W.W. Grainger, Inc. (GWW)

GWW 
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W.W. Grainger (GWW)

Q1 2013 Earnings Call

April 16, 2013 8:00 am ET

Executives

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

William D. Chapman - Senior Director of Investor Relations

Presentation

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 first quarter 2013 results. Please also reference our 2013 first quarter earnings release issued today, April 16, in addition to other information available on our Investor Relations website to supplement this podcast.

Before we begin, please remember that certain statements and projections of future results made in the press release and in this podcast 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 results for the 2013 first quarter and raised our 2013 sales and earnings guidance. We raised the low end of the guidance ranges to reflect the solid start to the year and account for an increase in growth spending. We now expect sales to grow 5% to 9% and are forecasting EPS of $11.30 to $12 for the full year 2013. At the end of this recording, we'll talk more about our revised guidance and assumptions.

Company sales for the quarter increased 4% versus the 2012 first quarter, 6% on a daily basis. We had 63 selling days in the quarter, 1 less than the previous year. Operating earnings and net earnings increased 13%. Earnings per share were $2.94 for the quarter, an increase of 14% versus the 2012 first quarter.

Let's now walk down the operating section of the income statement in more detail. Gross profit margins increased 80 basis points to 45.2% versus 44.4% in 2012, primarily driven by the United States segment. Company operating margin increased 120 basis points to 15.1% versus 13.9% a year ago. The earnings growth was driven by the 4% sales increase and operating expenses growing at a slower rate than sales. Operating expenses increased 3%, including $22 million in incremental growth-related spending versus the 2012 first quarter. These growth investments include additional sales coverage, eCommerce, advertising, IT systems and expansion of the company's distribution center network.

We took a cautious approach to spending in the 2013 first quarter given the uncertainties surrounding the threat of the fiscal cliff at the end of December. Given a modestly improving economic backdrop and solid performance in the quarter, we are increasing the estimated amount of incremental growth-related spending to $160 million for the year. We had originally forecasted $135 million in incremental growth-related investment in 2013, but also bracketed this number with $25 million on either side based on sales growth. We view our commitment to a higher growth spending as an example of our leadership in the MRO industry and an attractive opportunity to gain market share over the long term.

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 March; second, operating performance by segment; third, cash generation and capital deployment; and finally, we'll wrap up with the discussion of our 2013 guidance and other key items.

As mentioned earlier, company sales for the quarter increased 4% on a reported basis and 6% on a daily basis. Daily sales growth by month was as follows: 8% in January, 6% in February and 3% in March. Daily sales growth in March was affected by the timing of the Easter holiday, which I will cover in more detail in the March sales section.

The 6% increase in daily sales in the quarter included 3 percentage points from volume, 2 percentage points from price, 1 percentage point from acquisitions and 1 percentage point from sales of seasonal products, partially offset by a 1 percentage point drag from foreign exchange.

Let's move on to sales by segment. We report 2 business segments: the United States and Canada. Our remaining operations located primarily in Asia, Europe and Latin America are reported under a grouping titled, Other Businesses.

Sales in the United States, which accounted for 77% of total company revenue in the quarter increased 4%, 6% on a daily basis. The 6% daily sales growth for the quarter was driven by 3 percentage points from price, 2 percentage points from volume and 1 percentage point from the Techni-Tool business acquired on December 31, 2012. Daily sales increased 7% in January, 7% in February and 4% in March.

Let's review sales performance by customer end market in the United States. Light manufacturing was up in the high-single digits; Heavy Manufacturing, Commercial, Contractor, Retail and Natural Resources were up in the mid-single digits; Government was up in the low-single digits; and Reseller was down in the low-single digits.

Now let's turn our attention to the Canadian business. Sales in Canada represented 12% of total company revenues. For the quarter, sales in Canada increased 4% in U.S. dollars and 5% in local currency. On a daily basis in U.S. dollars, sales increased 5% and consisted of 8 percentage points from volume, partially offset by a 2 percentage point decline from the timing of the Easter holiday and a 1 percentage point decline from foreign exchange. By month, daily sales in Canadian dollars increased 8% in January, 8% in February and 3% in March. Sales performance in Canada was driven by strong growth to customers in the Construction, Commercial, Forestry, Oil and Gas and Light Manufacturing end markets.

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