We maintained our Neutral recommendation on
W.W. Grainger Inc.
), given the slowdown in sales, margin headwinds and the entry of
) in the maintenance, repair & operations (MRO) space.
Grainger's second quarter 2012 earnings increased 18% year over
year to a record $2.63 per share, while revenues advanced 12% to
$2.25 billion. EPS in the quarter was in line with the Zacks
Consensus Estimate but revenues fell short.
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 413,000 products
compared with 350,000 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 the program.
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 internationally are sales and
earnings growth in the existing markets, selective expansion into
new markets in a phased approach and ongoing development of the
E-commerce is one of Grainger's most efficient and profitable
channels as it is reportedly growing twice as fast as other
channels. Grainger still continues to invest in e-commerce and
expects to increase the number of customers utilizing this channel,
boosting overall sales.
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&P 500 can
claim. Going forward, the company will continue to redeploy cash
and plans to repurchase approximately 2% of outstanding shares each
On the flip side, 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 11% in July 2012 was
weaker than expected, and the lowest so far this year. Grainger's
sales growth has trailed from the highest level of 18% in February,
as well as from 12% in April, 13% in May and 12% in June.
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 maintained our Neutral recommendation on Grainger.
The company currently retains a Zacks #3 Rank (short-term Hold
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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