Grainger (GWW) Misses on Earnings Estimates, Lowers Guidance - Analyst Blog


W.W. Grainger, Inc. ( GWW ) reported second-quarter 2014 earnings per share of $3.09, up 2% from $3.03 per share in the year-ago quarter but falling short of the Zacks Consensus Estimate of $3.11 by 1%. Sales growth in the United States helped offset weakness in Canada.

During the quarter, Grainger recorded an after tax charge of 15 cents per share related to the transition of its employee retirement plan in Europe from a defined benefit plan to a defined contribution plan, while simultaneously transferring the existing defined benefit obligation to a third party.  Including this, earnings in the quarter stood at $2.94, down 3% from $3.03 earned in the prior-year quarter.

Operational Update

Revenues in the quarter were $2.51 billion, up 5.2% from $2.38 billion in the year-ago quarter but short of the Zacks Consensus Estimate of $2.54 billion. There were 64 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 1 percentage point reduction from foreign exchange.

Organic sales (excluding acquisitions and foreign exchange) increased 4% on the back of increase in volumes (5 percentage points), partially offset by a 1 percentage point decline from the timing of Good Friday. Good Friday fell in April this year unlike in March last year.

Cost of sales increased 7% year over year to $1,425 million. Gross profit increased 3% year over year to $1,081 million. Gross margin contracted 90 basis points to 43.1%, affected by unfavorable mix from the acquired businesses, faster growth with lower gross margin customers and lower gross profit margins from the international businesses.

Operating expenses increased 4% to an adjusted $726 million (excluding $14 million pre-tax charge for the retirement plan transition costs) driven by increased growth and infrastructure spending as well as incremental expenses from the acquired businesses. Adjusted operating income in the quarter increased 1.3% to $354 million from $350 million in the prior-year quarter. Operating margin contracted 50 basis points to 14.2% in the quarter.

Segment Performance

Revenues from the United States segment increased 7% year over year to $1,992 million, driven by favorable volume and acquisitions. However, it was somewhat offset by the negative impact from the timing of Good Friday. Solid growth was witnessed in the Heavy and Light Manufacturing, Natural Resources, Retail and Commercial customer end markets.

Operating income rose 8% to $365 million driven by higher sales growth and positive expense leverage. However, lower gross margins had a deterring effect.

Revenues from the Acklands-Grainger business in Canada dipped 8.5% (down 3% in local currency) to $264 million due to decline in volume and the timing of Good Friday. Among the end-markets, growth was witnessed in Commercial, Forestry, Utilities, Transportation, Heavy Manufacturing and Retail end markets which was offset by weakness in the Construction, Mining, Oil and Gas, Government, Light Manufacturing and Reseller customer end markets.

Operating income in Canada plunged 48% (down 45% in local currency) to $19.2 million, hurt by lower sales and gross margins and negative expense leverage.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased 14% to $299 million. Growth from volume and price (16 percentage points) was offset by a 2 percentage point dip due to unfavorable foreign exchange. Improved performance in Zoro Tools and the businesses in Japan contributed to the increase. However, sales declined in Europe and Latin America.

The segment reported an adjusted operating profit of $15.5 million (excluding the $14 million expense incurred for the retirement plan transition in Europe and $2 million for the write-off of capitalized software development costs for Mexico) compared with an operating profit of $12.8 million in the year-ago quarter.

Financial Position

Grainger had cash and cash equivalents of $331.7 million as of Jun 30, 2014, compared with $431 million as of Dec 31, 2013. The company generated cash flow from operating activities of $328 million during the first half of fiscal 2014, down from $387 million in the prior-year comparable period. Long-term debt was $432 million as of Jun 30, 2014, compared with $445 million as of Dec 31, 2013.

During the quarter, Grainger paid dividends worth $76 million and spent $85 million to buy back 0.3 million shares.  At the quarter end, the company had 9.9 million shares remaining on its share repurchase authorization.


Grainger reduced its earnings per share (EPS) guidance to the range of $12.20 to $12.60 from the previous range of $12.10-$12.85 per share for fiscal 2014. The company now projects 5-7% growth in sales, lower than the previous expectation of 5-9% growth.

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. Grainger continues to invest in e-commerce and expects to increase the number of customers utilizing this channel and its percentage of overall sales. 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, Grainger's business in Canada continues to face a sluggish macroeconomic environment and unfavorable currency exchange. The weakness in the Canadian economy is due to lower commodity prices and a reduction of 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 #4 (Sell). Some better-ranked stocks in the sector include Blount International Inc. ( BLT ), EnPro Industries, Inc. ( NPO ) and Broadwind Energy, Inc. ( BWEN ). While Blount International Inc. sports a Zacks Rank #1 (Strong Buy), EnPro Industries and Broadwind Energy hold a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: EPS , NPO , BWEN , BLT

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