Grainger Beats on Earnings, Shares Up - Analyst Blog

Shares of W.W. Grainger, Inc. GWW went up 0.74% during pre-market trading as this leading broad line supplier of maintenance, repair and operating MRO products, reported first-quarter 2014 earnings per share of $3.07, up 4% from $2.94 per share in the year-ago quarter and ahead of the Zacks Consensus Estimate of $2.97. Growth in the United States and online sales helped offset weakness in Canada.

Operational Update

Revenues in the quarter were $2.386 billion, up 4.6% from $2.28 billion in the year-ago quarter but short of the Zacks Consensus Estimate of $2.399 billion. There were 63 selling days in the first quarter, same as the prior-year quarter.

Acquisitions (net of dispositions) had a positive impact of 2 percentage points which was offset by a 2 percentage point reduction from foreign exchange. Organic sales (excluding acquisitions and foreign exchange) increased 5% on the back of increase in volumes (4 percentage points), pricing and higher sales of seasonal products (1 percentage point each), partially offset by a 1 percentage point decline from business disruptions due to inclement weather that led to closure of some customer and Grainger facilities during the first two months of the quarter.

Cost of sales increased 5% year over year to $1,310 million. Gross profit increased 4% year over year to $1,076 million. Gross margin contracted 10 basis points to 45.1%, affected by lower gross margins from the acquired businesses.

Operating expenses increased 5% to $722 million due to increased growth and infrastructure spending as well as incremental expenses from the acquired businesses. Adjusted operating income in the quarter increased 3.2% to $354 million from the $343 million in the prior-year quarter, driven by sales growth but offset by lower gross margins and higher operating expenses. Operating margin contracted 20 basis points to 14.9% in the quarter.

Segment Performance

Revenues from the United States segment increased 7% year over year to $1,897 million, driven by favorable volume, acquisitions, and sale of seasonal products. However, it was somewhat offset by the negative impact of a harsh winter. Solid growth was witnessed in the Heavy and Light Manufacturing, Natural Resources, Retail and Commercial customer end markets. Operating income rose 7% to $354 million driven by higher sales growth and a positive expense leverage. However, lower gross margins had a deterring effect.

Revenues from the Acklands-Grainger business in Canada dipped 10% (down 2% in local currency) to $254 million due to decline in volume. Among the end-markets, growth was witnessed in Utilities, Forestry, Transportation and Reseller end markets while Construction, Light and Heavy Manufacturing, Mining, Retail, Government, and Oil and Gas customer remained weak.

Operating income in Canada declined 35% (down 29% in local currency) to $21.3 million, hurt by lower sales and gross margins and negative expense leverage.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased 11% to $275 million. Growth from volume and price (18 percentage points) was compensated by a 7 percentage point dip due to unfavorable foreign exchange. Improved performance in Zoro Tools and the businesses in Mexico and Japan contributed to the increase. Furthermore, increase in sales in Japan was offset by the weakness in the Japanese yen versus the U.S. dollar.

The segment reported an adjusted operating profit of $8.5 million, up 3% year over year, as strong results of Zoro Tools offset weaker performance from the businesses in Latin America and costs associated with evaluating the new online business outside of the United States.

Financial Position

Grainger had cash and cash equivalents of $376 million as of Mar 31, 2014, compared with $431 as of Dec 31, 2013. The company generated cash flow from operating activities of $167 million during the reported quarter, down from $176 million in the prior-year quarter.

During the quarter, Grainger paid dividends worth $65 million and spent $150 million to buy back 0.6 million shares. Long-term debt was $438 million as of Mar 31, 2014, compared with $445 million as of Dec 31, 2013.

Outlook

Grainger maintained its earnings per share EPS guidance in the range of $12.10–$12.85 per share for fiscal 2014 on the back of 5–9% growth in sales.

Our Take

Grainger remains focused on expanding its product offerings, sales force as well as the share of its private label products which will lead to long-term growth. Moreover, Grainger expects incremental investment spending to total approximately $130 million in 2014, marking the fourth consecutive year of growth spending on initiatives such as new sales representatives and investments in information technology IT infrastructure, new branches and distribution centers and e-commerce.

Grainger continues to invest in e-commerce and expects to increase the number of customers utilizing this channel and its percentage of overall sales. Grainger crossed the $3 billion mark in e-commerce sales in 2013, representing 33% of total company sales. Grainger's target is to increase it to 50% by 2015. E-commerce is one of Grainger's most efficient channels as it is reportedly growing twice as fast as other channels and is deemed to be Grainger's most profitable channel.

Furthermore, Grainger's sound balance sheet, low debt level and cash flow allow the company to invest in growth opportunities, raise dividends and reinvest capital through share repurchases.

However, the Canada segment continues to be affected by a weak macroeconomic environment, unfavorable currency exchange, lower commodity prices and a reduction in Canadian exports.

Lake Forest, IL-based Grainger is a leading North American distributor of material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components, and various aftermarket components.

Grainger currently carries a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Kadant Inc. KAI, The Middleby Corp. MIDD and Altra Industrial Motion Corp. AIMC. While Kadant holds a Zacks Rank #1 (Strong Buy), Middleby Corporation and Altra Industrial Motion hold a Zacks Rank #2 (Buy).