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Analyst Blog

On Jun 25, we maintained our Neutral recommendation on distributor of facilities maintenance, repair and operating supplies, W.W. Grainger Inc. (GWW - Analyst Report), based on expectations of growth opportunities through product and geographic expansion and e-commerce; partially offset by the recent slowdown in sales, weakness in government-end market and impending pressure on margins.

Why Reiterated?

Grainger reported first-quarter 2013 earnings of $2.94 per share, up 14% year over year from $2.57 and ahead of the Zacks Consensus Estimate of $2.73. Total revenue was $2.28 billion, up 4% from $2.19 billion in the year-ago period. However, revenues missed the Zacks Consensus Estimate of $2.3 million.
 
Grainger increased its EPS guidance in the range of $11.30-$12.00 per share for fiscal 2013, up from the prior guidance of $10.85-$12.00 per share. However, Grainger increased its sales growth guidance to a range of 5% to 9%, up from prior projection of 3% to 9%.
 
We appreciate Grainger’s focus on expanding its product offerings as well as gaining traction for its private label products. Grainger expects to increase its product count from the current 413,000 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. Grainger also continues to invest in e-commerce, as it is reportedly growing two fold compared to other channels and is deemed to be the company’s most profitable channel. In 2012, e-commerce sales represented 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 show a downward trend. In 2012, after enjoying a double-digit run till August, sales growth has remained in the single digits before plunging to the lowest level of 2% in December. In the first quarter of 2013, even though sales growth recovered to 8% in Jan, it again dipped to 6% in Feb and 3% in March.

So far in the second quarter, Grainger’s sales growth recouped to 8% in April, but again dipped lower to 5% in May. June daily sales growth is reportedly similar to May. Sales in Canada slowed considerably because of weaker demand for exports and extended road closures due to unfavorable weather. Management expects the negative effects to continue in June as well.

Grainger has increased its investment spending for 2013 to $160 million from the previous projection of $135 million. Even though these initiatives will lead to additional share gains in the future, it will weigh on margins in the short term.

Other Stocks to Consider

Grainger retains a short-term Zacks Rank #3 (Hold). Other industrial product makers with favorable Zacks Rank are Graco Inc. (GGG - Snapshot Report), with a Zacks Rank #1 (Strong Buy), and Hudson Technologies Inc. (HDSN - Snapshot Report) and MSC Industrial Direct Co. Inc. (MSM - Snapshot Report) with a Zacks Rank #2(Buy).

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