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Grainger Misses Q3 Earnings on Harsh Industrial Economy

W.W. Grainger, Inc. 's GWW third-quarter 2015 adjusted earnings per share of $3.03 decreased 8% from the prior-year quarter figure of $3.30. Earnings also missed the Zacks Consensus Estimate of $3.06 per share.

WW Grainger Inc. - Earnings Surprise | FindTheBest

Including one-time items, earnings from continuing operations of $2.92 per share, fell 11.5% year over year. Earnings for the quarter include restructuring costs of 6 cents per share primarily related to payroll and charges of 5 cents per share related to U.S. branch closure. The year-ago quarter had no such adjustments.

Grainger's results were impacted by challenging industrial economy in North America. Further, sales decline, lower gross margins and increase in operating expenses also hurt earnings.

Operational Update

Revenues of $2.53 billion went down 1% from $2.56 billion in the year-ago quarter. It also lagged the Zacks Consensus Estimate of $2.55 billion. There were 64 selling days in the quarter, same as the prior-year quarter.

Sales decline for the quarter included 3 percentage points reduction from foreign exchange, partly offset by a 2 percentage points increase from acquisitions. Excluding acquisitions and foreign exchange, organic sales were flat.

Cost of sales increased 0.8% year over year to $1.47 billion. Gross profit decreased to $1.06 billion from $1.10 billion in the year-ago quarter. Gross margin contracted 110 basis points to 41.9% primarily due to faster growth with lower gross margin customers, fall in supplier rebates tied to lower-than-expected volume and decline in prices as against marginal cost inflation.

Grainger's adjusted operating income in the quarter went down 8.8% to $351.7 million from $385.5 million the prior-year quarter. Operating margin decreased 110 basis points to 13.9% in the quarter.

Segment Performance

Revenues for the United States segment remained flat with the year-ago quarter at $2.04 billion. Adjusted operating income for the segment declined 4.6% year over year to $368.8 million.

Revenues of $213 million from the Canadian Acklands-Grainger business decreased 23% in US dollars and 8% in local currency, from the year-ago quarter. Adjusted operating income in Canada plunged 83% year over year to $4.7 million.

Revenues from Other businesses (which include Asia, Europe and Latin America) increased 18% year over year to $354.7 million. The segment's adjusted operating profit increased significantly to $14.8 million.

Financial Position

At the end of third-quarter 2015, Grainger had cash and cash equivalents of $258 million compared with $226.6 million as of Dec 31, 2014. The company generated $735.9 million in cash from operating activities for the nine months ended Sep 30, 2015 compared with $662.8 million in the prior-year period. Long-term debt increased to $1.58 billion as of Sep 30, 2015 from $0.4 billion as of Dec 31, 2014.

Guidance

Grainger lowered its 2015 guidance due to a sluggish industrial market and difficult economic environment. The company now expects sales growth of (0.5%) to +0.5% compared with the prior projection of 0% to 2%. The company has also slashed its earnings per share expectation to the range of $11.60 to $11.80 from the previous band of $12.00 to $12.50.

Grainger expects revenues to decline persistently based on the feedback from its customers and suppliers. Many of its large customers are cutting jobs and planning extended year-end shutdowns during the holidays. However, the company is poised to benefit from cost structure adjustments, made to counter a weaker economic environment. In addition, Grainger's continued focus on investments will accelerate long-term growth.

W.W. Grainger is a leading North American distributor of material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, forestry and agriculture equipment, building and home inspection supplies, vehicle and fleet components, and various aftermarket components.

Grainger currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the sector include Codexis, Inc. CDXS , Barnes Group Inc. B and HD Supply Holdings, Inc. HDS . All these stocks carry a Zacks Rank #2 (Buy).

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GRAINGER W W (GWW): Free Stock Analysis Report

BARNES GRP (B): Free Stock Analysis Report

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CODEXIS INC (CDXS): Free Stock Analysis Report

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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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