHER

Purchase obligations include all legally binding contracts such as firm commitments for inventory purchases, media and sponsorship spend, software and license commitments, and legally binding service contracts. We issue inventory purchase orders in the ordinary course of business, which are typically cancellable by their terms, therefore we do not consider purchase orders that are cancellable to be firm inventory commitments. At February 1, 2026, we had aggregate purchase obligations of $1.9 billion, with $1.2 billion payable within 12 months.

At February 1, 2026, we had aggregate liabilities for unrecognized tax benefits totaling $559 million, nearly all of which are recorded as non-current liabilities. The timing of payment, if any, associated with our long-term unrecognized tax benefit liabilities is unknown. See Note 6 to our consolidated financial statements for further discussion of our unrecognized tax benefits.

We have no material off-balance sheet arrangements.

CASH FLOWS SUMMARY

Operating Activities

Cash flow generated from operations provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, associate compensation, operations, occupancy costs, and income taxes. Cash provided by or used in operating activities is also subject to changes in working capital. Working capital at any point in time is subject to many variables, including seasonality, inventory management and category expansion, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates.

Net cash provided by operating activities decreased by $3.5 billion in fiscal 2025 compared to fiscal 2024, primarily due to changes in working capital. Changes in working capital were primarily driven by the timing of vendor payments and increased inventories during fiscal 2025, along with the deferral of our fourth quarter fiscal 2024 estimated federal tax payment to the first quarter of fiscal 2025, resulting in fewer estimated tax payments in fiscal 2024 compared to fiscal 2025. This was partially offset by a reduction to our fiscal 2025 cash tax payments resulting from the OBBBA.

Fiscal 2025 Form 10-K

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Investing Activities

Net cash used in investing activities decreased by $12.1 billion in fiscal 2025 compared to fiscal 2024, primarily resulting from higher cash paid for acquisitions during fiscal 2024 compared to fiscal 2025.

Financing Activities

Net cash used in financing activities in fiscal 2025 primarily reflected $9.2 billion of cash dividends paid and $5.0 billion of repayments of long-term debt, partially offset by $4.1 billion of proceeds from commercial paper borrowings, net of repayments, and $2.2 billion of net proceeds from long-term debt.

Net cash used in financing activities in fiscal 2024 primarily reflected $8.9 billion of cash dividends paid, $1.5 billion of repayments of long-term debt, and $649 million of share repurchases prior to pausing share repurchases in March 2024, largely offset by approximately $10.0 billion of net proceeds from long-term debt, which were used to finance the SRS acquisition, and $316 million of proceeds from commercial paper borrowings, net of repayments.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The following discussion addresses our most critical accounting estimates, which are those that are both important for the representation of our financial condition and results of operations, and that require significant judgment or use of significant assumptions or complex estimates.

BUSINESS COMBINATIONS

We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of the acquisition date fair values of identifiable assets acquired and liabilities assumed requires estimates and the use of valuation techniques when fair value is not readily available and requires a significant amount of management judgment. For the valuation of intangible assets acquired in a business combination, we typically use an income approach. Specifically, we utilize the multi-period excess earnings method to determine the estimated acquisition date fair values of the customer relationships intangible assets. The significant assumptions used to estimate the fair values of customer relationships included forecasted revenues, expected customer attrition rates, and the discount rate applied. Although the Company believes its estimates of acquisition date fair values are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair values of the customer relationships intangible assets acquired.

The excess of the purchase price over fair values of identifiable assets acquired and liabilities assumed is recorded as goodwill. During the measurement period, which is up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill due to the use of preliminary information in our initial estimates. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

MERCHANDISE INVENTORIES

We value the majority of our inventory under the retail inventory method, with the remainder of our inventories valued under a cost method, primarily the moving average cost and first-in, first-out methods. Under the retail inventory method, inventories are stated at cost, which is determined by applying a cost-to-retail ratio to the retail value of inventories.

The retail value of our inventory is adjusted as needed to reflect current market conditions. Because these adjustments are based on current prevailing market conditions, the value of our inventory approximates the lower of cost or market. The valuation under the retail inventory method is based on a number of factors such as markups, markdowns, and inventory losses (or shrink). As such, there exists an inherent uncertainty in the final determination of inventory cost and gross profit. We determine markups and markdowns based on the consideration of a variety of factors such as current and anticipated demand, customer preferences and buying trends, age of the merchandise, and weather conditions.

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We calculate shrink based on actual inventory losses identified as a result of physical inventory counts during each fiscal period and estimated inventory losses occurring between physical inventory counts. The estimate for shrink occurring in the interim period between physical inventory counts is calculated on a store-specific basis and is primarily based on recent shrink results. A 10% increase in the shrink rate used to estimate our inventory shrink reserve would have increased cost of sales by approximately $79 million for fiscal 2025. Historically, the difference between estimated shrink and actual inventory losses has not been material to our annual financial results.

We do not believe there is a reasonable likelihood of a material change in the estimates or assumptions we use to value our inventory under the retail inventory method. We believe that the retail inventory method provides an inventory valuation which approximates cost and results in valuing our inventory at the lower of cost or market.

ADDITIONAL INFORMATION

For information on our accounting policies and on accounting pronouncements that have impacted or may materially impact our financial condition, results of operations, or cash flows, see Note 1 to our consolidated financial statements.