Higher Expenses, Weak Canada Operations Ail Grainger (GWW)

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We issued an updated research report on W.W. Grainger, Inc.GWW on Jan 16, 2018. Weakness on Canada operations and inflationary expenses are expected to weigh on the company's results in the near term.

Tepid Guidance

Grainger's third-quarter 2017 adjusted earnings per share of $2.90 came in lower than the prior-year figure of $3.06 by 5%. During the third-quarter conference call, the company lowered 2017 guidance. It now expects 2017 sales growth of 1.5-2.5%, down from previously projected range of 1-4%. Earnings per share are now expected to lie between $10.40 and $10.90, down from the prior guidance range of $10.00-$11.30. The midpoint of the earnings guidance reflects an 8% year-over-year decline due to ongoing challenges in Canada operations and headwind from the sale of the specialty business.

Results Anticipated to be Lower than Prior-Year Levels

The Zacks Consensus Estimate for 2017 for earnings is $10.71, reflecting dip of 7.51% from 2016 levels. The Zacks Consensus Estimate for the fourth quarter is currently pegged at $2.18, depicting year-over-year decline of 11.02%.

Factors That Will Dent Margins

Expenses in the fourth quarter will be higher due to normal seasonality and incremental investments in the single channel online business as well as digital marketing. From 2017 to 2019, Grainger expects inflationary expenses to be approximately $80-$85 million, which is about 2% of the base annually. These actions will result in significant operating expense leverage which is likely to hurt the margin performance.

Grainger's new web pricing strategy was launched to reverse unfavorable market share trends, which the company has witnessed in certain market segments in recent years. Meanwhile, Grainger's pricing initiatives are driving solid growth. Further, the company will continue pricing strategies in the United States through 2018 and expects to cut down prices by 6.9% in the period. However, it will affect margins in the short term. Also, it remains to be seen whether the company can retain customer base if competitors also resort to slashing prices.

Weak Canada Operations Continues to be a Drag

Grainger's Canada segment continues to be underperform due to higher expenses and weakness in the energy sector. The company is amid a substantial transformation in the Canadian business. The company continues to manage expenses and trying to turnaround the business. It has announced the closure of 59 branches and eliminated poorly performing assets. It remains to be seen whether its efforts will yield results.

Grainger's shares have fallen 5.2% in the past year, wider than the industry 's decline of 1.5%.

Currently, Grainger carries a Zacks Rank #5 (Strong Sell).

Stocks to Consider

Some better-ranked stocks in the sector are Deere & Company DE , H&E Equipment Services, Inc. HEES and Graphic Packaging Holding Company GPK . While Deere and H&E Equipment sport a Zacks Rank #1 (Strong Buy), Graphic Packaging carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Deere has a long-term earnings growth rate of 8.2%. Its shares have rallied 34.5% in the past year.

H&E Equipment Services has a long-term earnings growth rate of 18.6%. The company's shares have surged 77% over a year's time.

Graphic Packaging has a long-term earnings growth rate of 5%. The stock has gained 28% in a year's time.

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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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