Still Neutral on Grainger - Analyst Blog
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).
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.
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