We have downgraded our recommendation on
W.W. Grainger Inc.
) from Outperform to Neutral, given the slowdown in its sales in
April and the entry of
) in the maintenance, repair & operations (MRO) space.
Grainger's first quarter 2012 earnings increased 19% year over
year to $2.57 per share, while revenues advanced 16% to $2.193
billion. Both outperformed the respective Zacks Consensus
Grainger remains focused on expanding its product offerings and
growing the share of its private label products. The company's
catalog, issued in February 2012, offers around 410,000 compared
with 350,000 products in the February 2011 issue.
The company has a long-term vision to expand the count to
500,000 products by 2015. It has historically seen approximately 2%
incremental growth per year on sales from products added through
Currently, 23% of Grainger's sales are from private label, but
the company expects to increase that to 40% over time. Private
label has been a significant driver of sustainable margin expansion
over the past few years, especially in the globally sourced product
Grainger also focuses on expansion programs to strengthen its
businesses in each of its operating regions, mainly in Asia and
Latin America. Approximately 25% of 2012 sales are expected to come
from outside the U.S compared with 10% in 2002.
The primary areas of focus for international growth are sales
and earnings growth in the existing markets, selective expansion
into new markets in a phased approach and ongoing development of
the global infrastructure.
E-commerce is one of Grainger's most efficient and profitable
channels as it is reportedly growing twice as fast as other
channels. Grainger continues to invest in e-commerce and expects to
increase the number of customers utilizing this channel, boosting
The e-commerce business currently generates 27% of Grainger's
revenues and there is scope to drive it up to 50% in the next five
years. This channel also carries higher margins as it requires
lower selling, general and administrative costs.
Grainger's sound balance sheet, low debt level and cash flow
characteristics allow the company to further invest in growth
opportunities, increase dividends and reinvest capital through
share repurchases. The company has been rewarding shareholders with
an uninterrupted streak of increased dividends for 41 consecutive
years, a record that only 12 companies in the S&P500 can claim.
Going forward, the company will continue to redeploy cash and plans
to repurchase approximately 2% of outstanding shares each year.
On the flipside, we believe margins will be under pressure due
to Grainger's accelerated growth investments: product line
expansion, sales force expansion, e-commerce, inventory services,
distribution centers and international expansion.
Furthermore, Grainger's sales growth of 12% in April 2012 was
weaker than expected, as management had hinted in the first quarter
conference call that even though sales growth in April had a slow
start due to the religious holidays, but was expected to be roughly
in line with the 15% growth in March. Sales growth has dipped as
compared with the 17% growth witnessed in January, 18% in February
and 15% in March this year.
Amazon has recently launched www.AmazonSupply.com, a website
offering more than 500,000 parts/supplies to business, industrial,
scientific and commercial customers at competitive prices. Grainger
is presently a dominant player in industrial maintenance, repair
& operations distribution, with a product offering of 413,000.
With the entry of Amazon in this space, we expect pricing
We have thus downgraded our recommendation from Outperform to
Neutral on Grainger. The quantitative Zacks #3 Rank (short term
Hold rating) for the company indicates no clear directional
pressure on the stock over the near term.
Illinois-based W.W. Grainger is a leading North American
distributor of material handling equipment including safety and
security supplies, lighting and electrical products, power and hand
tools, pumps and plumbing supplies, etc. The company's services
comprise inventory management and energy efficiency solutions.
The company competes with
Applied Industrial Technologies Inc.
WESCO International Inc.
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