W.W. Grainger, Inc.
) 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.
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
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
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
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.
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
Grainger currently carries a short-term Zacks Rank #4 (Sell).
Some better-ranked stocks in the sector include
Blount International Inc.
EnPro Industries, Inc.
Broadwind Energy, Inc.
). While Blount International Inc. sports a Zacks Rank #1 (Strong
Buy), EnPro Industries and Broadwind Energy hold a Zacks Rank #2
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