W.W. Grainger, Inc. (GWW)

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W.W. Grainger (GWW)

Q4 2012 Earnings Call

January 24, 2013 8:00 am ET


Laura D. Brown - Senior Vice President of Communications & Investor Relations

William D. Chapman - Director of Investor Relations


Laura D. Brown

Hello, this is Laura Brown, Senior Vice President of Communications and Investor Relations. With me is Bill Chapman, Senior Director of Investor Relations. The purpose of this podcast is to provide you with additional information regarding Grainger's fourth quarter 2012 results. Please also reference our 2012 fourth quarter earnings release issued today, January 24, in addition to other information available on our Investor Relations website to supplement this webcast.

Before we begin, please remember that certain statements and projections of future results made in the press release and in this webcast constitute forward-looking information. These statements are based on current market conditions and competitive and regulatory expectations and involve risk and uncertainty. Please see our Form 10-K for a discussion of factors that relate to forward-looking statements.

Today, we reported record results for the year 2012 and reiterated our earnings per share guidance for 2013. We'll discuss 2012 in more detail, as well as comment on January's strong sales start.

At the very end of December, we experienced a dramatic slowdown in sales, contributing to quarterly performance that was below our guidance. In addition, there were 3 items included in our quarterly results that were not part of our November 14, 2012, earnings guidance: at $0.18 per share charge, primarily related to streamlining operations in Europe, India and China to improve the long-term performance of these businesses; a $0.03 per share charge related to the closure of branches in the United States; and a $0.04 per share impairment charge related to our Alliance Energy Solutions business acquired in 2009. The impairment was caused by lower-than-expected operating performance. A schedule detailing these items can be found in the earnings release. These 3 items combined represented a $0.25 reduction to earnings per share, resulting in adjusted fourth quarter earnings per share of $2.42.

As a reminder, the 2011 fourth quarter included a $0.16 per share charge from the closure of 27 branches in the U.S. business and a $0.07 per share gain from the sale of our 49% ownership in a joint venture in Korea. These 2 items in 2011 represented a $0.09 net reduction to earnings per share, resulting in adjusted EPS of $2.13.

Excluding the items noted above, net earnings for the 2012 quarter increased 12% and the earnings per share increased 14% versus the prior year. So why did we fall below the low end of our EPS guidance or $2.55 issued on November 14 of last year? There were 2 primary factors: Number 1, first, the sudden and dramatic sales slowdown in the last 1/3 of December did not allow us to pull back on operating expenses sufficiently to mitigate the negative operating leverage.

To put this in perspective, in the U.S. business, we were anticipating 7% daily sales growth in the first 2/3 of December and 1% daily sales growth in the final 1/3 of the month. Actual results were much lower with 5% daily sales growth in the first 2/3 of the month and a 13% daily sales decline in the last 1/3 of the month, driven by the timing of the holidays and concerns regarding the economy and the fiscal cliff. Second, legal, M&A and health care costs related to long-term disability came in above our forecast.

Company sales for the quarter increased 7% versus the 2011 fourth quarter. We had 64 selling days in the quarter, one more than the previous year. Given the timing of the holidays in December, the additional selling day added a minimal amount of sales dollars and created the headwind to sales on a daily basis, which increased 6%. On a reported basis, operating earnings increased 17%, while net earnings increased 5%. Items below the operating line, such as other income/expense tax rate contributed to earnings performance and are discussed later in the podcast. Reported earnings per share were $2.17 for the quarter, representing an increase of 6% versus the 2011 fourth quarter.

In a few moments, we will more fully analyze our sales results for the quarter. Let's now walk down the operating section of the income statement. Gross profit margins were flat at 43.6% versus 2011 as forecasted in our 2012 third quarter podcast. We'll provide more detail when we review the business by segment.

Company operating margin increased 90 basis points to 11.6% versus 10.7% a year ago. The increase in earnings growth was driven by the 7% sales increase and operating expenses growing at a slower rate than sales. Operating expenses grew 4%, including $1 million in incremental growth-related spending over the 2011 fourth quarter to fund the growth programs, including new Territory Sales Representatives, e-commerce, advertising and incremental expenses for the company's distribution center network. Incremental growth spending for the full year 2012 was $71 million versus 2011. A schedule summarizing incremental growth spending for 2011 and 2012 can be found in Exhibit 3 of this podcast.

Let's now focus on performance drivers during the quarter. In doing so, we'll cover the following topics: first, sales by segment in the quarter and the month of December; second, operating performance by segment; third, cash generation and capital deployment; and finally, we'll wrap up with a discussion of our 2013 guidance and other key items.

Read the rest of this transcript for free on seekingalpha.com