Focus on Investments to Aid Grainger (GWW), Expenses Rise

On Jan 3, we issued an updated research report on W.W. Grainger, Inc.GWW . The company's performance will be backed by lower tax rate, turnaround in the Canadian business and investments in digital capabilities. However, its results might be marred by escalating expenses and the impact of tariffs.

Let's illustrate these factors in detail.

Turnaround in the Canadian Business to Aid Grainger

In its Canada business, the execution of Grainger's turnaround continues to make progress and is on track. The company is focused on improving gross margin and reducing its cost structure in the Canada operations. The company expects to record a profitable run rate for the business in the near future.

Lower Tax Rate to Boost Earnings

Grainger reaffirmed its 2018 earnings per share guidance of $15.05-$16.05, which reflects year-over-year growth of 36% at the mid-point. The company expects to report earnings at the higher end of the guidance. Earnings will benefit from the lower tax rate. As a result of the U.S. tax reform and the tax benefit from stock-based compensation, Grainger expects an adjusted tax rate of 23-26% for the year.

Investments in Digital Capabilities

Grainger witnessed growth in e-commerce sales, primarily buoyed by the launch of Grainger.com and other electronic purchasing platforms in the United States, and across all single-channel online businesses. The company is focused on improving end-to-end customer experience by making investments in its e-commerce and digital capabilities, and executing continued improvement initiatives in the supply chain.

Tariffs, Rising Expenses to Hurt Margins

With respect to tariffs, Grainger has deployed a cross-functional task force to evaluate the impact of tariff and execute mitigating moves. The company is working with suppliers to minimize cost impact, including identifying alternative supply; and evaluating pricing actions. However, approximately half of the products sourced from China will be impacted by tariffs.

Grainger's margin performance will be impacted by rising expenses due to investments in digital marketing capabilities.

Share Price Performance

Grainger's shares have outperformed the industry over the past year. The stock has gained around 14%, while the industry recorded break-even results.

Zacks Rank & Key Picks

Grainger carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same sector are Brady Corporation BRC , Lindsay Corporation LNN and Enersys ENS . All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .

Brady has a long-term earnings growth rate of 7.5%. The company's shares have gained 11% over the past year.

Lindsay has an estimated long-term growth rate of 18%. Its shares have rallied 3% in a year's time.

Enersys has a projected long-term growth rate of 10%. Its shares have rallied 5% over the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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