Grainger Reports Results For The 2014 Third Quarter

CHICAGO, Oct. 16, 2014 /PRNewswire/ -- Grainger GWW today reported results for the 2014 third quarter ended September 30, 2014.  Sales of $2.6 billion increased 7 percent versus $2.4 billion in the 2013 third quarter.  There were 64 selling days in the quarter, the same as in 2013.  Net earnings for the third quarter increased 9 percent to $230 million versus $211 million in 2013.  Earnings per share of $3.30 increased 12 percent versus $2.95 in 2013.

"We were pleased with the overall performance of the business in the quarter," said Chairman, President and Chief Executive Officer Jim Ryan.  "Strong volume growth and positive operating leverage in the U.S. business were the primary drivers of our results.  We were encouraged by better top line growth in Canada this quarter, but margins remain under pressure due to currency and additional investments.  Outside of North America, we were disappointed with the performance of several multichannel businesses and are committed to improving or exiting those operations."  Ryan added, "We are very excited about the continued success of our single channel businesses in Japan and the United States, and we are evaluating and testing additional markets for expansion of this model."  Ryan concluded, "Despite headwinds from historically low inflation and a sluggish global economy, we will continue to invest in infrastructure and growth to capitalize on the attractive share gain opportunity in the large and fragmented MRO market."  

With three quarters complete, the company lowered the top end of its sales and earnings per share guidance for 2014.  For 2014, the company now expects 5.0 to 5.5 percent sales growth and earnings per share of $12.20 to $12.30, excluding the $0.15 per share charge for the Fabory retirement plan transition in the second quarter of 2014.  The company's previous 2014 guidance was issued on July 17, 2014, of 5 to 7 percent sales growth and earnings per share of $12.20 to $12.60.  The previous guidance assumed an effective tax rate of 37.5 to 37.8 percent.  The company is now forecasting an effective tax rate of 38.3 percent due to a higher proportion of earnings from the U.S. segment, reducing earnings for the full year by approximately $0.12 per share.   

Company
Sales in the 2014 third quarter increased 7 percent consisting of 2 percentage points from acquisitions, net of dispositions, and a 1 percentage point reduction from unfavorable foreign exchange. (See Exhibit 1 at the end of this press release for a schedule of acquisitions and divestitures.)  Excluding acquisitions and foreign exchange, organic sales increased 6 percent driven by 6 percentage points from volume and 1 percentage point from price, partially offset by a 1 percentage point decline from lower sales of seasonal products.     

The company's gross profit margin decreased 0.8 percentage point to 43.0 percent versus 43.8 percent in the 2013 third quarter, with more than half the decline due to unfavorable mix from the recently acquired businesses. The remainder of the decline was due to faster growth with lower gross margin customers and lower gross profit margins outside the United States.  Operating expenses for the company increased 2 percent including approximately $17 million in incremental growth and infrastructure spending versus the 2013 quarter and incremental expenses from the acquired businesses.

Company operating earnings increased 11 percent to $386 million for the 2014 third quarter versus $347 million in the prior year.  The increase was driven by the 7 percent sales increase and positive expense leverage, partially offset by lower gross profit margins.      

Grainger has two reportable business segments, the United States and Canada, which represented approximately 88 percent of company sales for the quarter.  The remaining operating units are located primarily in Asia, Europe and Latin America and are included in Other Businesses and are not reportable segments.  Results for the company's single channel businesses in Japan, the United States and Europe are also included in Other Businesses.  

United States
Sales for the U.S. segment increased 7 percent in the 2014 third quarter versus the prior year.  Results for the quarter included 2 percentage points from acquisitions, net of dispositions.  Excluding acquisitions, organic sales increased 5 percent driven by 6 percentage points from volume, partially offset by 1 percentage point from lower sales of seasonal products.  Sales growth to customers in the Heavy and Light Manufacturing, Commercial, Retail and Natural Resources customer end markets contributed to the sales increase. 

Operating earnings for the segment increased 13 percent in the quarter driven by the 7 percent sales growth and positive expense leverage, partially offset by lower gross profit margins.  Gross profit margins for the quarter decreased 0.8 percentage point from unfavorable mix due to faster growth with lower margin customers and lower gross margins from the acquired businesses.  Operating expenses for the quarter were essentially flat versus the prior year.  Operating expenses included $12 million in incremental growth-related spending and incremental expenses from the acquired businesses, which were essentially offset by productivity and controlled spending. 

Canada
Sales in the 2014 third quarter in Canada increased 3 percent versus the prior year, 8 percent in local currency.  The 8 percent increase in local currency consisted of 5 percentage points from volume, 2 percentage points from acquisitions and 1 percentage point from price.  The sales increase for the quarter was led by solid growth to customers in the Commercial, Transportation, Oil and Gas, Government, and Heavy and Light Manufacturing end markets. 

Operating earnings in Canada declined 14 percent in the 2014 third quarter, down 10 percent in local currency.  The lower operating performance was primarily the result of a lower gross profit margin and negative expense leverage.  The gross profit margin in Canada declined 1.5 percentage points versus the prior year primarily due to unfavorable foreign exchange from products sourced from the United States, lower supplier rebates and higher freight costs.  The increase in operating expenses was primarily driven by higher payroll, occupancy costs and incremental costs from the acquisition of WFS Enterprises, Inc. on September 2, 2014.    

Other Businesses
Sales for the Other Businesses increased 16 percent for the 2014 third quarter versus the prior year.  This performance consisted of 18 percentage points of growth from volume and price, partially offset by a 2 percentage points decline from unfavorable foreign exchange.  The sales increase was primarily driven by the single channel businesses, MonotaRO in Japan and Zoro in the United States, and from the business in Mexico. 

Operating earnings for the Other Businesses were $5 million in the 2014 third quarter versus $6 million in the 2013 third quarter.  The earnings decline for the quarter versus the prior year was primarily driven by incremental expenses associated with the start-up of the single channel business in Europe and continued soft performance from the multichannel business in Europe (Fabory).  This decline was partially offset by improved performance in Mexico and continued strong results from the single channel models in Japan and United States and narrowing of losses in China. 

Other
Other income and expense of $3 million in the 2014 third quarter was flat versus the 2013 third quarter.  The tax rate in the quarter was 39.1 percent versus 38.0 percent in the 2013 quarter.  The increase was primarily due to a higher proportion of year-to-date earnings from the U.S. segment with higher tax rates than previously expected.  This shift in earnings in higher tax jurisdictions reduced earnings per share by $0.09 for the quarter.  The company now projects an annual effective tax rate of 38.3 percent, versus the previous estimate of 37.5 to 37.8 percent, excluding the effect of the $0.15 per share charge related to the Fabory retirement plan transition in the second quarter of 2014.

Cash Flow
Operating cash flow was $329 million in the 2014 third quarter versus $354 million in the 2013 third quarter.  Cash flow in the 2014 third quarter was lower than the previous year primarily due to higher inventory purchases and accounts receivables.  The company used cash from operations to fund capital expenditures of $84 million in the quarter versus $65 million in the third quarter of 2013.  In the 2014 third quarter, Grainger returned $156 million to shareholders through $74 million in dividends and $82 million to buy back 336,000 shares of stock.  As of September 30, 2014, the company had 9.4 million shares remaining on its share repurchase authorization.

Year-to-Date
For the nine months ended September 30, 2014, sales of $7.5 billion increased 6 percent versus $7.1 billion in the nine months ended September 30, 2013.  There were 191 selling days in the first nine months of 2014, the same number of selling days as 2013.  Reported net earnings increased 2 percent to $653 million versus $640 million in the first nine months of 2013.  Reported earnings per share for the first nine months increased 4 percent to $9.30 versus $8.92 for 2013.  The year 2014 includes the $10 million after-tax, or $0.15 per share, charge related to the transition of the employee retirement plan in Europe.        

W.W. Grainger, Inc., with 2013 sales of $9.4 billion, is North America's leading broad line supplier of maintenance, repair and operating products, with operations in Asia, Europe and Latin America.

Visit www.grainger.com/investor to view information about the company, including a history of sales by segment and a podcast regarding 2014 third quarter results. The Grainger website also includes more information on Grainger's proven growth drivers, including product line expansion, sales force expansion, eCommerce and inventory services.

Forward-Looking Statements

This document contains forward-looking statements under the federal securities law.  Forward-looking statements relate to the company's expected future financial results and business plans, strategies and objectives and are not historical facts.  They are generally identified by qualifiers such as "estimate", "expects", "guidance", "earnings per share guidance", "will continue to", "potentially", "projects" or similar expressions.  There are risks and uncertainties, the outcome of which could cause the company's results to differ materially from what is projected. The forward-looking statements should be read in conjunction with the company's most recent annual report, as well as the company's Form 10-K, Form 10-Q and other reports filed with the Securities & Exchange Commission, containing a discussion of the company's business and various factors that may affect it.

 

 

 

 

 

 

 

SOURCE W.W. Grainger, Inc.