On Feb 20, we maintained our Neutral recommendation on
distributor of facilities maintenance, repair and operating
supplies,
W.W. Grainger Inc.
( GWW), following a mixed fourth-quarter 2012 results and growth
opportunities through product and geographic expansion, partially
offset by the recent slowdown in sales growth rate and impending
pressure on margins. Grainger retains a short-term Zacks Rank #3
(Hold).
Why Reiterated?
Grainger reported fourth-quarter earnings of $2.42 per share,
up 14% year over year from $2.13 but well short of the Zacks
Consensus Estimate of $2.61. Total revenue was $2.23 billion, up
7.2% from $2.08 billion in the year-ago period but missed the
Zacks Consensus Estimate of $2.24 million.
Grainger reaffirmed its EPS guidance in the range of
$10.85-$12.00 per share for fiscal 2013. Grainger, however,
increased its sales growth guidance to a new range of 3% to 9%,
up from the prior projection of 2% to 8%.
We appreciate Grainger's focus on expanding its product
offerings as well as gaining traction for its private label
products. The company added more than 80,000 new products,
bringing the total number of products in the 2012 printed catalog
to more than 413,000. Grainger expects to increase the count 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. The primary
areas of focus for international growth 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.
Grainger also continues to invest in e-commerce, as it is
reportedly growing two fold compared to other channels and is
deemed to be its most profitable channel. Grainger posted $2.7
billion in eCommerce sales in 2012, representing 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 administrative costs.
On the flipside, Grainger's overall sales growth continued to
decline in the quarter due to weakness in the U.S. business.
Growth had been recorded at 9% in September, 6% in October, 8% in
November but it plunged to as low as 2% in December. The timing
of the holidays (Christmas and New Year s Day) had a negative
impact on sales in the fourth quarter. Although Grainger's sales
growth recovered to 8% in January 2013, it is almost half of the
17% growth achieved in January last year.
Grainger has an incremental $135 million of growth spending in
the pipeline for 2013. 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
Other industrial product makers with favorable Zacks rank are
Houston Wire & Cable Company
(
HWCC
),
Anixter International Inc.
(
AXE
) and
Graco Inc
. (
GGG
), which retain a Zacks Rank #2 (Buy).
ANIXTER INTL (AXE): Free Stock Analysis
Report
GRACO INC (GGG): Free Stock Analysis Report
GRAINGER W W (GWW): Free Stock Analysis
Report
HOUSTON WIRE&CB (HWCC): Free Stock Analysis
Report
To read this article on Zacks.com click here.
Zacks Investment
Research