We maintain our Outperform recommendation on
W.W. Grainger Inc.
(
GWW
) given its successful market share strategy which includes
increased product offerings, expansion of private label products,
sales force investment and focus on e-commerce. A sound balance
sheet combined with positive cash flow enables Grainger to further
invest in growth opportunities, increase dividends and reinvest
capital through share repurchases.
Grainger reported fourth-quarter EPS and revenues of $2.13 and
$2.08 billion, respectively, both outperforming the corresponding
Zacks Consensus Estimates. For 2011, adjusted EPS came in at $9.04
with record revenues of $8.08 billion.
Thus far in 2012, the company maintained the sales momentum in
January and February, posting growth of 17% and 18%, respectively,
outperforming the 2011 peak of 16%. For 2012, the company expects
sales growth of 10% to 14% to drive EPS in the range of $9.90 and
$10.65.
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 410,000 compared
with 350,000 products in the February 2011 issue.
The company has a long-term vision to expand the count to
500,000 products by 2015. The company has historically seen
approximately 2% incremental growth per year on sales from products
added through the program.
Currently, 23% of Grainger 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
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 focal areas for
international growth are sales and earnings growth in the existing
markets, selective, phase-by-phase expansion into new markets and
the ongoing development of global infrastructure.
E-commerce is one of Grainger's most efficient and profitable
channels as it is reportedly growing twice as fast as other
channels. Grainger 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 25% 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 enable it 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 40 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
year. We expect Grainger to announce a significant increase in its
dividend as the company has indicated that it would grow its payout
ratio over time.
Considering the overwhelming positives, we maintain our
Outperform recommendation on Grainger. The quantitative Zacks #1
Rank (short term Strong Buy rating) for the company indicates
upward pressure on the stock over the near term.
Illinois-based 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.
(
AIT
) and
WESCO International Inc.
(
WCC
).
APPLD INDL TECH (
AIT
): Free Stock Analysis Report
GRAINGER W W (
GWW
): Free Stock Analysis Report
WESCO INTL INC (
WCC
): Free Stock Analysis Report
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