We are maintaining our Neutral recommendation on
W.W. Grainger Inc.
), a leading North American distributor of maintenance, repair
and operating supplies, as well as other related products and
Grainger's third quarter 2012 earnings increased 12% year over
year to $2.81 per share, while revenues advanced 8% to $2.28
billion. However, both fell short of the respective Zacks
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
Currently, 23% of Grainger's sales come 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 category.
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 in the international market 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
businesses, 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 offers further 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 consistent dividend hikes over the last 41 years, a record
that only 12 companies in the S&P 500 can boast. Going
forward, the company will continue to redeploy cash and plans to
repurchase approximately 2% of outstanding shares each year.
On the flip side, Grainger's sales growth of 6% in October
2012 was the lowest so far this year. Grainger's sales growth has
trailed from the highest level of 18% achieved in February to
growth in the low double digits before dipping to 10% in August
and 9% in September.
Even though daily sales growth in November is trending higher
than the October levels, boosted by increased sales of products
related to recovery effort from the Hurricane Sandy, Grainger
expects the timing of the holidays (Christmas and New Year's Day)
to have a negative impact on sales in the fourth quarter.
Earlier this month, in light of a weak economy, Grainger
narrowed its earnings guidance for 2012 to a range of $10.55 to
$10.75 per share from the previous guidance of $10.50-$10.80. The
Zacks Consensus Estimate for the year is at $10.62 per share.
Grainger reiterated its sales growth guidance of 11%-12% for
For fourth-quarter 2012, Grainger expects sales to be in the
range of 7% to 9%. It anticipates earnings to lie within
$2.55-$2.75 per share. The Zacks Consensus Estimate for the
fourth quarter is currently pegged at $2.61 per share. Grainger
also provided its outlook for 2013. It envisions sales to grow 2%
to 8% and earnings to be in the range of $10.85-$12.00 per
) 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 pressure.
We have thus maintained our Neutral recommendation on
Grainger. The company currently retains a Zacks #3 Rank
(short-term Hold recommendation).
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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