On Jun 25, we maintained our Neutral recommendation on
distributor of facilities maintenance, repair and operating
W.W. Grainger Inc.
), based on expectations of growth opportunities through product
and geographic expansion and e-commerce; partially offset by the
recent slowdown in sales, weakness in government-end market and
impending pressure on margins.
Grainger reported first-quarter 2013 earnings of $2.94 per share,
up 14% year over year from $2.57 and ahead of the Zacks Consensus
Estimate of $2.73. Total revenue was $2.28 billion, up 4% from
$2.19 billion in the year-ago period. However, revenues missed
the Zacks Consensus Estimate of $2.3 million.
Grainger increased its EPS guidance in the range of $11.30-$12.00
per share for fiscal 2013, up from the prior guidance of
$10.85-$12.00 per share. However, Grainger increased its sales
growth guidance to a range of 5% to 9%, up from prior projection
of 3% to 9%.
We appreciate Grainger's focus on expanding its product offerings
as well as gaining traction for its private label products.
Grainger expects to increase its product count from the current
413,000 to 500,000 products by 2015. The company has historically
seen annual growth of approximately 2% on sales from products
added through the program.
The company continues to expand its businesses across its
operating regions, mainly in Asia and Latin America. Grainger
also continues to invest in e-commerce, as it is reportedly
growing two fold compared to other channels and is deemed to be
the company's most profitable channel. In 2012, e-commerce sales
represented 30% of the total company sales. Grainger's target is
to increase it up to 50% by 2015. This channel also carries
higher margins as it requires lower selling, general and
On the flipside, Grainger's overall sales growth continued to
show a downward trend. In 2012, after enjoying a double-digit run
till August, sales growth has remained in the single digits
before plunging to the lowest level of 2% in December. In the
first quarter of 2013, even though sales growth recovered to 8%
in Jan, it again dipped to 6% in Feb and 3% in March.
So far in the second quarter, Grainger's sales growth recouped to
8% in April, but again dipped lower to 5% in May. June daily
sales growth is reportedly similar to May. Sales in Canada slowed
considerably because of weaker demand for exports and extended
road closures due to unfavorable weather. Management expects the
negative effects to continue in June as well.
Grainger has increased its investment spending for 2013 to $160
million from the previous projection of $135 million. Even though
these initiatives will lead to additional share gains in the
future, it will weigh on margins in the short term.
Other Stocks to Consider
Grainger retains a short-term Zacks Rank #3 (Hold). Other
industrial product makers with favorable Zacks Rank are
), with a Zacks Rank #1 (Strong Buy), and
Hudson Technologies Inc.
Direct Co. Inc.
) with a Zacks Rank #2(Buy).
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