Home Depot CEO says mortgage deduction changes ‘not as big a deal’ as people think

Key Points
  • Home Depot CEO says fears about changes to the mortgage interest deduction are "overblown."
  • Tax reform will have an "immediate and significant benefit" for our tax rate, CEO Craig Menear said.
  • Home Depot said it is accelerating the pace of investment in its stores.
Craig Menear
The Home Depot

Fears that the housing market could be weakened by possible mortgage interest provisions in an upcoming tax bill are "overblown," according to Home Depot's CEO.

"When it comes to deductibility as it relates to mortgage, we believe that's not as big a deal as people are making it out to be," Craig Menear, the home improvement retailer's chairman and CEO, told CNBC in a phone interview.

"Only about 20 percent of Americans deduct mortgage interest, and the numbers show less than 5 percent of folks have a mortgage greater than $500,000," he said.

Although the U.S. House of Representatives and the Senate are still hashing out the details, the final tax reform bill will likely include changes to mortgage interest deductions.

A strong housing market has helped fuel Home Depot's record run. As recently as Monday, the retailer's shares hit a fresh all-time high as sales and profit have been strong. The home improvement retailer has made good choices with its business but investors still watch the housing market closely.

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Home Depot noted it will benefit from a lower corporate tax rate. For its most recent fiscal year, it paid an effective tax rate of 36.3 percent.

"With tax reform, Home Depot would have an immediate and significant benefit for our tax rate. We are in favor of tax reform, if it puts more money in the pocket of the average American and drives GDP growth at a higher rate than previously, we are all in," Menear said.

In a note to investors, Deutsche Bank analyst Mike Baker said if the corporate rate drops to 20 percent, as currently being considered, Home Depot's "earnings power goes up by at least 20 percent."

At an investor meeting Wednesday, the company outlined its three-year financial plan, earnings and sales forecasts.

Home Depot expects sales to grow between 4.5 and 6 percent to between $115 billion and $120 billion, with a resulting operating margin between 14.4 and 15 percent. It also announced a new $15 billion stock buyback plan. Both earnings and sales expectations came up short of analysts' consensus.

The retailer plans to invest $11.1 billion over the next three years to improve its stores, pay workers more, build a new website for professionals and enhance its supply chain, delivery and product innovation.

While Home Depot has been "incredibly fortunate and blessed with great performance" over the last number of years, it has to do more to catch up with consumer expectations, Menear said.

While 45 percent of Home Depot's online orders are picked up in its more than 2,280 stores, Menear said, the retailer still isn't where it wants to be for shoppers.

"We are accelerating the pace of investment to truly create the 'one Home Depot experience' because our customers are blending the physical and digital world together, and that's candidly, not how we were built. We have to be that for them," he said.

Menear added, some of the initiatives include shortening the typical two-day delivery window to next-day and same-day, and adding self-serve lockers in store for online order pickup.

Home Depot shares traded lower Wednesday as investors were disappointed with the financial targets, hoping for more. The stock is up 35 percent so far this year.

However, analysts point out that the world's largest home improvement retailer has a history of conservative guidance, and the company's Chief Financial Officer Carol Tome pointed out during the meeting that Home Depot has beat or exceeded its forecast every year since 2009.

"This is a substantial increase in investment and we want to make sure we are delivering on the same high level of execution that we have been able to deliver," Menear told CNBC. "I don't know that it would be prudent for us to push to far beyond that, for our conservative nature."

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Correction: Home Depot plans to invest $11.1 billion over the next three years. An earlier version misstated the figure.