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Home Depot CEO Craig Menear On Lowe’s Newest CEO

CNBC Exclusive: CNBC Transcript: Home Depot Inc (NYSE:HD) Chairman and CEO Craig Menear Speaks with CNBC‘s Courtney Reagan Today

Home Depot CEO Craig Menear

WHEN: Today, Monday, June 24, 2019

WHERE: CNBC’s “Squawk on the Street

The following is the unofficial transcript of a CNBC EXCLUSIVE interview with Home Depot Chairman and CEO Craig Menear and CNBC’s Courtney Reagan on “Squawk on the Street” (M-F 9AM – 11AM) today, Monday, June 24th. The following is a link to video of the interview on CNBC.com:

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Home Depot CEO: Lowe’s has always been strong competitor, new CEO doesn’t change that

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DAVID FABER: Welcome back to "Squawk on the Street." Home Depot celebrating its 40th anniversary of what was the first store opening for the company, which of course is now the largest home improvement retailer in the world. It went public in 1981. Joining us now exclusively is Home Depot’s Chairman and CEO Craig Menear and our own Courtney Reagan, of course, who covers retail very closely. Nice to have you here. Congrats--

CRAIG MENEAR: Thank you.

DAVID FABER: --on 40 years. It was nice to see a number of your founders joined you as well.

CRAIG MENEAR: Yeah, it was a great morning. Thank you.

DAVID FABER: But right back to business, of course. We heard from you about a month or so ago when you reported earnings. At that point lumber prices, obviously, had been down. Some concerns about potential tariffs. The weather was an issue in the first quarter of this year. Do you have any updates for us in terms of your continued 5% comp guidance and whether it’s been impacted enough by those things that you need to revise it?

CRAIG MENEAR: Well, we’ll take a look at that as we enter our second quarter. Obviously, the lumber situation hasn’t changed. Lumber has continued to be pressured in the marketplace, for sure. Weather is improving slightly as it moves forward. And we see great demand when the weather is normalized. So, we’re looking forward to a great finish of the year.

DAVID FABER: What’s going on with lumber prices? Can you explain to the viewers what is behind the significant decline? Last year it was the opposite.

CRAIG MENEAR: Right. It was. As a matter of fact, it completely flipped. So, what happened is you had a wet early part of the year. There were logs backed up. The mills needed to process the logs. They had some challenges doing that. And then of course with the wet weather, there is not much demand on the building side. It’s really the building part of the business, the new construction that drives the lumber prices. It’s not our part of the business. So, that’s really what’s come together to kind of create the perfect storm, if you will, that has lumber prices down about 40% year over year.

DAVID FABER: And continues.

CRAIG MENEAR: And continues.

COURTNEY REAGAN: And that’s a problem because lumber is often a project starter, Craig, for a lot of other things. So, that’s an issue that Home Depot has to grapple with. I think a $200 million hit in the first quarter. And your CFO Carol Tome said it could be up to $800 million for the year.

CRAIG MENEAR: That’s correct.

COURTNEY REAGAN: So that could be a really big deflationary pressure, as you are looking at something like tariffs, which is inflationary. You said about a billion-dollar hit in 2018, potentially another billion dollars if we go forward. Do those two at all balance each other out, or are we looking at two totally different silos?

CRAIG MENEAR: It’s really two different things. You know, the deflation of lumber is obviously there. But the unit demand is solid, which is great to see. You just can’t offset 40% deflation. And, of course, the good news for Home Depot is about 70% of our goods are domestic. And the balance then comes from offshore. We’ve-sized it at about 3.5% of U.S. purchases with the current tariffs that are in place.

COURTNEY REAGAN: But even with 30%, I think you are still the third largest in boarder by containers in the country.

CRAIG MENEAR: We sell a lot of bulky, big things, right?

COURTNEY REAGAN: That’s right.

CRAIG MENEAR: And so, it takes a lot of containers to move product.

COURTNEY REAGAN: You are about 18 months through a three-year transformation. Lowe's Companies, Inc. (NYSE:LOW) has a relatively new CEO, a former colleague of yours, Marvin Ellison. Comps at Home Depot almost always outperform Lowe’s, except for two times under your tenure—and one of those was just last quarter.  Lowe’s is looking to sign more pros, up about 60% quarter-over-quarter. Is Lowe’s a more formable competitor under Mr. Ellison than perhaps they’ve been previously?

CRAIG MENEAR: Well, look. We have a lot of great competitors out there. And that’s the thing that makes you better, is you drive to continue to deliver value for your customer. And the way you do that is to understand how you are operating in the marketplace. So, no. They are -- they have been a good competitor for a number of years and they will continue to be so.

SARA EISEN: What’s going on, Craig, with the housing market? You mentioned the signal from lumber prices. I mean, Manhattan real estate prices have gotten crushed lately. Generally, what’s happening?

CRAIG MENEAR: So, for us, with the things we look at in the housing market, the indicators are actually really positive for us. We’re not in new construction. So, we play more in remodel and maintenance, if you will. So, when you look at home values, they continue to increase. Part of that is due to the fact that there is a shortage of new available new homes on the market. Then you look at housing turnover, running about 3.8%, historical norms about 4% and change. So, a little bit lower than normal but doing okay. And then the new household formations are estimated to be about 1.6 million. And then if you think about 52% of the housing stock in the U.S. is 40 years or older, more maintenance with the age of the housing. A typical customer with a 40-year-old home spends 3x on maintenance then a customer with a 10-year-old home does.

SARA EISEN: Have you seen any impact -- just in the last few weeks or so – just as we’ve seen Treausry Yields collapse, mortgage rates have gone down substantially. I mean, we did see that spike up in applications. Does that translate into more business for you?

CRAIG MENEAR: Not necessarily in the beginning. Housing turnover ultimately has some play as customers will go in and do projects but it’s not an immediate correlation for us.

DAVID FABER: How do you approach the potential increase in tariffs? The 25% of the additional 300 billion, recognizing again, as you just said, that it’s relatively, on a relative-basis small, but on an absolute basis still very large. How do you go about your decision-making when it’s so uncertain what you are going to do and how you are going to respond to?

CRAIG MENEAR: We are in the project business, first of all. So, the first step is to try to protect the customer and the project. We will do everything we can to try to take other costs out of the business, working with our suppliers, whether that’s opportunities in supply chain, other elements of the business and then we’ll try to protect the customer on the project. Some of it at that rate, some of it has to get passed through.

DAVID FABER: At 25%, there’s no way--

CRAIG MENEAR: Yep. Some of it has to. But we’ll try to minimize that impact on the customer.

DAVID FABER: Do you have any sense as to where that might end up? Or is it too difficult?

CRAIG MENEAR: It’s too early at this point to know.

DAVID FABER: And in terms of just planning, does it impact your ability to plan given you just don’t know?

CRAIG MENEAR: No, not really. I mean, we constantly get thrown curveballs in the retail business all the time. This is just another one that happens. And we have tried to build our business in a way that is nimble and flexible, whether that be in the supply chain or how we deal with those type of things that get thrown at us.

DAVID FABER: Is there that much room amongst your suppliers to potentially have them give up margin or find efficiencies, or is it going to be really difficult?

CRAIG MENEAR: Well, it will be hard work, but we will work together to try to figure out how to do that. And there is always ways when you look at the entire value chain between the supplier all the way through our operations to find ways to be able to take out, to try to offset these costs. That’s what we’ll do.

COURTNEY REAGAN: In the most recent quarter, you talked about how the pros had this big backlog of business because of the weather. About 90 days. Are they working through that or not? Because it’s still been really wet and pretty terrible weather in the Midwest, out here in the Northeast. Are they making progress? And what does that mean for your sales cadence?

CRAIG MENEAR: So, there’s -- it depends where you are at in the country, in terms of whether the weather has helped them or not. Where the weather has improved, we are definitely seeing them -- the business demand is there. But they do have a backlog. And when you talk to them anecdotally every week, when we’re in our stores talking with our pros, they will tell you that they are busy and they are booked.

COURTNEY REAGAN: So, it’s business they can make up. It just takes time to get there. It’s not at all lost.

CRAIG MENEAR: Yep. It’s extending projects. The length of time is extending on the projects.

COURTNEY REAGAN: There was about $1 billion in products that sort of disappeared during the recession and shortly thereafter. Have you been able to sort of find that billion dollars to make that back up?

CRAIG MENEAR: Actually, we lost $13 billion in top line sales during the recession. And we have been able to get that and then some back. There are still a couple of categories that haven’t matched the peak of ’06, and we’re still working on those.

SARA EISEN: I mean, generally, retail has been a tale of winners and losers, and Home Depot has been a relative winner. I mean, how did you think about some of the challenges that a lot of the other retailers are facing: the Amazon threat, you know, moving into e-commerce, lower traffic, and how have you fought that?

CRAIG MENEAR: So, we look at the retail business with a couple of factors. Number one, consumers are shopping fewer retailers today than what they are five years ago. Number two, we believe that the interconnected environment is the way the retail business is going in the long-term. So, part of our doubling down in investment in the business, we put $11 billion in the business over the next few years, is to truly create that interconnected experience that allows the customer to blend the physical and digital worlds together. And that’s really what’s happening. The front door of our store is no longer at the front door of our store. It’s in the customer’s pocket, it’s on the job site, it’s on their couch. They start in the digital world even if they finish in the physical world.

DAVID FABER: And this the 40th anniversary of your first store opening, obviously your employees are a key part of that. More difficult these days to find the qualified kinds of people that you need?

CRAIG MENEAR: In general, we just hired over 80,000 people for spring. That went really well. There are pockets of the country where it’s more pressured than others. But in general, I’d say, we have been table to sell Home Depot and get associates on board.

DAVID FABER: Well, not too bad. 40 years and a $230 billion market value. Congratulations on that.

CRAIG MENEAR: Thank you very much.

DAVID FABER: Craig Menear, the CEO and Chairman of Home Depot. Courtney, thank you as well.